In Conversation With... Ted Tsiakopoulos, economist

Buying a home, of course, doesn’t necessarily require a degree in economics, but it sure would help. Fact is, there are so many factors for homebuyers to consider these days. Higher interest rates, the economy, inflation, demographic trends… It’s all very serious stuff, and for some, perplexing and even intimidating.

For insights into these issues, we spoke to Ted Tsiakopoulos, an economist, best-selling author and sought-after speaker with more than 25 years of experience analyzing housing and financial markets. He is also an instructor of housing economics at Metropolitan Toronto University.

Some of these subjects may seem a tad peripheral for prospective homebuyers, but trust us, they’re worth learning even a little more about.

Gen Z is such an important part of the future of homebuying. Last year in GTA Builders’ Annual, you wrote about the digital economy, and how it might impact the financial stability of these younger consumers. How are things looking, a year later?

More and more businesses are now selling their goods and services online, versus the pre-pandemic period. Online e-commerce sales have doubled as a share of total retail sales. This trend will only accelerate over the next decade.

What will trigger this acceleration is a recalibration of growth in the economy and in business revenue. A lot of businesses have not adjusted their expectations for growth lower. This downward adjustment in growth will take hold in the next year, and the focus will turn to managing costs. Productivity-enhancing investments, while creating opportunities in some sectors of the economy, will likely displace more younger workers, especially in client-facing industries. So, we need to prepare for this.

You also wrote about the financial literacy of the younger generation, and how, still to this day, not enough elementary and high school programs across the country include financial education as part of the curriculum. The last year, with inflation and rising interest rates, underlines this importance even more… will it be enough to make a difference? How much are educators adjusting to this growing need?

Fortunately, we have seen some progress with financial literacy topics now embedded in the math curriculum, which is mandatory in some regions of the country, especially here in Ontario.

There’s a lot for today’s prospective homebuyers to think about. What advice would you have for them?

Prospective homebuyers should exercise caution and patience. There are better days ahead. Home prices and interest rates will be in a better place one year from now. Also, all levels of government are working hard to expedite the delivery of new housing. The Housing Accelerator Fund was tabled in the last federal budget, and this is all about incentivizing cities to expedite the planning approval process. This is also about eliminating structural barriers that are getting in the way of delivering more housing.

We realize you don’t have a crystal ball, but given your expertise in economics, what is your outlook for interest rates? Some in the industry see a leveling out, and possibly a return to lower rates, early next year…

The consensus in Canada among economists is that we could see the terminal overnight rate at 4.00 to 4.25 per cent by year end or shortly thereafter. At that point, I think you will see the Bank of Canada pause and evaluate the impact on the economy in the following months.
Should aggregate demand drop enough or should productivity growth surprise to the upside to pull inflation below its target, only then could we see a pivot. But this seems highly unlikely in the immediate term.

The Fed, however, in its recent testimony, indicated it doesn’t expect inflation to hit its target of two per cent until 2024, so they are calling for a terminal rate in the 4.5- to 5.00-per-cent range by the end of 2023.

And what about inflation? It’s inching down, but how long until we see some notable improvement in this area, and we see a boost in consumer confidence?

The recent Fed testimony suggests with inflation expected to hit its target by no sooner than 2024, the implicit assumption is that it will remain sticky on the way down.

Service sector inflation has lagged goods sector inflation, and there is still some pent-up price pressures here.

What other message would you like to leave prospective homebuyers?

What we have learned in recent years is that prospective buyers need to plan ahead. This means being aware of budget constraints, in advance of a home search, is important as is having an awareness of all closing costs to a real estate transaction.

Research has shown that a budget is an acknowledgement that income is a constraint, and trade-offs need to be made. Also, those with a budget or plan are less likely to engage in impulsive behaviour, and are most likely to stay within their budget while taking on less debt.

These are all necessary behaviours, particularly in undersupplied markets where bidding wars are common. Far too often, we see prospective first-time buyers engaging in bidding wars and getting emotionally hijacked because they lack an entry and exit strategy or plan.

Any messages for the industry? You have written before about the increasing need to better adopt technology and building practices, to find ways to build homes faster…

There are opportunities to embrace innovation across the housing system. We have seen tremendous success with CMHC’s Rapid Housing Initiative, which uses modular housing techniques to deliver homes at record times. I spoke about the need to have a manufacturing mindset when building a home. This is long overdue, given lagging productivity growth in the construction sector, but necessary given the shortage of trades. Builders are also facing great uncertainty in the planning approval process, and this may be disincentivizing innovation.

Research has also shown that planning approval times could diminish if cities embrace technology as well. Digital building permit practices around the world have shown to cut permit approval times significantly.

Cities can also embrace enhanced analytical tools in their land use planning. UrbanSim is a set of regional models that enable cities to experiment with policies that align land use and infrastructure investments. These tools help cities evaluate how location choices made by households, builders and employers are impacted by these policies and what the broader market impacts are.