Near-Record Decline in Q1 GDP Better Than Flash Estimate

General Bob Rees 29 May

Thank you for the insight Dr Cooper.  I personally appreciate her positive view on CMHC’s most recent press release as its does appear the market is bouncing back and that the initial “drops” are not as significant as originally expected …. still drops just the same, but we are a strong and resilient bunch!

 

Near-Record Decline in Q1 GDP Better Than Flash Estimate

The hand-wringing about the Q1 GDP data released today misses the point that the data were actually better than expected. The Canadian economy declined at an 8.2% annualized rate in the first quarter, less harsh than the earlier estimate by StatsCan of -10%. Of course, every sector of the economy was hit by the enforced shutdown, but not by nearly as much as most economists anticipated. For the month of March, the decline was 7.2%, less dire than the -9% earlier estimate.

In light of the current unprecedented national and global economic environment, StatsCan is providing leading indicators of economic activity. Their preliminary flash estimate for April is an 11% decline in real GDP. This estimate will be revised as more info becomes available, but the March and April decreases are likely to be the largest consecutive monthly declines on record.

The Economy Has Bottomed

It looks increasingly likely that we are already past the bottom of the latest economic downturn, with GDP potentially getting back on a positive growth trajectory as early as May.

That won’t be enough to prevent a historically large drop in Q2 output– likely multiples of the decline in Q1–but it would leave the data tracking along the more “optimistic” end of the -15% to -30% growth range estimated by the Bank of Canada in their last Monetary Policy Report. Government support programs for those losing work have been unprecedented–household disposable income actually edged up slightly in Q1 despite the large drop in overall economic activity, boosted by government transfers. With the decline in spending in March and April and the rise in disposable income, the savings rate is soaring. All of us are saving money by doing our own cooking and cleaning. We aren’t travelling and shopping is certainly limited, not to mention the savings on gasoline, entertainment, hairstyling and gym memberships. Hopefully, this could provide a cushion to support spending and the economy will turn sharply higher in Q3.

Still, the three million jobs lost over March and April will not be recouped quickly. The lockdown is easing only gradually, and any activities requiring large gatherings–think tourism, conferences, concerts, movies and sports–will remain closed until there is a vaccine or effective treatment. We expect things will begin to get better from this point, but still look for the unemployment rate to remain elevated at 8.5% in Q4 of this year. It is currently 13%.

The Housing Outlook

Much has been made of the recent CMHC Housing Market Outlook report released this week. The gloomy outlook of up to an 18% drop in home prices, a delayed recovery not until 2022, and a 20% arrears rate garnered headlines. First-time homebuyers were warned that housing was no longer a good investment, at least not over a three-year horizon. But the CMHC’s own data shows that home prices have risen an average of 5% annually over the past twenty-five years. And though no one’s retirement nest egg should consist solely of their residential real estate, a home is one of the few investments that you can actually use. People buy homes for many reasons well beyond wealth accumulation. The pride of ownership and lifestyle choice dominates the decision to buy for many.

Also this week, the Governor of the Bank of Canada suggested that the doomsters were overly pessimistic and asserted his view that the economy would recover from its medically induced coma much faster than the pessimists were suggesting. Clearly, none of us have a crystal ball, nor have we ever before experienced a pandemic recession. While we rise from the abyss, the pain may well be far from over. People are still losing jobs and many businesses continue to sink. Any recovery is dependent on whether the virus cases keep slowing and whether there is a second wave of infections.

But oil prices have risen sharply, a major boon for Alberta and some high-frequency data have improved. The stock market is well off its lows, interest rates have fallen sharply and the qualifying rate for mortgage stress tests has fallen to 4.94%. Actual mortgage rates are near record lows and are likely to remain low for the foreseeable future.

In time, immigration to Canada will restart, and foreign students will return. New businesses are blossoming even now and many sectors will continue to advance. To name a few, we are seeing burgeoning growth in telemedicine, artificial intelligence, big data analysis, cloud services, cybersecurity, 5G, home entertainment, virtual everything, home fitness, DYI renovations, indeed, DIY anything.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

First National and you: a progress report on what we accomplished together in Q1

General Bob Rees 19 May

Great to see how one of our preferred lenders is managing the new World that COVID19 has presented, keep up the great work First National!

 

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First National and you: a progress report on what we accomplished together in Q1

As you know, it’s been almost two months since the COVID-19 lockdown and various signs are now pointing to the gradual restart of the Canadian economy.

At this juncture, I want to take the opportunity to bring you up to date on where things stand at First National.

