Housing Market Correction Gains Steam in May

General 15 Jun

 
Housing Market Correction Gains Steam in May
Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% monthly (m/m). National home sales fell by 8.6% between April and May, building on April’s decline, leaving monthly activity at pre-COVID levels recorded in the second half of 2019. (see chart below).

Sales were down in three-quarters of all local markets, led by many larger census metropolitan areas (CMAs), including those in the Lower Mainland, Calgary, Edmonton, the Greater Toronto Area (GTA) and Ottawa. The actual (not seasonally adjusted) number of transactions in May 2022 came in 21.7% below the record for that month set last year. At a little over 50,000 units sold, the May 2022 sales figure was very close to the 10-year average for that month.
New ListingsThe number of newly listed homes climbed 4.5% month-over-month in May. The monthly increase was influenced by a jump in new supply in Montreal, while new listings in the GTA posted a modest decline.

With sales down and new listings up in May, the sales-to-new listings ratio eased back to 57.5% — its lowest level since April 2019. It was also not far off the long-term average for the national sales-to-new listings ratio of 55.1%.

Almost three-quarters of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in May 2022 – the most significant number since the fall of 2019. A little less than one quarter was in seller’s market territory, while a small handful was in buyer’s market territory.

There were 2.7 months of inventory on a national basis at the end of May 2022, still historically low but up by a month from the tightest conditions ever recorded just six months ago. The long-term average for this measure is a little over five months.
Home PricesThe non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.

The Aggregate Composite MLS® Home Price Index (HPI) edged down 0.8% m/m in May 2022, following a 1.1% decline in April.

Regionally, most of the monthly declines were in markets in Ontario. While most Ontario markets saw prices dip in May, prices rose in cottage country.

Prices rose in Vancouver Island but were flat in Greater Vancouver. Prices fell modestly in the Fraser Valley and posted a larger decline in Chilliwack. Prices were more or less unchanged across the Prairies save for small gains in Saskatoon and Winnipeg.

Meanwhile, Quebec, New Brunswick and PEI continued to outperform, while prices in Nova Scotia and Newfoundland and Labrador edged up slightly.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 19.8% y/y in May. However, this posted a marked slowdown from the near-30% record increases logged in January and February.
Bottom Line

The three-month slide in Canadian home sales has now returned sales to pre-COVID levels after running roughly 3)% above that level for the  18 months through February. The most significant slowdown has occurred in Ontario, especially outside the core Toronto region. New listings have risen, but inventories remain low. The sales-to-new listings ratio has fallen sharply to 57.5%, its lowest level since early 2019. Prices have fallen moderately, taking the year-over-year gain down to 19.8% from 23.6% y/y in April. The average home price is now up just 3.4% y/y, which is down 11% from the February peak.

Toronto is cooling, but the suburbs are cooling even faster, while the exurbs (think London, Woodstock, Barrie) are seeing the sharpest shifts. The sales-to-new listings ratio for all of Ontario sunk below 50%, a level we’ve only seen during the 2009 recession and the dark days of the early 1990s. Elsewhere, Alberta remains relatively tight, albeit with stalling prices, while Vancouver, Ottawa and Montreal are mixed between the extremes.

Interest rates have risen sharply from their COVID-induced lows. Mortgage rates have risen sharply from lows of about 1.5% to nearly 5% for 5-year fixed rates. Variable mortgage rates are on their way to 4%-to-4.5% by yearend. By late summer, any still-favourable rate holds will be gone, and this new interest-rate reality will fully sink in. Stress tests at the contract rate plus 200 bps are now nearing 7%; they’ll also be pushing above 5.25% in the variable space.

Many potential Canadian homebuyers now expect home prices to continue to fall in some regions. This shift in psychology will also contribute to the housing correction. In a separate report, CMHC reported that housing starts increased sharply in May. Homebuilding is at its most robust pace on record, going back to the 1950s. Given the record-low unemployment rate, home construction is constrained by record-high job vacancies in the sector, shortages of materials, and rising wage rates. Construction costs have risen sharply in the past year. With higher mortgage rates in the future, the deceleration in sales could lead to slower housing starts next year.

