Housing Slowdown Continues in July

General Bob Rees 15 Aug

Housing Slowdown Continues in July

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates continued in July, albeit at a slower pace. Home sales recorded over Canadian MLS® Systems fell by 5.3% between June and July 2022. The pace of home sales last month was well below its 10-year moving average as buyers and sellers moved to the sidelines in response to rising mortgage rates and a reassessment of the outlook. While this was the fifth consecutive month-over-month decline in housing activity, it was also the smallest of the five.Sales were down in about three-quarters of all local markets, led by the Greater Toronto Area (GTA), Greater Vancouver, Fraser Valley, Calgary and Edmonton.

The actual (not seasonally adjusted) number of transactions in July 2022 came in 29.3% below that same month last year.

Housing market analysts at the Canadian banks continued to revise their home price forecasts over the next year. Royal Bank, TD, Desjardin and BMO all project that Canadian benchmark prices will fall roughly 20%-to-25% from their February peak by the end of 2023. Of course, this will vary from region to region. The hardest hit has been the geographies where prices surged the most, especially in the Greater Golden Horseshoe in Ontario and, to a lesser extent, in BC.

However, even if these forecasts prove to be correct, home prices in most regions will remain well above the levels posted before the pandemic began in early 2020. Housing in Canada’s largest cities will remain unaffordable for median-income households.

New ListingsThe number of newly listed homes fell back by 5.3% month-over-month in July. The decline in new supply was broad-based, with listings decreasing in about three-quarters of local markets, including most significant markets.With sales and new listings down by 5.3% in July, the sales-to-new listings ratio remained unchanged at 51.7% – slightly below the long-term average for the national sales-to-new listings ratio of 55.1%.

There were 3.4 months of inventory on a national basis at the end of July 2022, still historically low but up quite a bit from the all-time low of 1.7 months set at the beginning of 2022.

Home PricesThe Aggregate Composite MLS® Home Price Index (HPI) edged down 1.7% month-over-month in July 2022. This was similar but less than the 1.9% decline in June.

Regionally, most of the monthly declines in recent months have been in markets across Ontario and, to a lesser extent, in British Columbia.

Prices continue to be more or less flat across the Prairies while only now showing minor signs of dipping in Quebec. On the East Coast, prices continue to rise at a much slower pace. The exception is relatively more expensive Halifax-Dartmouth, where prices have dipped slightly.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 10.9% on a year-over-year basis in July. However, those year-over-year comparisons have been winding down quickly from the near-30% record year-over-year increases logged in January and February.

Bottom Line

The Bank of Canada raised the overnight policy rate by a percentage point on July 13, so the full effect of this jumbo hike will likely spill into the August data. Inflation fell a bit more than expected last month in the US. We expect to see a decline in Canadian CPI inflation in July, as well, when it is published tomorrow morning. Nevertheless, central banks will continue to tighten monetary policy further. CREA today said they expect an additional 100 bp hike in the remainder of this year, which would take the policy rate up to 3.5% by yearend. That would imply a prime rate of 5.7%.

In contrast, the five-year government of Canada bond yield is hovering just under 2.8%, reflective of the economic slowdown in Canada in the second half of this year. This could make fixed mortgage rates more attractive to future borrowers. Should the prime rate hit those levels, many fixed-payment variable rate borrowers that first booked their mortgages when prime touched 2.45%–it’s low posted since mid-March 2020– might be hearing from their lenders regarding potential trigger points. Will this temper Bank of Canada rate hikes?

Probably not. The Governing Council makes its next decision on September 7. Another 50-to-75 bps is baked in at this point.

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

The Canadian Economy Is Slowing–Job Markets Will Begin To Shift

General Bob Rees 5 Aug

The Canadian Economy Is Slowing–Job Markets Will Begin To Shift
The July employment report, released this morning by Statistics Canada, is a real head-scratcher. The job numbers fell for a second consecutive month, but so did the number of job seekers, so the unemployment rate remained unchanged at a historic low of 4.9%. I have been pondering the profusion of labour market data for longer than usual today to decide where I come out on this. My bottom line is the Canadian economy is slowing in response to the whopping rise in interest rates. Labour markets across the country are still very tight as massive job vacancies continue, but the market’s tenor (or mood) is shifting.

There are still labour shortages in businesses that need customer-facing employees–think restaurants, hotels, travel, retail, household services, as well as in construction and the trades. But we are also now hearing of layoffs and cutbacks in businesses that boomed during the lockdowns. Many of those over-expanded and are currently cutting back. A great Canadian example is Shopify, but the same can be said of major retailers like Walmart and Target, which now find themselves overstocked.

The housing markets in Canada are slowing sharply, especially in the highest-cost regions around the Greater Vancouver and Toronto areas.

Central banks worldwide took interest rates down to near-zero levels in the early days of the pandemic, triggering a massive boom in housing. Canada’s boom was second to none, reflecting the long-standing housing shortage. Since 2015, home construction for rent and purchase in Canada has paled compared to the rising demand generated by surging immigration targets. First-time buyers’ FOMO, combined with record-low mortgage rates, especially on variable rate loans, triggered a buying frenzy. Millennial parents helped by tapping their homeowner equity to make those down payments possible. Some of those parents could be left with the legacy of home equity loans whose monthly payments have sky-rocketed with the prime rate. Cabin fever during lockdown generated a host of other buyers who just wanted more space and were willing to move to the exurbs and beyond to afford it. Investors, long tantalized by the surge in condo prices and the growing demand for rental properties, piled on.

Central banks kept interest rates too low for too long. They should have started to raise them when inflation percolated. They thought inflation was transitory, and we all thought vaccines were the magic bullet to end the Covid pandemic. The Russian invasion of Ukraine created the perfect storm, exacerbated by China’s zero Covid policy. Supply chains crumbled further, and commodity prices surged.

Now that oil prices below $90 a barrel have returned to pre-war levels, and gasoline prices have fallen since early June, inflation might have peaked. But central banks must continue tightening to return policy interest rates to normal levels. This means an overnight rate in Canada of roughly 3.5% and nearly 5% in the US. That’s still a far cry from today’s level of 2.5%. And the central banks will not and cannot return rates to last year’s lows. Not soon, and possibly not ever. Unless you believe an equivalent global shutdown will be required sometime in the foreseeable future.

The economy lost 30,600 jobs last month, adding to a loss of 43,200 jobs in June. Canada’s job market is losing momentum as the broader economy is cooling. The job loss also reflects labour shortages and insufficiently trained new workers. Just look at the chaos at Pearson Airport. Labour market conditions are still very tight, and wage rates are rising, up 5.2% y/y last month.

In Direct Contract, US Employment Surged in July 

In other relevant news today, Bloomberg reports that “US employers added more than double the number of jobs forecast, illustrating rock-solid labour demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.” So much for a Fed pivot. The idea that the bond market rallied on the premature news of a US recession made no sense at this point in the cycle.

Similarly, the Bank of Canada is still likely to hike the policy rate by 75 basis points when they meet again on September 7. That would take the prime rate up to 5.45%. Currently, the 5-year government of Canada bond yield is 2.87%, well below its peak of 3.6% in mid-June. Consequently, we may see variable mortgage rates rise above fixed rates before year-end.



Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres