At long last, there may be an end in sight to Canada’s high inflation woes.

A new report from RSM Canada says that inflation could potentially be “cut in half” to a healthier 3% by the end of 2023. By 2024, it says, inflation could finally fall to the Bank of Canada’s 2% target.

But in classic good-news-before-bad-news fashion, RSM also cautions that we haven’t seen the last of those dreaded interest rate hikes.

“Tightening financial conditions are hurting the Canadian economy to the point where the rising risk of a recession and a housing contraction much larger than anticipated cannot be discounted,” writes Joe Brusuelas, Chief Economist for RSM. “Although we expect the Bank of Canada to raise its policy rate to a peak of 4.75% by the middle of the year, after that the central bank will most likely use a lift-and-hold policy that will keep financial conditions tight.”

He adds that, while the high interest rate environment has served its purpose in slowing overall inflation, the effects will “take time to sink in” in the housing market.

And Statistics Canada’s latest Consumer Price Index, released Tuesday, seems to agree.

The country's annual inflation rate may have slowed to 5.9% in January, down from 6.3% in December, but shelter prices saw a 6.6% increase. Although that latter figure was down from an increase of 7% in December, StatCan notes that the mortgage interest cost index rose 21.2% in January -- the largest increase since September 1982 -- following an 18% increase in December.

The effects of inflation and interest rates have “dented” the housing market, says Brusuelas later in the report, and this will implicate the country’s gross domestic product (GDP). RSM projects that Canada’s GDP will decline from about 3.25% growth this past year to just under 1% in 2023 before rising to 2% in 2024.

A Case for Adaptive Reuse

RSM’s report concludes with a section on adaptive reuse, pointing to this strategy as a savvy way for cities to “re-imagine” their downtown cores.

According to data from CBRE, the national commercial vacancy rate ended 2022 at a staggering high of 17.1%. It was a similar story in major Canadian cities, including Toronto (16.2% vacancy), Edmonton (22.2% vacancy), and Calgary (30% vacancy).

“But just as cities face high office vacancy rates, they also face an acute shortage of housing — especially affordable housing,” writes Jake Salpeter, Manager of ESG Advisory Services for RSM. “Adaptive reuse offers a way not only to potentially ease the housing shortage, but also to combat climate change as developers make buildings more efficient (think HVAC systems, windows, insulation and heat retention). This trend is being further incentivized by government subsidies for energy and building envelope retrofits; the falling cost of renewable energy is spurring the trend along as well."

However, the strategy is not without challenges. Obtaining permits, overcoming restrictive zoning laws, and contending with the physical limitations of commercial properties are all identified as significant roadblocks to the widespread adoption of adaptive reuse.

“For all of these reasons, it can take years and a lot of money to convert an office building into apartments,” says Salpeter. “These barriers all point to the growing need for increased public-private partnerships between municipalities and developers, to help ease the housing shortage and address a surge in office vacancies that is not going away. Municipalities and developers have an opportunity to be economic catalysts to ease zoning laws and create easier pathways for adaptive reuse projects. As these conversions become more common, the market may be encouraged to pursue similar projects and to view buildings as ever-adapting solutions to a rapidly changing world.”