Residential Market Commentary – BoC sings same song

General Bob Rees 13 Dec

Thank you to our preferred partners at First National for the below insight 🙂

 

Residential Market Commentary – BoC sings same song

  • Dec 13, 2021
  • First National Financial LP

The Bank of Canada has made its final rate announcement of the year and it ended where it started – holding at 0.25%.

The December announcement stuck pretty much to the same script as the last announcement in October (there is no setting in November):

  • The economy continues to recover
  • The labour market is gaining strength
  • Consumer inflation is high but is expected to moderate in the 2nd half of next year
  • The Bank continues to watch inflation carefully
  • Rates will stay low until the “slack” comes out of the economy and the Bank’s 2% inflation target can be “sustainably achieved”

Market watchers tend to be characterizing the latest announcement as a wait-and-see approach.  The Bank also repeated, it did not expect to move on interest rates until the “middle quarters” of 2022.  Current thinking is, that means April rather than June.  There is no setting in May.

Speculation about a January increase, triggered by last month’s strong jobs report, seems to have been silenced.

One factor to keep an eye on is U.S. inflation.  It hit a 40-year high of 6.8% last month, sparking calls for the U.S. Federal Reserve to intervene.  If the Fed were to respond with a rate hike to tamp down inflation it could open the door to a similar move by the BoC.  But good economic growth on both sides of the border and the uncertainty brought by the omicron variant of COVID make early rate increases seem unlikely.

 

Bank of Canada maintains policy rate and forward guidance

General Bob Rees 9 Dec

Hot off the press!  The Bank of Canada met today and below is a link to their decision.  In summary, Prime Rate was unchanged and their next meeting will happen in the short term on January 26, 2022.  If you have a variable mortgage or line of credit, this is great news (no change) as your rate remains unchanged.   I am here if any questions arise and enjoy your day!

 

Bank of Canada maintains policy rate and forward guidance

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank’s extraordinary forward guidance on the path for the overnight rate is being maintained. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant.

The global economy continues to recover from the effects of the COVID-19 pandemic. Economic growth in the United States has accelerated, led by consumption, while growth in some other regions is moderating after a strong third quarter. Inflation has increased further in many countries, reflecting strong demand for goods amid ongoing supply disruptions. The new Omicron COVID-19 variant has prompted a tightening of travel restrictions in many countries and a decline in oil prices, and has injected renewed uncertainty. Accommodative financial conditions are still supporting economic activity.

Canada’s economy grew by about 5½ percent in the third quarter, as expected. Together with a downward revision to the second quarter, this brings the level of GDP to about 1½ percent below its level in the last quarter of 2019, before the pandemic began. Third-quarter growth was led by a rebound in consumption, particularly services, as restrictions were further eased and higher vaccination rates improved confidence. Persistent supply bottlenecks continued to inhibit growth in other components of GDP, including non-commodity exports and business investment.

Recent economic indicators suggest the economy had considerable momentum into the fourth quarter. This includes broad-based job gains in recent months that have brought the employment rate essentially back to its pre-pandemic level.  Job vacancies remain elevated and wage growth has also picked up. Housing activity had been moderating, but appears to be regaining strength, notably in resales. The devastating floods in British Columbia and uncertainties arising from the Omicron variant could weigh on growth by compounding supply chain disruptions and reducing demand for some services.

CPI inflation is elevated and the impact of global supply constraints is feeding through to a broader range of goods prices. The effects of these constraints on prices will likely take some time to work their way through, given existing supply backlogs. Gasoline prices, which had been a major factor pushing up CPI inflation, have recently declined. Meanwhile, core measures of inflation are little changed since September. The Bank continues to expect CPI inflation to remain elevated in the first half of 2022 and ease back towards 2 percent in the second half of the year. The Bank is closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation.

The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.

Information note

The next scheduled date for announcing the overnight rate target is January 26, 2022. The Bank will publish its full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report at the same time.

Content Type(s): Press, Press releases

Canadian Economy Bounced Back Sharply In Q3

General Bob Rees 30 Nov

Thank you Dr Cooper for the insight!