Finally, the Federal Reserve hiked interest rates by 75 bps today, intensifying the inflation fight. This opens the door for a 75 bps hike by the Bank of Canada when it meets again on July 13. It is now widely expected that the US policy rate, the overnight fed funds rate will exceed 4% by yearend. Canada’s central bank had already announced its intention to hike the overnight rate here more forcefully and has suggested that it will take an overnight rate above 3% to break the back of inflation. The overnight rate now is only 1.5%. A further correction in housing is likely in the coming months. As the economy’s most interest-sensitive sector, housing is the key transmission mechanism for tighter monetary policy to slow the economy and bring inflation under control.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

 

 

 

“Canada’s housing market is cooling down but it is still hotter than the long-term average and will likely stay that way for the next couple of years.”

General 25 May

Thank you to one of our preferred lenders, First National, for the below insight!

 

 

 

May 17, 2022

First National Financial LP

 

Canada’s housing market is cooling down but it is still hotter than the long-term average and will likely stay that way for the next couple of years.

The latest Housing Market Outlook from Canada Mortgage and Housing Corporation looks ahead to 2024 and sees moderating price growth, sales and housing starts.  However, this moderation is relative to record setting numbers posted in 2021, so all three factors will remain above their long-term averages.  These elevated numbers will be supported by continuing demand that is being fueled by robust economic (GDP) growth, higher employment and net migration.

While moderation and stability in the housing market are generally accepted as good things, CMHC is also forecasting an on-going decline in affordability.

CMHC points to sustained high prices and rising interest rates as key factors in affordability.  But in a new and separate “Housing Supply Report” the agency names the main culprit: Supply.

“The biggest issue affecting housing affordability in Canada is that supply simply is not keeping pace with demand,” according to the report.

“Housing starts have struggled to keep up with population growth,” the report adds.

The Housing Supply Report is scheduled to be released biannually for 2022 and 2023.  CMHC says it hopes to be able to estimate the number of housing units needed in Canada to improve home affordability.

 

Canadian Housing Market Feels The Pinch of Higher Rates

General 17 May

Canadian Housing Market Feels The Pinch of Higher Rates
Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% on a month-over-month (m/m) basis. The decline placed the monthly activity at its lowest level since the summer of 2020 (see chart below).

While the national decline was led by the Greater Toronto Area (GTA) simply because of its size, sales were down in 80% of local markets, with most other large markets posting double-digit month-over-month declines in April. The exceptions were Victoria, Montreal and Halifax-Dartmouth, where sales edged up slightly.

The actual (not seasonally adjusted) number of transactions in April 2022 came in 25.7% below the record for that month set last year. As has been the case since last summer, it was still the third-highest April sales figure ever behind 2021 and 2016.

Jill Oudil, Chair of CREA, said, “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue. For buyers, this slowdown could mean more time to consider options in the market. For sellers, it could necessitate a return to more traditional marketing strategies.”

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” said Shaun Cathcart, CREA’s Senior Economist. “But it’s less about what the Bank of Canada has done so far. It’s about a pretty steep pace of continued tightening that markets expect to play out over the balance of the year because that is already being factored into fixed mortgage rates. Of course, those have, for that very reason, been on the rise since the beginning of 2021, so why the big market reaction only now? It’s likely because typical discounted 5-year fixed rates have, in the space of a month, gone from the low 3% range to the low 4% range. The stress test is the higher of 5.25% or the contract rate plus 2%. For fixed borrowers, the stress test has just moved from 5.25% to the low 6% range – close to a 1% increase in a month! It won’t take much more movement by the Bank of Canada for this to start to affect the variable space as well.”
New ListingsThe number of newly listed homes edged back by 2.2% on a month-over-month basis in April. The slight monthly decline resulted from a relatively even split between markets where listings rose and those where they fell. Notable declines were seen in the Lower Mainland and Calgary, while listings increased in Victoria and Edmonton.

