Thiru and his colleague Derek Johnson, portfolio manager at Canoe Financial, explained that their worry is around the re-introduction of froth in the housing market. While some have noted that interest rate cuts can be disinflationary by lowering carrying costs on shelter, they note that there is such a deep lack of supply in Canadian housing that acceleration appears to be the only likely course forward.
Immigration is key to their view of the Canadian economy and the housing market. High rates of immigration have driven up demand for housing. At the same time, immigration has introduced slack into the labour market. While analysts and the Bank of Canada may cite an uptick in unemployment, Johnson and Thiru note that we haven’t seen widespread layoffs yet. Rather, labour market participation rates have ticked up, meaning the demographics with the highest unemployment rates are new immigrants and new graduates.
Johnson connects the flaws in our immigration system with the ongoing lack of housing supply. “There are structural shortages in housing, but there are also structural shortages in construction labour, which is not being addressed by immigration,” he says.
Dylan Wilson, portfolio manager at Verecan Capital Management Inc. shares a similar concern around cuts reinflating the housing market and a lack of new housing starts. He notes that these cuts are having an immediate positive impact for any clients with variable rate mortgages. From an asset allocation standpoint, however, he is not advocating for any significant deviations in his plan.
Despite what they see as a major risk to the housing market coming out of these cuts, Thiru and Johnson are far more bullish on the Canadian economy than most. Two years ago, they claimed we would not fall into a recession, and recent GDP numbers seem to have borne out their prediction.