 

Canadian Economy Bounced Back Sharply In Q3
In line with the Bank of Canada’s forecast, the economy rebounded sharply in the third quarter following the weak performance in Q2. Stats Canada announced this morning that GDP grew by a whopping 5.4% in Q3 following the downwardly revised 3.2% earlier in Q2. As pandemic restrictions phased out and businesses resumed normal operations, consumer spending accelerated, growing at a 17.9% annual rate. Expenditures on clothing (+26.8%) and footwear (+30.3%) surpassed pre-pandemic spending. Expenditures on services rose 27.8%, led by a jump in accommodation and food services sales. Transport services (+40.3%), recreation and culture services (+26.1%), food, beverages and accommodation services (+29.0%), and personal grooming services (+35.8%) all showed significant increases.

Exports rebounded after a sharp decline in Q2. Business investment barely changed, hampered by supply chain disruptions.

Consumers remained flush with cash as incomes grew, boosted by wage gains and government transfer payments. The household saving rate fell from 14.0% in the second quarter to 11.0% in the third quarter, still strong from a historical perspective. Although spending surpassed income this quarter, this was the sixth consecutive quarter with a double-digit savings rate. The rate also remained higher than in the pre-pandemic period. The household savings rate is aggregated across all income brackets. In general, savings rates rise with income.

Housing Investment DeclinesAfter four consecutive quarters of solid growth, new construction and renovations fell in the third quarter. The 5.2% (not annualized) drop in new construction was the most significant drop since the second quarter of 2009. The decrease in investments for the new construction of detached and multiple-unit dwellings was substantial, especially in Newfoundland and Labrador and Prince Edward Island. Nationally, there were $96.3 billion additions to the stock of homes in the third quarter.

Housing investment in new construction and renovations

Chart 4: Housing investment in new construction and renovationsOwnership transfer costs (-10.0%) fell for the second consecutive quarter as activity in the resale market slowed. The decrease was widespread, and only Newfoundland and Labrador and Yukon posted increased ownership transfer costs.

The remarkable accumulation of residential mortgage liabilities in the previous quarter continued, with households adding $38 billion in the third quarter, more than double that two years earlier.

Bottom LineToday’s release is, in some respects, ‘ancient history.’ Monthly GDP by industry data released this morning for September showed a modest uptick of 0.1%. And preliminary information indicates that real GDP rebounded in October, up 0.8% with increases in most sectors. Manufacturing led the growth after contracting in September due in part to the effects of the semiconductor shortage. Other notable increases were in the public sector, construction, finance and insurance, and transportation and warehousing.

All in, GDP in Canada is still below its pre-pandemic level. And uncertainty has increased with the announcement of the new Omicron variant. Traders are betting that the Bank of Canada will begin hiking the key overnight rate by April of next year and markets are currently pricing in five rate hikes in the next 12 months. Inflation remains a troubling concern, and Fed Chairman Jay Powell said today in testimony before Congress that he would accelerate his plan to taper all bond purchasing. In addition, according to Bloomberg News, “Powell also told a Senate banking committee that it’s time to stop using the word “transitory” to describe inflation.”

– Dr Sherry Cooper

Inflation Surge Is No Need For Hysteria

General Bob Rees 17 Nov

Why does it feel like a carton of eggs and a litre of milk costs $100 these days? ……..  Dr Cooper explains

 

 

Inflation Surge Is No Need For Hysteria
StatsCanada today reported that consumer price inflation rose to 4.7% from year-ago levels in October, compared to 4.4% in September. This is in line with market expectations and is well below the US’s 6.2% pace reported for the same period. Inflation is rising all over the world, the direct result of extreme weather events and supply chain chaos generated the creaky reopening of economies around the world. With pent-up demand surging, delays in production and transportation have led to price hikes in many sectors. Extreme weather conditions have exacerbated these price pressures, driving up food, energy and other commodity prices. The pandemic and climate change are unprecedented exogenous forces and should not be compared to the inflation surge in the 1970s. Nor should we assume that traditional monetary tightening would ease these pressures unless we are willing to run the risk of recession.
Last month, prices rose in all eight major components on a year-over-year basis, primarily driven by the surge in gasoline prices, which spiked 47.1% from year-ago levels. Extreme drought, especially in China, led to a dearth of hydroelectric power and shortages in other energy sources such as coal and natural gas. The shift to oil for power generation boosts the cost of oil and gasoline. It also caused a domino effect in shortages of other essential materials that require intensive energy use in their production, such as fertilizer and aluminum. These feed into shortages of food and metal components that raise the price of many consumer goods. Combine this with disruptions at the ports, in trucking and on the rail lines. It is no wonder that increasing costs and excess demand are driving up consumer prices worldwide.