With sales falling by more than new listings in April, the sales-to-new listings ratio eased back to 66.5% – its lowest level since June 2020. This reading is right on the border between what would constitute a seller’s and a balanced market. The long-term average for the national sales-to-new listings ratio is 55.2%.

More than half of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in April 2022. A little less than half were in seller’s market territory.

There were 2.2 months of inventory on a national basis at the end of April 2022, still historically very low but up from slightly lower readings in the previous eight months. The long-term average for this measure is a little over five months.
Home PricesThe non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.
Bottom Line

The fever broke in the Canadian housing market last month. Nevertheless, despite the sizeable two-month slide in sales, activity is still almost 10% above pre-COVID levels and the raw April sales tally was still one of the highest on record.

Markets in Ontario are weakening most, significantly further outside the core of Toronto. Sales in the province slid 21% in April and are now in line with pre-pandemic activity levels. The market balance has gone from drum tight with “not enough supply” to one that resembles the 2017-19 correction period. Elsewhere, Vancouver and Montreal look better with relatively balanced markets, while others like Alberta and parts of Atlantic Canada remain pretty strong.

The Bank of Canada will likely hike interest rates by another 50 bps on June 1.
 

By,
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Labour Market Bumps Up Against Capacity Constraints

General 16 May

Labour Market Bumps Up Against Capacity Constraints
Job vacancies abound in many sectors, yet employers have trouble finding workers to fill those jobs and retaining workers with so many options available. As the jobless rate falls to new record lows, net new employment has slowed. This is not dissimilar to the housing market, where supply is insufficient to meet demand. Home sales are slowing in response to very low inventories, which are now compounded by rising mortgage rates.

Statistics Canada released the April Labour Force Survey this morning, reporting a slowdown in job gains to 15,300, a mere fraction of the  72,500 jump last month and the whopping 337,000 surge in February.  The April figure was way below the 40,000 rise anticipated by economists.

After reaching a record low of 5.3% in March, the unemployment rate edged down 0.1 percentage points to a series-low of 5.2% last month, compared to the 5.7% level posted before the pandemic. There is considerable excess demand for workers as the economy failed to produce any new growth in labour supply. In April, hours worked declined 1.9%, reflecting a jump in Covid-related absences and disability.

Increases in employment in professional, scientific and technical services and public administration were offset by construction and retail trade declines. These two sectors are reporting significant labour shortages. The federal government hopes to double the housing supply over the next decade, but to do so, homebuilders need many more construction workers.

More people worked in the Atlantic region and Alberta, while employment fell in Quebec. At the national level, employment gains among core-aged women aged 25 to 54 were offset by a decrease among core-age men.

Average hourly wages were up 3.3% (+$0.99 to $31.06) year over year, similar to the growth observed in March (+$1.03; +3.4%). Since consumer prices have risen 6.7% year-over-year, wages are not keeping up with inflation.

Many signs have pointed to an increasingly tight labour market in recent months. In addition to increases in full-time work, one aspect of this tightening has been a decrease in part-time workers reporting that they would prefer full-time employment. The involuntary part-time employment rate fell to 15.7% in April 2022, the lowest level on record. The involuntary part-time rate had been elevated over the first 18 months of the pandemic and peaked at 26.5% in August 2020, as many workers faced challenges securing full-time employment.

There are signs that wage inflation could accelerate in response to continued high job vacancy rates and tightening labour supply.
Bottom Line 

Mounting inflation pressure point to another 50 basis point hike in the overnight rate when the Bank of Canada meets again on June 1. Governor Mackem has stated that a full half-point increase will be in play. That will take the policy rate up to 1.5%, compared to 1.75% immediately before the pandemic. The war in Ukraine has exacerbated supply disruptions and markedly increased key commodity prices. Canada’s economy remains strong–the strongest in the G-7–owing to the relatively large commodity sector. Markets expect the overnight rate to hit close to 3% by yearend. However, the Bank will adjust its plans based on incoming data. Preliminary evidence suggests that housing activity weakened in April due to rising mortgage rates and insufficient supply.
 