Like you, we are still working from home. However, that hasn’t stopped you or the team here at First National from serving Canadian homebuyers in record numbers. In fact, I’m very pleased to announce that with the support of the mortgage broker community, we achieved best ever single family first quarter mortgage origination volumes of $2.8 billion – 55% or $1 billion higher than a year ago.

Every First National office across the country experienced growth, as did our Excalibur program. Given the severe disruption of COVID-19, I am very proud of these results and proud of you as our valued partner for making our performance possible.

As testament to the fact that activity levels did not drop after we collectively retreated to our home offices, we underwrote a record volume of new commitments in March that we will fund in the upcoming months.

Looking ahead, we are 100% committed to being and doing our best for you. In this environment, being the best means living up to our pledge to respond quickly to all mortgage requests, underwriting deals on time with the help of our always secure MERLIN system and more generally, being a tireless advocate of the mortgage broker channel.

These are challenging times but the adjustments you and First National have made to succeed in this ‘new normal’ environment are paying off.

Thank you for your ongoing support and confidence in First National.


Scott McKenzie
Senior Vice President, Residential Mortgages

Record Declines in Canadian Home Sales and Listings in April

General Bob Rees 15 May

Sales are still happening and there is activity … just less of it.  Here’s to hoping the market rebounds as quickly as it dropped.  See below from Dr Cooper.  Cheers!

 

 

 

Record Declines in Canadian Home Sales and Listings in April

The pandemic shutdown has put every sector of the economy into a medically induced coma, so, of course, the housing sector is no exception. Data released this morning from the Canadian Real Estate Association (CREA) showed national home sales fell a record 56.8% in April, compared to an already depressed March, in the first full month of COVID-19 lockdown (see chart below). Transactions were down across the country.

Among Canada’s largest markets, sales fell by 66.2% in the Greater Toronto Area (GTA), 64.4% in Montreal, 57.9% in Greater Vancouver, 54.8% in the Fraser Valley, 53.1% in Calgary, 46.6% in Edmonton, 42% in Winnipeg, 59.8% in Hamilton-Burlington and 51.5% in Ottawa.

The residential real estate industry is not standing still, however. Technological innovation is creating new ways of buying and selling homes. According to Shaun Cathcart, CREA’s Chief Economist, “Preliminary data for May suggests things may have already started to pick up a bit for both sales and new listings, in line with evidence that realtors and their clients have adopted new and existing virtual technology tools. These tools have allowed quite a bit of essential business to safely continue, and will likely remain key for some time.”

I have heard agents discussing software that virtually “stages” properties, allowing potential buyers to see the possibilities of existing and renovated floor plans and options in decor and design. The software replaces the need for expensive “physical” staging and can be far more creative. Where there is challenge, there is opportunity, and the people that create and adopt these innovative virtual solutions could be big winners.

Keeping the lid on price pressures, the number of newly listed homes across Canada declined by 55.7% m-o-m in April. The Aggregate Composite MLS® Home Price Index declined by only 0.6% last month, the first decline since last May. While some downward pressure on prices is not surprising, the comparatively small change underscores the extent to which the bigger picture is that both buying and selling is currently on pause.

Mortgage Qualifying Rate Set To Drop

The mortgage qualifying rate, the so-called Big Bank posted rate, has been above 5% since the OSFI stress test began on January 1, 2018. Despite dramatic declines in the government of Canada bond yield, which currently hovers at a mere 0.388%, and a huge fall in contract mortgage rates, the banks have kept their posted rates elevated. The minimum stress test rate began in 2018 at 5.34%, then finally fell to 5.19% and more recently to 5.04%–all still at a historically wide margin above market-determined rates.

In the past week, RBC and BMO have cut their 5-year posted rates slightly further to 4.94%. If no other banks follow, the Bank of Canada’s OSFI stress test rate will fall to 4.99%. If at least one other bank goes to 4.94%, the qualifying rate will drop to 4.94%. Every little bit helps.

Highlights of the Bank of Canada ‘Financial System Review’ (FSR)

With the first news of the COVID-19 pandemic threat, the BoC report said that “uncertainty about just how bad things could get created shock waves in financial markets, leading to a widespread flight to cash and difficulty selling assets. Policy actions are working to:

  • restore market functioning
  • ensure that financial institutions have adequate liquidity
  • give Canadian households and businesses access to the credit they need”

The Bank of Canada’s actions have put a floor under the economy. These along with the federal government spending initiatives and the mortgage deferral program have cushioned the blow to households and businesses. Governor Poloz said, “our goal in the short-term is to help Canadian households and businesses bridge the crisis period. Our longer-term goal is to provide a strong foundation for a recovery in jobs and growth.”

With the economic outlook remaining highly uncertain, the BoC erred on the side of caution in projecting mortgage arrears and non-performing business loans based on the more severe economic scenario it laid out in the April Monetary Policy Report. The pessimistic reading would be that even with policymakers’ extraordinary actions, that scenario would see mortgage and business loan delinquencies eclipse previous peaks. A more optimistic reading would be that policy support has prevented a significantly worse outcome, and a resilient financial system will be able to absorb losses and leave the foundation in place for an eventual economic recovery. And, as Governor Poloz mentioned, a better economic scenario is still within reach as many provinces are beginning to gradually re-open their economies.

The projections in today’s FSR are based on a scenario in which Canadian GDP is 30% lower in Q2 and recovers slowly thereafter. In that scenario, mortgage arrears are projected to increase to 0.8% by mid-2021 from 0.25% at the end of 2019–nearly double the peak in arrears seen in 2009. Meanwhile, non-performing business loans are forecast to rise to 6.4% at the end of this year from 1% at the end of last year, significantly higher than past peaks of less than 5% in 2003 and 2010.

The upshot is that while we might see a significant increase in mortgage arrears and troubled loans over the next two years in this pessimistic economic scenario, these outcomes would have been much worse without the extraordinary programs that have been put in place to support businesses and households. That has important implications for the banking sector. The BoC’s analysis suggests that, with these policy measures, large bank’s existing capital buffers should be sufficient to absorb losses. Without those interventions, “banks would be faring much worse, with important negative effects on the availability of credit to households and businesses.”

Households:

  • 1 in 5 households don’t have enough cash or liquid assets to cover two months of mortgage payments
  • Government support programs (CERB payments and CEWS wage subsidies) will cover a large share of households’ “core” spending (food, shelter, and telecoms)
  • Loan payment deferrals (banks have allowed more than 700,000 households to delay mortgage payments) and new borrowing can help offset remaining income losses
  • Still, some households are likely to fall behind on their debt payments (first credit cards and auto loans, then mortgages)—something we’re already seeing in Alberta and Saskatchewan

Businesses:

  • There have been some signs of reduced funding stress in April: The Bank of Canada’s bankers’ acceptance program is shrinking, the drawdowns of credit lines have slowed as some borrowers are repaying, and corporate debt issuance picked up significantly in April after ceasing in March.
  • Surveys show higher-than-normal rejection rates for small- and medium-sized businesses requesting additional funding from financial institutions
  • Upcoming corporate debt refinancing needs are in line with historical levels, but many borrowers will face in increased costs of funds owing to elevated corporate risk spreads
  • Nearly three-quarters of investment-grade corporate bonds are rated BBB (the lowest investment grade rating)—downgrades would double the stock of high-yield debt and significantly increase funding costs for those borrowers
  • Firms in the industries most affected by COVID-19 tend to have smaller cash buffers, and a sharp drop in revenues will make it difficult to meet fixed costs including debt payments. What started as a cash flow problem could develop into a solvency issue for some businesses
  • The energy sector is facing particular challenges: it has had to rely more on credit lines, has the highest refinancing needs over the next six months and faces the most potential downgrades

Banks:

  • BoC’s term repos have provided ample liquidity to the banking system and reduced funding costs, hence the drop in some banks’ posted and contract mortgage rates
  • Take-up of term repos has slowed in recent weeks—an indication of improved market functioning
  • Regulators have eased capital and liquidity requirements

Governments:

  • The BoC’s asset purchases have helped improve liquidity in the key Government of Canada securities market (the baseline for many other bond markets)
  • The FSR made little mention of government debt sustainability, but in his press conference Governor Poloz noted that overall government debt levels are similar to 20 years ago, and federal debt is significantly lower, giving the federal government plenty of room to maneuver

Bottom Line:

Of course, the pandemic shutdown has strained the financial wherewithal of many households and businesses. That was deemed the price we must pay to mitigate the severe health threat and contain its spread. The BoC report acknowledges the economic fallout of the necessary measures and promises to take additional actions to assure the economy returns to its full potential growth path as soon as feasibly possible. Cushioning the blow for those most in need.

Nevertheless, there are businesses that will close permanently and others that will scoop up declining competitors. Some will benefit from the new opportunities created by social distancing, enhanced sanitation, remote activity, new forms of entertainment and advances in healthcare. Others will no doubt die, although many of these companies were at death’s door before the pandemic emerged. Creative destruction is always painful for the losers, but it opens the way for many new winners and those existing businesses and individuals that are creative enough to adapt quickly to the changing environment.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres