Affordable Housing Is A Key Theme In Federal Budget 2022

General Bob Rees 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 Bob Rees 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 Bob Rees 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 Bob Rees 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 Bob Rees 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 Bob Rees 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

Bank of Canada holds benchmark interest rate steady, updates 2022 economic outlook

General Bob Rees 26 Jan

Thank you to our partners at First National for the below summary!

 

Jan 26, 2022

First National Financial LP

 

This morning in its first scheduled policy decision of 2022, the Bank of Canada left its target overnight benchmark rate unchanged at what it describes as its “lower bound” of 0.25%. As a result, the Bank Rate stays at 0.5% and the knock-on effect is that borrowing costs for Canadians will remain low for the time being.

The Bank also updated its observations on the state of the economy, both in Canada and globally, leaving a strong impression that rates will rise this year.

More specifically, the Bank said that its Governing Council has decided to end its extraordinary commitment to hold its policy rate at the effective lower bound and that looking ahead, it expects “… interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving” its 2% inflation target.

These are the other highlights of today’s BoC announcement.

Canadian economy

  • The economy entered 2022 with considerable momentum, and a broad set of measures are now indicating that economic slack is absorbed
  • With strong employment growth, the labour market has tightened significantly with elevated job vacancies, strong hiring intentions, and a pick up in wage gains
  • Elevated housing market activity continues to put upward pressure on house prices
  • Omicron is “weighing on activity in the first quarter” and while its economic impact will depend on how quickly this wave passes, the impact is expected to be less severe than previous waves
  • Economic growth is then expected to bounce back and remain robust over the Bank’s “projection horizon,” led by consumer spending on services, and supported by strength in exports and business investment
  • After GDP growth of 4.5% in 2021, the Bank expects Canada’s economy to grow by 4% in 2022 and about 3.5% in 2023

Canadian inflation

  • CPI inflation remains “well above” the Bank’s target range and core measures of inflation have edged up since October
  • Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022
  • As supply shortages diminish, inflation is expected to decline “reasonably quickly” to about 3% by the end of 2022 and then “gradually ease” towards the Bank’s target over the projection period
  • Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target
  • The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation

Global economy

  • The recovery is strong but uneven with the US economy “growing robustly” while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector
  • Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions
  • Oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19
  • Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions
  • Overall, the Bank projects global GDP growth to moderate from 6.75% in 2021 to about 3.5% in 2022 and 2023

January Monetary Policy Report

The key messages found in the BoC’s Monetary Policy Report published today were consistent with the highlights noted above:

  • A wide range of measures and indicators suggest that economic slack is now absorbed and estimates of the output gap are consistent with this evidence
  • Public health measures and widespread worker absences related to the Omicron variant are slowing economic activity in the first quarter of 2022, but the economic impact is expected to be less severe than previous waves
  • The impacts from global and domestic supply disruptions are currently exerting upward pressure on prices
  • Inflationary pressures from strong demand, supply shortages and high energy prices should subside during the year
  • Over the medium term, increased productivity is expected to boost supply growth, and demand growth is projected to moderate with inflation expected to decline gradually through 2023 and 2024 to close to 2%
  • The Bank views the risks around this inflation outlook as roughly balanced, however, with inflation above the top of the Bank’s inflation-control range and expected to stay there for some time, the upside risks are of greater concern

Looking ahead

The Bank intends to keep its holdings of Government of Canada bonds on its balance sheet roughly constant “at least until” it begins to raise its policy interest rate.  At that time, the BoC’s Governing Council will consider exiting what it calls its “reinvestment phase” and reducing the size of its balance sheet. It will do so by allowing the roll-off of maturing Government of Canada bonds.

While the Bank acknowledges that COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council believes that overall slack in the economy is now absorbed, “thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate” and setting the stage for increases in 2022.

Residential Market Commentary – Canadians prefer interest increases over inflation

General Bob Rees 19 Jan

Thank you for the below update First National, one of our preferred / exclusive lenders 

 

Jan 17, 2022

First National Financial LP

 

Inflation is running at generational highs in this country, and that is a bigger concern for Canadians than higher interest rates.

Canada’s headline inflation rate – the Consumer Price Index – is currently running at just below 5%.  That is the highest level in nearly 20 years.  The most recent numbers out of the U.S. put the rate there at 7% which is a 40 year high.

A Nanos poll taken for Bloomberg News late last month suggests a majority of Canadians would prefer to see the Bank of Canada increase interest rates, in an effort to rein-in rising costs, rather than let inflation get any higher.

The poll found 87% of those surveyed are more concerned about the pace of rising prices that they are about higher interest rates.  Ten percent are more concerned about higher borrowing costs.

Given the level of Canadian household debt the results might seem counter-intuitive.  Fifty-one percent of respondents say they will likely face, at least, some negative impact from higher interest rates.