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Affordable Housing Is A Key Theme In Federal Budget 2022

General 7 Apr

Affordable Housing Is A Key Theme In Federal Budget 2022
Today’s budget announced a $10 billion package of proposals intended to reduce the cost of housing in Canada (see box below). The fundamental problem is insufficient supply to meet the demands of a rapidly growing population base. Thanks to the federal government’s policy to rapidly increase immigration since 2015, new household formation has risen far faster than housing completions, both for rent and purchase. This excess demand has markedly pushed home prices to levels beyond average-income Canadians’ means.

The measures announced in today’s budget to increase housing construction, though welcome, are underwhelming. The Feds can control the construction of lower-cost housing through CMHC. Still, most home building is under the auspices of the municipal governments, where the red tape, zoning restrictions and delays abound. The federal government increased funds to help local governments address these issues, but NIMBY thinking still prevents increased housing density in many neighbourhoods.

The headline policy announcement for a two-year ban on foreign residential property purchases may sound reasonable. Still, according to Phil Soper, chief executive of Royal LePage, “It will have a negligible impact on home prices. We know from the pandemic period, when home prices escalated with virtually no foreign money, that our problem is made-in-Canada.”

According to the Financial Post, Soper added that measures like the tax-free savings account for young Canadians would be encouraged to help them achieve their dreams of homeownership in a typical real estate market. However, in a low-supply environment with pandemic-fuelled price gains, these measures would only add more demand without addressing the supply issue. Only a few first-time buyers would be able to take advantage of it.

The Home Buyers’ Bill of Rights that would end blind bidding and assures the right to a home inspection and transparent historical sales prices on title searches is also long overdue.

The First-Time Home Buyer Incentive has been extended to March 2025. This program has been a bust. Buyers do not want to share the equity in their homes with CMHC. The Feds are taking another kick at the can, “exploring options to make the program more flexible and responsive to the needs of first-time homebuyers, including single-led households.” To date, the limits on the program have made them useless in high-priced markets such as the GTA and the GVA.
Budget 2022 Measures To Improve Housing Affordability
Tax-Free Home Savings Account
  • Introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home—including investment income—would be non-taxable, like a TFSA.
New Housing Accelerator Fund
  • With the target of creating 100,000 net new housing units over five years, proposes to provide $4 billion over five years, starting in 2022-23, to launch a new Housing Accelerator Fund that is flexible to the needs and realities of cities and communities, while providing them support such as an annual per-door incentive or up-front funding for investments in municipal housing planning and delivery processes that will speed up housing development.
 New Affordable Housing
  • To ensure that more affordable housing can be built quickly, Budget 2022 proposes to provide $1.5 billion over two years, starting in 2022-23, to extend the Rapid Housing Initiative. This new funding is expected to create at least 6,000 new affordable housing units, with at least 25% of funding going towards women-focused housing projects.
An Extended and More Flexible First-Time Home Buyer Incentive
  •  Extension of the First-Time Home Buyer Incentive–which allows eligible first-time homebuyers to lower their borrowing costs by sharing the cost of buying a home with the government–to March 31, 2025. Explore options to make the program more flexible and responsive to the needs of first-time homebuyers, including single-led households.
A Ban on Foreign Investment in Canadian Housing
  • Proposes restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a two-year period.
 Property Flippers Pay Their Fair Share
  • Introduce new rules so that any person who sells a property they have held for less than 12 months would be subject to full taxation on their profits as business income, applying to residential properties sold on or after January 1, 2023. Exemptions would apply to Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce.
Rent-to-Own Projects
  • Provide $200 million in dedicated support under the existing Affordable Housing Innovation Fund. This will include $100 million to support non-profits, co-ops, developers, and rent-to-own companies building new rent-to-own units.
Home Buyers’ Bill of Rights
  • Bring forward a national plan to end blind bidding. Among other things, the Home Buyers’ Bill of Rights could also include ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches.
Multigenerational Home Renovation Tax Credit
  • Provide up to $7,500 in support for constructing a secondary suite for a senior or an adult with a disability, starting in 2023.
Doubling the First-Time Home Buyers’ Tax Credit 
  • Double the First-Time Home Buyers’ Tax Credit amount to $10,000, providing up to $1,500 in direct support to home buyers, applying to homes purchased on or after January 1, 2022.
Co-Operative Housing Development
  • Reallocate funding of $500 million to a new Co-Operative Housing Development Program to expand co-op housing in Canada. Provide an additional $1 billion in loans to be reallocated from the Rental Construction Financing Initiative to support co-op housing projects.
There is also a laundry list of other programs to create additional affordable housing for Indigenous Peoples, Northern Communities, and vulnerable Canadians. Enhanced tax credits for renovations to allow seniors or disabled family members to move in; and for seniors to improve accessibility in their homes. As well, money is provided for long-term efforts to end homelessness.
To combat money laundering, the government said it would extend anti-money laundering and anti-terrorist financing requirements to all mortgage-lending businesses within the next year.