The question is, would central bank tightening reduce this kind of inflation. I doubt it. Instead, we are likely to see these pressures ease over time (see chart below). The problem is we have repeatedly underestimated the time it would take to work this all out, leading some to call for a quicker response by the Bank of Canada and the Fed, among other central banks, for fear that the inflation will become embedded.

Embedded inflation, caused by rising wages and inflation expectations, led to wage-price spiralling in the 1970s and early 1980s. In Canada, inflation remained high well into the early 1990s because of substantial federal and provincial budgetary spending. I do not believe we are anywhere near that reality today. To be sure, fiscal policy in response to the pandemic has generated extraordinary budgetary red ink, but price pressures today are not the result of budgetary actions.

Bottom Line

Market-driven interest rates have already surged and are reflected in the rise in fixed mortgage rates. Maintaining a steady overnight rate at its effective lower bound has kept the prime rate and variable mortgage rates stable at extremely low levels. Undoubtedly, these rates will rise in time. The Bank of Canada has been clear that it will occur soon than they initially thought. They are nervous about inflation and are now saying a return to the 2% target will not happen until the end of next year.

Just this week, senior leadership at the Bank has taken to the news waves to suggest we are getting closer to full employment. Traders are now betting that the overnight rate target will rise 1.5 percentage points in 2022, beginning in April. Rates will increase, but we are not on the precipice of runaway inflation.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Home Sales Surge in October

General Bob Rees 15 Nov

Thank you Dr Cooper!

 

Home Sales Surge in October
Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose a whopping 8.6% in October, its most robust month-over-month pace since July 2020, when the first lockdown eased briefly. This was on the heels of a modest uptick in September–the first gain since March of this year.Sales were up month-over-month in about three-quarters of all local markets and in all major cities.

The actual (not seasonally adjusted) number of transactions in October 2021 was down 11.5% on a year-over-year basis from the record for that month set last year. That said, it was still the second-highest ever October sales figure by a sizeable margin.

On a year-to-date basis, some 581,275 residential properties traded hands via Canadian MLS® Systems from January to October 2021, surpassing the annual record of 552,423 sales for all of 2020.

“2021 continues to surprise. Sales beat last year’s annual record by about Thanksgiving weekend, so that was always a lock, but I don’t think too many observers would have guessed the monthly trend would be moving up again heading into 2022,” said Shaun Cathcart, CREA’s Senior Economist. “A month with more new listings is what allows for more sales because those listings are mostly all still getting gobbled up; however, with demand that strong, the supply of homes for sale at any given point in time continues to shrink. It is at its lowest point on record right now, which is why it’s not surprising prices are also re-accelerating. We need to build more housing.”

The basic story hasn’t changed, even with the rise in fixed mortgage rates: Housing demand remains well more than supply. Inventories of unsold properties are at historic lows. While the Trudeau government promised to address the massive supply shortage, in reality, housing construction is under the auspices of provincial and local government planning and zoning bodies. Moreover, the resurgence of immigration will widen the excess demand gap for homes to buy or rent. 

New ListingsThe number of newly listed homes rose by 3.2% in October compared to September, driven by gains in about 70% of local markets. With so many markets starved for supply, it’s not surprising to see sales go up when new listings rise.

As of October, 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. The sales-to-new listings ratio tightened again last month to 79.5% compared to 75.5% in September and 73.5% in August. The long-term average for the national sales-to-new listings ratio is 54.8% (see chart below).

There were just 1.9 months of inventory on a national basis at the end of October 2021, down almost half a month from three months earlier and back in line with the all-time lows recorded in February and March of this year. The long-term average for this measure is more than five months.

Home PricesIn line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) accelerated to 2.7% on a month-over-month basis in October 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 23.4% on a year-over-year basis in October, a more significant gain than in the three previous months.

Year-over-year price growth in B.C. has crept back above 20%, though it is lower in Vancouver, on par with the 20% provincial gain in Victoria, and higher in other parts of the province.