This might be explained by a generational divide that showed up in the poll.

“Younger Canadians are much more likely to report a negative sensitivity to higher interest rates compared to middle-aged and older individuals,” says Nik Nanos, founder of the Nanos Research Group.

Analysts point out, though, that interest rate increases may cool spending and reduce the demand for debt, such as mortgages, but they will not resolve key inflation drivers like constrained production and supply chain slowdowns.

 

Housing Affordability Erodes Further With Record-Low Supply

General Bob Rees 17 Jan

Thank you Dr Cooper!

 
Housing Affordability Erodes Further With Record-Low Supply
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. What we desperately need is dramatic increases in new housing construction, which has been woefully constrained by local zoning 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. More on that below.
Today the Canadian Real Estate Association (CREA) released statistics for December 2021 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 2.5%, taking the 2021 home price index up a record 26.6% year-over-year.

Small gains in home sales in November and December followed a 9% surge in activity in October, placing sales in the final quarter of 2021between the highs and lows seen earlier and the year (see chart below).With the exception of month-over-month sales gains in Calgary and the Fraser Valley, most other large markets mirrored the national trend of little change between November and December. The actual (not seasonally adjusted) number of transactions in December 2021 came in 9.9% below the record for that month set in 2020. That said, as has been the case throughout the second half of 2021, it was still the second-highest level on record for the month.

On an annual basis, a total of 666,995 residential properties traded hands via Canadian MLS® Systems in 2021. This was a new record by a large margin, surpassing the previous annual record set in 2020 by a little more than 20%, and standing 30% above the average of the last 10 years.
New ListingsThe number of newly listed homes fell 3.2% in December compared to November, with declines in Greater Vancouver, Montreal and a number of other areas in Quebec more than offsetting an increase in new supply in the GTA.

With sales little changed and new listings down in December, the sales-to-new listings ratio tightened to 79.7% compared to 77% in November. The long-term average for the national sales-to-new listings ratio is 54.9%.

Almost two-thirds of local markets were sellers’ markets based on the sales-to-new listings ratio being more than one standard deviation above its long-term mean in December 2021. The remaining one-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 December 2021 — the lowest level ever recorded. The long-term average for this measure is a little more than 5 months.
Home PricesIn line with the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.5% on a month-over-month basis in December 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 26.6% on a year-over-year basis in December.

Looking across the country, year-over-year price growth has crept back above 25% in B.C., though it remains lower in Vancouver, close to on par with the provincial number in Victoria, and higher in 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 12% in Manitoba.

Ontario saw year-over-year price growth remain above 30% in December, with the GTA continuing to surge ahead after trailing other parts of the province for most of the pandemic.

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

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 11% year-over-year.
Bottom Line–We Are In The Political Season

The Bank of Canada conducted a recent study of residential mortgage originations at federally regulated financial institutions since 2014 to determine the share and financial characteristics of mortgage-financed homebuying by type of purchaser: first-time homebuyers; repeat buyers (the so-called move-up market); and investors.

First-time homebuyers are the largest group, generally accounting for roughly half of all mortgage purchases since 2014. Repeat homebuyers (those that discharged their previous mortgage when they took a new mortgage) comprised 31% of all mortgaged buyers over the same period. Investors having multiple mortgages represent 19% of purchases since 2014. Investors without mortgages are not included in the data, so foreign investors who might have borrowed money outside of Canada are not included.

The chart below shows that since 2015, the share of first-time homebuyers has fallen from over 52% to less than 48% of all mortgaged homebuying, while the share of repeat buyers is up slightly, and the share of investors has risen from under 18% to over 20%. Most of the rise in investor activity was in 2017 and 2021.

The Bank of Canada concludes that the increased presence of investors in the housing market has augmented demand and “may reflect a belief that house prices will continue to rise in value…By exacerbating so-called boom-bust cycles in housing markets, investors could thus be a source of instability for the financial system and the economy more broadly. At the same time, investors are an important source of housing rental supply. We need to do further research to examine the delicate balance between adding to rental supply while removing new builds and resale supply in a housing market that already has supply constraints.”

The Ministry of Housing and Diversity and Inclusion, in partnership with the Canada Mortgage and Housing Corporation (CMHC), according to a Financial Post article dated January 12, is concerned about “speculative investing” in housing, “prompting Canadians to overbid on properties, borrow beyond what they can afford, and push home prices even higher.”

“By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.” Currently, investors must make a 20% down payment.

It looks like the Feds may well raise the minimum downpayments on investment property loans. They are also considering a limitation on the sources of funding for these properties.