For greener housing initiatives, the government is planning to provide $150 million over five years starting this year to drive building code reform to focus on building low-carbon construction projects and $200 million over the same timeline for building retrofits large development projects.
 

Bottom Line

Nothing the federal government has done in today’s budget will make much of a difference in the housing market. What does make a difference is the spike in interest rates that is already in train. Fixed mortgage rates are up to around 4%, and variable mortgage rates have begun their ascent. There is still a record gap between the two, but the Bank of Canada will likely hike the policy rate by 50 bps next week. The Bank will probably hike interest rates at every meeting for the remainder of the year and continue into the first half of next year.

It is also noteworthy what Budget 2022 did not do. It did not address REITs or investment activity by domestic non-flipping purchasers. Some were expecting a rise in minimum downpayment on investor purchases or restrictions on using HELOCs for their funding.

Budget 2022 did not raise the cap of $1 million on insurable mortgages. It did not reinstate 30-year amortization, a favourite of the NDP. And, it did not follow the BC provincial government in allowing a “cooling-off” period after a bid has been accepted, technically giving would-be buyers more time to secure financing.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

New Listings Finally Show Some Life

General 15 Mar

New Listings Finally Show Some Life
Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales were up in February 2022 as buyers jumped on the first spring listings. The number of newly listed properties surged a welcome 23.7% from extremely depressed levels, hopefully portending a much-needed increase in supply that will continue for the spring selling season. National home sales rose 4.6% month-over-month in February as prices rose 3.5%, taking the y/y price gain to a record 29.2%.

In February, sales were up in about 60% of local markets, led by some big jumps in Calgary and Edmonton. The GTA also outperformed the national averages.

The actual (not seasonally adjusted) number of transactions in February 2022 came in 8.2% below the monthly record set in 2021. That said, as was the case in January and throughout the second half of 2021, it was still the second-highest level on record for that month.
New Listings

The pullback in new listings in January was reversed in February, rebounding by 23.7% m/m. The monthly gain was led by the GTA, Calgary and the Fraser Valley.With sales up by quite a bit less than new listings in February, the sales-to-new listings ratio fell back to 75.3% after having shot up briefly to 89% in January. The February reading puts the measure roughly back in line with where it has been since the summer of 2020. The long-term average for the national sales-to-new listings ratio is 55.1%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in February 2022. The other third of local markets were in balanced market territory.

There were just 1.6 months of inventory on a national basis at the end of February 2022 — tied with January 2022 and December 2021 for the lowest level ever recorded. The long-term average for this measure is a little over five months.
Home PricesThere were just 1.6 months of inventory on a national basis at the end of February 2022 — tied with January 2022 and December 2021 for the lowest level ever recorded. The long-term average for this measure is a little over 5 months.

Compared to the national year-over-year increase, gains remain about on par in British Columbia, lower in the Prairies and Newfoundland & Labrador, a little lower in Quebec and Prince Edward Island, and a little higher in Ontario, New Brunswick and Nova Scotia. The regional differences under the surface of those provincial numbers can be seen in the table below.
Bottom Line

Canada has the most significant housing shortage in the G7. This began in late 2015 when the federal government decided it would target the entry of much larger numbers of economic immigrants. Canada is “underpopulated” and celebrates a growing population, unlike many other countries. There are many job vacancies to be filled, and more people means more economic growth and prosperity for Canada.