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while they are currently at about 10% in Manitoba.

Ontario saw year-over-year price growth closing in on 30% in October, with GTA surging forward. Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 13%.

Price growth is running a little above 30% in New Brunswick (a little higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (a bit lower in St. John’s).

Bottom Line

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 level. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US just posted a year-over-year inflation rate for October at 6.2%–higher than expected. This Wednesday, Canada’s CPI data will be released. We saw a y/y inflation rate of 4.4% in September. Undoubtedly, the October data will surpass that level. Maybe that is why Tiff Macklem wrote an op-ed in the Financial Times today reiterating that the Bank of Canada is getting closer to raising interest rates as slack in the economy dissipates. This is in line with the hawkish BoC policy statement last month.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem wrote. “We are not there yet, but we are getting closer.”

According to Bloomberg News, Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged that a high level of uncertainty remains. “Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates,” he wrote.

“While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand,” Macklem said. “What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust.”

 

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

General Bob Rees 8 Nov

Thank you to our preferred parnters at First National!

 

  • Nov 8, 2021
  • First National Financial LP

The Bank of Canada is clearly signaling its intention to raise interest rates as early as the middle of next year.  That has many market watchers forecasting a surge in home purchases and prices in the coming months.  The analysts expect to see a scramble of home buyers trying to lockdown their deals before the rates rise.

However, in a recent report, Moody’s Analytics lays out the case for price stabilization and slower price growth, based mainly on the premise that supply and demand will fall back into line.

The report cites Canadian Real Estate Association data that shows existing-home sales fell for the fifth straight month in August.  At 587,000 annualized units, sales are down 27.5% from the peak reached in March. CREA has also forecast a slowdown in price growth.  The association expects prices to rise by 5.6% in 2022, a significant pullback from the nearly 20% increase projected for this year.

Moody’s points to declining housing starts and a contraction in the value of building permits being issued as further signs the market is cooling.  Although both of those measures remain high compared to pre-pandemic levels.  As well, the pandemic caused a slowdown in home completions which contributed to supply shortages.  As those homes are finished and hit the market, over the next year, the shortages should start to ease.  Moody’s also believes the pandemic-inspired surge in demand has largely played out.  Further, it expects the Bank of Canada’s pending interest rate increases to drag home price appreciation to a near standstill through 2022 and 2023.

The report says price growth should be re-invigorated by the end of 2023 as population growth, immigration and “a nearly healed labour market re-energize wage and salary growth.”

A More Normal Jobs Report In October

General Bob Rees 5 Nov

A More Normal Jobs Report In October
Statistics Canada released the October Labour Force Survey this morning, reporting a slowdown in employment growth from the blockbuster pace of recent months. While some commentators were disappointed in the results, I have a more positive take. Canada returned its pre-pandemic level of employment in September ahead of the US and other G-7 countries. The resumption of a more normal pace of job gains was inevitable as we get closer to full employment.

Employment rose by 31,200 (+0.2%) in October, following a jump of 157,000 the month before. Indeed, job growth surged at an average monthly rate of 143,000 from June through September. That is not a sustainable pace of job gains but rather a reflection of the spike in hiring in the immediate aftermath of the lockdown. For example, hiring averaged 23,000 per month in the two years before the outbreak of Covid.

Employment increases in several industries, including retail trade, were offset by declines elsewhere, including accommodation and food services. Employment rose in Ontario and New Brunswick, while it fell in Manitoba and Saskatchewan. Declines in self-employment offset Gains among paid employees.The number of employed people working less than half their usual hours fell 9.7% (-100,000) in October and remained 117,000 higher (+14.5%) than in February 2020. Total hours worked were up 1.0% in October and were 0.6% below their pre-pandemic level.

Among people of core working age (25 to 54 years), employment rose by 53,000 (+0.4%) in October, with all the gains in full-time work.

Unemployment rate declines for the fifth consecutive month

The unemployment rate fell 0.2 percentage points to 6.7% in October, a 20-month low and within 1.0 percentage points of the rate (5.7%) in February 2020 (see chart below).

Long-term unemployment—the number of people continuously unemployed for 27 weeks or more—was little changed in October, at 378,000, but down from its most recent peak of 486,000 in April 2021. Among people who were in long-term unemployment in September, 15.2% had found employment in October, slightly higher than the average of 11.6% observed from 2017 to 2019.