What the Canadian housing market needs is substantial new affordable housing construction. Impeding this is the long and tortuous planning process and local government zoning rules. Actions taken to reduce housing demand in the face of nearly a million new immigrants coming to Canada in 2021 and 2022, if severe enough, could throw the whole economy into recession, particularly given that the Bank of Canada is on the precipice of hiking interest rates. The wealth and liquidity of millions of Canadian households are tied up in housing, so the government must take care not to push demand restrictions too far, especially since condo investments augment the very tight rental markets.
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Housing Demand Outpaces Supply

General Bob Rees 15 Dec

Thank you Dr Cooper!

 
Housing Demand Outpaces Supply
Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose 0.6% in November following the whopping 8.6% surge the month before. Sales could have been higher had it not been for the limited supply of homes for sale. Homebuyers are anxious to finalize purchases before the Bank of Canada hikes interest rates next year.Across the country, sales gains in Calgary, Edmonton, the B.C. interior, Regina and Saskatoon offset declines in activity in the GTA and Montreal.

The actual (not seasonally adjusted) number of transactions in November 2021 was firm historically, edging down a scant 0.7% on a year-over-year basis, missing the 2020 record for that month by just a few hundred transactions.

On a year-to-date basis, some 630,634 residential properties have traded hands via Canadian MLS® Systems between January and November 2021, far surpassing the annual record 552,423 sales for all of 2020.

“The fact is that the supply issues we faced going into 2020, which became much worse heading into 2021, are even tighter as we move into 2022. Interest rate hikes will make it even harder for new entrants to break into the market next year, even though activity may remain robust as existing owners continue to move around in response to all of the changes to our lives since COVID showed up on the scene. As such, the issue of inequality in the housing space will remain top of mind. One wildcard will be what policymakers decide to do with the national mortgage stress test, which could act as a kind of cushion against rising rates for young and/or first-time buyers. It could also make things that much harder for them,” said Shaun Cathcart, CREA’s Senior Economist.
New ListingsThe number of newly listed homes rose by 3.3% in November compared to October, driven by gains in a little over half of local markets, including the GTA, Lower Mainland, Montreal, and many markets in Ontario’s Greater Golden Horseshoe.

With new listings up by more than sales in November, the sales-to-new listings ratio eased a bit to 77% compared to 79.1% in October. The long-term average for the national sales-to-new listings ratio is 54.9%.

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

There were just 1.8 months of inventory on a national basis at the end of November 2021, tied with March 2021 for the lowest level ever recorded. The long-term average for this measure is more than 5 months.
Home PricesIn line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.7% on a month-over-month basis in November 2021.
The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 25.3% year-over-year in November.

Year-over-year price growth has crept back up to nearly 25% in B.C., though it remains lower in Vancouver, on par with the provincial number in Victoria, and higher in 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 have risen to about 13% in Manitoba.

Ontario saw year-over-year price growth hit 30% in November, with the GTA continuing to surge ahead after trailing most other parts of the province for most of the pandemic.

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

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (lower in St. John’s).
Bottom Line–Lots of News Today

Canada continues to contend with one of the developed world’s most severe housing shortages; as our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal and provincial levels. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US posted a year-over-year inflation rate for November at 6.8%, up from 6.2% posted the month before. This undoubtedly led the US Federal Reserve to issue a hawkish statement today, intensifying their battle against inflation. They announced that they will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.

According to Bloomberg News, “The faster pullback puts Powell in a position to raise rates earlier than previously anticipated to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new omicron strain, saying that risks to the economic outlook remain, including from new variants of the virus.”

On more positive news, Canada’s inflation rate held steady at 4.7% y/y in November, well below the pace in the US. Excluding food and energy products, CPI ticked slightly lower to 3.1% from a year ago in November, or 2.7% on an annualized seasonally adjusted basis relative to the pre-shock February 2020 level. Roughly half of that 2.7% can still be attributed to rising expenses related to home-owning and car purchase or leasing. But the breadth of inflation pressure has also widened, with 58% of the consumer basket seeing faster-than-2% annualized growth in November from pre-pandemic (2019) levels on average over the last three months. That compares to 47% in February 2020. The broadening is expected to carry on in 2022 as rising input, transport and labour expenses continue to flow through supply chains for a wider swath of goods and services. Further disruptions to supply chains and energy markets from Omicron and the BC flood later in November are expected to add to price uncertainties in the near term.

In a speech today, Governor Tiff Macklem of the Bank of Canada assured the public that the Bank of Canada would remain the country’s number-one inflation fighter. Macklem clarified that flexibility in their new mandate won’t apply in situations — like now — when inflation is considerably above target.

At a press conference after the speech, Macklem noted he wasn’t comfortable with current elevated levels of inflation and the “time is getting closer” for policymakers to move away from the forward guidance. Markets are pricing in five interest rate hikes next year by the Bank of Canada.
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
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