In mid-February, the federal government revised up its targets for immigration this year and next (see chart below), raising the spectre of even more significant housing shortages going forward. While CMHC announced an 8% rise in February housing starts this morning, home completions are not keeping up with the increase in household formation. The only solution is a sharp increase in new home construction for sale and rent. This requires local zoning regulations to increase housing density and measures to speed up the approval processes.

This month, the Bank of Canada began their rate-hiking cycle with much more to come. We believe they will raise the overnight rate again on April 13, with the likelihood of five more rate hikes this year. That would take the overnight rate up to 2.0% by yearend. The Ukraine War has added to future uncertainty, but it has also boosted inflation pressures and increased the risk of a marked economic slowdown. All in, home price pressures are likely to dissipate for the remainder of this year and well into next year.
 Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canada Reached Full-Employment in February

General 11 Mar

Canada Reached Full-Employment in February
Statistics Canada released the February Labour Force Survey this morning, reporting a much more significant than expected 336,600 net new jobs, with the unemployment rate falling a full percentage point to 5.5%. This is the first time the unemployment rate fell below its pre-Covid level and reinforces the expectation for another Bank of Canada rate hike in April and as many as five more increases this year. Last month’s recovery more than offsets the losses that coincided with the Omicron lockdowns in January and points to the continued resilience of the Canadian economy.

The loonie jumped on the news, as did Canadian government bond yields.

Other indicators point to an increasingly tight labour market in February. Total hours worked surged 3.6% to a record high, while the employment rate rose 1.0 percentage points to 61.8%. Gains were most notable in the hard-hit accommodation and food services sector (+114,000; +12.6%), and information, culture and recreation (+73,000; +9.9%) industries. Employment increases were widespread across provinces and demographic groups.

Average wages increased 3.1% from February 2020, significantly faster than the 2.4% rate recorded in January. That could signal that inflationary pressures, already intense, continue to build.
Bottom Line 

This Labour Force Survey was conducted in mid-February, before the start of the Ukrainian War. since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This will accelerate CPI inflation worldwide, which dampens consumer and business confidence and reduces family purchasing power. The war has also contributed to continuing supply disruptions, all of which point to increased uncertainty and potentially slower growth.

The Bank of Canada is likely to hike interest rates when it meets again on April 13 by 25 basis points. Any more than that is imprudent given the risk of an economic slowdown. The outlook for the remainder of this year is more uncertain and likely to be volatile, depending on how long the war lasts. Right now, the likelihood for another five or six rate hikes this year and a few more next year. This, however, is subject to change.
 

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Bank of Canada Starts Hiking Rates, Signalling More To Come 

General 2 Mar

Was expected and has finally started, great summary by our Chief Economist, Dr Cooper …….

 

 

 
Bank of Canada Starts Hiking Rates, Signalling More To Come 
The Governing Council of the Bank of Canada raised the overnight policy rate target by a quarter percentage point in a widely expected move and signalled that more hikes would be coming. This is the first rate hike since 2018. In a cautious stance, the Bank announced it was continuing the reinvestment phase, keeping its overall Government of Canada bonds holdings on its balance sheet roughly stable.

The Bank’s press release highlighted the major new source of uncertainty provided by the unprovoked invasion of Ukraine by Russia and suggested that it is a new source of substantial inflation pressure. Prices for oil, metals, wheat and other grains have skyrocketed recently. Moreover, this geopolitical distention negatively impacts confidence worldwide and adds new supply disruptions that dampen growth. “Financial market volatility has increased. The situation remains fluid, and we are following events closely.”

The Bank commented that economies have emerged from the impact of the Omicron variant more quickly than expected. Demand is robust, particularly in the US.

“Economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand. In January, Canada’s labour market recovery suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.”

Canadian CPI inflation has risen to 5.1%, as expected in January, well below the 7.5% level posted in the US.” Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.”

The final paragraph of the Bank’s press release speaks with great clarity: “The policy rate is the Bank’s primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement the policy interest rate increases. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”
Bottom Line

The Bank of Canada has made a clear statement regarding the outlook for a normalization of interest rates. We expect a series of rate hikes over the next year. Expect another 25 basis point increase following the next meeting on April 13. The increased uncertainty and volatility arising from the war in Ukraine is front of mind worldwide. Still, it will not deter central banks from tightening monetary policy to forestall an embedded rise in inflation expectations. 

The Bank of Canada has postponed Quantitative Tightening, for now, a prudent move in the face of geopolitical uncertainty.

 

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Wanted: Home Sellers

General 15 Feb

Wanted: Home Sellers
Housing affordability remains a huge political issue, and with the Department of Finance working on the upcoming budget, no doubt measures to reduce home prices will be front and center. With an election coming this spring in Ontario, Premier Ford’s Housing Affordability Task Force has made recommendations to step up homebuilding. Still, Ontario’s mayors are balking at some of their proposals. The task force report from the calls for “binding provincial action” to allow buildings up to four storeys tall and up to four units on a residential lot.

Ontario’s Big City Mayors group responded, saying, “Unilateral actions, absent municipal input, may have unintended consequences that slow down development and reduce the community support needed to continue to sustainably add housing.””While overcoming Not In My Back Yard-ism is essential to success, so is respect for local decision-making and the democratic process.”  This is a roadblock to the aggressive and timely response.

We desperately need dramatic increases in new housing construction, which has been woefully constrained by local zoning, red tape and city planning issues. These are not under the auspices of the federal government. So instead, bandaid measures that do not directly address the fundamental issue of a housing shortage will likely be forthcoming in the spring federal budget.

Today the Canadian Real Estate Association (CREA) released statistics for January 2022 showing national existing-home sales rose edged higher on a month-over-month basis, constrained by limited supply. Excess demand pushed home prices up on the month by a record 2.9%, taking the year-over-year home price index up a record 28%.

Cliff Stevenson, Chair of CREA said, “The question is will that supply be overwhelmed by demand as it was last spring, or will we start to see the re-emergence of some of the many would-be sellers who have been hunkered down for the last two years?

“The ideal situation between now and the summer would be that a huge surge of sellers come forward looking to sell in the spring 2022 market,” said Shaun Cathcart, CREA’s Senior Economist. “If that were to occur, similar to 2021, we’d likely see a massive number of sales take place which would get a lot of frustrated buyers into homeownership, and we’d likely see some cooling off on the price growth side if those offers are spread across more listings. Those are all things this market needs. It really comes down to how many properties come up for sale in the months ahead.”
New ListingsIn January, the number of newly listed homes dropped by a whopping 11% m/m, with a pullback in the GTA accounting for more than half of the national decline (chart 1 below).

With sales up a bit and new listings down by double-digits in January, the sales-to-new listings ratio shot to 89.4% compared to 78.7% in December (chart 2 below). This was the second-highest level on record for this measure, only slightly below the record 90.2% set last January. The long-term average for the national sales-to-new listings ratio is 55%.

A record 85% of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in January 2022. The other 15% of local markets were in balanced market territory.

There were only1.6 months of inventory on a national basis at the end of January 2022 — tied with December 2021 for the lowest level ever recorded. The long-term average for this measure is a little over five months.
Home PricesIn line with the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (HPI) was up a record 2.9% on a month-over-month basis in January 2022. The gains were similar to those recorded in the previous three months.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 28% on a year-over-year basis in January.

Looking around the country, year-over-year price growth is in line with the national figure at 28% in B.C., though it remains lower in Vancouver, close to on par with the provincial number in Victoria, and higher in most other parts of the province.

Year-over-year price gains are still in the mid-to-high single digits in Alberta and Saskatchewan, while gains are running at about 13% in Manitoba.

Ontario saw year-over-year price growth remain above 30% in January, with the GTA having now caught up with the pace of provincial gains. The rest of the province is a mixed bag, up in between 25% and 40% on a year-over-year basis, save for Ottawa where prices are running at 16% year-over-year.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City was about half that.

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), 27% on Prince Edward Island, and Newfoundland and Labrador is now at 12% year-over-year.
Bottom Line

While most developed countries have seen excess demand for housing over the past two years pushing home prices higher, Canada has the most significant housing shortage in the G7. This began in late 2015 when the federal government decided it would target the entry of much larger numbers of economic immigrants. Canada is “underpopulated” and celebrates a growing population, unlike many other countries. There are many job vacancies to be filled, and more people means more economic growth and prosperity for Canada.

But what the federal government forgot to do was provide housing for all new residents. Simply put, governments at all levels established no plan to provide any additional housing for all of these newcomers, let alone affordable housing.Canada’s net migration rate is 6.375 per 1,000 people, the eighth-highest in the world. Approximately 1.8 million more people were calling Canada home in 2021 than five years earlier, with four in five of these having immigrated to Canada since 2016.

This is not rocket science. The government can blame foreign buyers or investors for our housing shortage, but inadequate planning and antiquated processes and policies are the real culprits.

 
 Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

No Wonder The Bank of Canada Didn’t Hike Interest Rates Last Month

General 4 Feb

Great insight from our Chief Economist Dr Cooper!

 
No Wonder The Bank of Canada Didn’t Hike Interest Rates Last Month
Statistics Canada released the January Labour Force Survey this morning, reporting a much more extensive than expected decline in jobs last month. The Omicron shutdowns and restrictions took a much larger toll in Canada than expected, as employment fell 200,100 in January and the unemployment rate rose 0.5 percentage points to 6.5%.

Ontario and Quebec drove January employment declines, and accommodation and food services was the hardest-hit industry. In January, youth and core-aged women, who are more likely than other demographic groups to work in industries affected by the public health measures, saw the most significant impacts. Goods-producing sectors recorded a gain, led by construction.

We did not expect the Bank of Canada to hike rates in January because of the risk that Omicron restrictions would batter the economy at least temporarily. If we see a reversal in these declines in February, rate hikes could well commence. The Bank of Canada’s next policy-decision date is March 2. But we won’t see the Labour Force Survey for February until March 11. This could postpone lift-off by the BoC until the next meeting on April 13, when we will have both the February and March employment reports. This would put the first rate hike in April, exactly when the Bank’s forward guidance initially told us the hikes would begin. 

The timing of lift-off is subject to the incoming data. It is troubling that the US employment report, also released today for January, was surprisingly strong, in contrast. To be sure, the US did not impose Canadian-style Omicron restrictions last month, but the Omicron wave did depress US economic activity. It was expected to translate into weak hiring. It didn’t. 467,000 jobs were created in the US, and massive upward revisions suggest a fundamentally very strong US economy. With US companies desperate to hire and the most significant issue being the lack of qualified staff, wages are rising more sharply south of the border.

Canadian employment remains just over 30,000 above pre-pandemic levels, and the country has a strong track record of bouncing back after prior waves of the virus. Yet, today’s jobs numbers suggest a tough start for the Canadian economy in the first quarter. Hours worked — which is closely correlated to output — fell 2.2% in January, and the number of employees who worked less than half their usual hours jumped by 620,000. January also saw the first drop in full-time employment — down 82,700 — since June.

Average hourly wages grew 2.4% (+$0.72) on a year-over-year basis in January, down from 2.7% in November and December 2021 (not seasonally adjusted). The January 2022 year-over-year change was similar to the average annual wage growth of 2.5% observed in the five years from 2015 to 2019.

The concentration of January 2022 employment losses in lower-wage industries did not significantly impact year-over-year wage change, partly because employment in these industries experienced similar losses in January 2021 as a result of the third wave of COVID-19.
Bottom Line 

There remains uncertainty regarding when (not if) the Bank of Canada will begin to renormalize interest rates. Canadian swaps trading suggests markets are still expecting a hike on March 2, with five more hikes over the next year. Potential homebuyers are certainly anxious to get in under the wire.

 

 
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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