The labour force participation rate—the share of the population working or searching for work—fell by 0.2 percentage points to 65.3% in October, as fewer youth aged 15 to 24 searching for work. The size of the October decrease is consistent with typical monthly variations observed prior to the COVID-19 pandemic. The overall participation rate in October was virtually the same as the pre-pandemic rate of 65.5% observed in February 2020.

This rebound in Canada’s labour force participation rate contrasts with trends observed in the United States, where participation has recovered less quickly. When Canadian data are adjusted to US concepts, Canada’s participation rate was 65.1% in September 2021, 0.3 percentage points below its February 2020 level. In the United States, the September labour force participation rate was 1.7 percentage points below its pre-pandemic level.

Bottom Line 

Today’s employment data confirm that the Canadian economy is moving closer to full employment and may well hit the zero-output-gap threshold in the middle quarters of 2022, as the Bank of Canada suggested at their most recent policy meeting. The bulk of the gains in hiring were in the hard-hit retail sector, which returned to pre-pandemic levels last month. All of the gains were in full-time employment and average wages for permanent workers were 2.1% y/y. Wages gains are still relatively modest, supporting the Bank of Canada’s view that inflation pressures will dissipate by the end of next year.

Employment is now a bit above levels in February 2020. This is a historically rapid rebound from the massive job losses in the immediate wake of the first pandemic lockdowns.

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Residential Market Commentary – Affordability and debt cause concerns

General Bob Rees 25 Oct

Thank you to our partners at First National for the below update 🙂

 

 

  • Oct 25, 2021
  • First National Financial LP

 

With growing expectations that the Bank of Canada is going to move ahead with interest rate increases in the second half of next year, concerns are building about affordability, debt and the standard of living in Canada.

The household debt-to-income ratio has been a serious economic concern in this country for several years.  The latest “Affordability Index” produced by debt services firm BDO Debt Solutions suggests the pandemic may be contributing to that problem.

The survey indicates 43% of the people who took part – and who have debt – increased that debt due to the pandemic, up 4% from last year.  It also shows that 26% of respondents incurred at least one new type of debt.  For more than a quarter of them, it was credit card debt.

Of all the respondents with a new type of debt, 70% say it has caused their standard of living to decrease.  Just 10% of that group feel confident they will be able to get back to their pre-pandemic standard of living.

House prices have jumped sharply during the pandemic.  Despite hectic sales, the survey suggests 45% of Canadians are facing affordability barriers to home ownership, a 7% increase year-over-year.

Three-quarters of the respondents aged 35 to 54, who do not own a home, say they are unlikely to buy in the next three years.  Nearly half of the respondents – of all age groups – who say they are unlikely to own a home in the next three years indicate they are unable to save enough for a down payment.

Prices are Rising Everywhere–Transitory Can Last A Long Time

General Bob Rees 20 Oct

We can all relate to the recent rise in inflation …. it seems like s jug of milk and a loaf of bread coast $30 these days.  Below explains …..

 

 

Prices are Rising Everywhere–Transitory Can Last A Long Time
Today’s release of the September Consumer Price Index (CPI) for Canada showed year-over-year (y/y) inflation rising from 4.1% in August to 4.4%, its highest level since February 2003. Excluding gasoline, the CPI rose 3.5% y/y last month.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down.”

Prices rose y/y in every major category in September, with transportation prices (+9.1%) contributing the most to the all-items increase. Higher shelter (+4.8%) and food prices (+3.9%) also contributed to the growth in the all-items CPI for September.Prices at the gas pump rose 32.8% compared with September last year. The contributors to the year-over-year gain include lower price levels in 2020 and reduced crude output by major oil-producing countries compared with pre-pandemic levels.

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

Bottom Line

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

Written by: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canadian Home Prices Continued to Rise As Insufficient Supply Creates Excess Demand

General Bob Rees 15 Oct

Thank you for the great summary Dr Cooper!

 

 

 

Canadian Home Prices Continued to Rise As Insufficient Supply Creates Excess Demand
Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose 0.9% between August and September 2021, posting the first monthly gain since March (see chart below). On a year-over-year (y-o-y) basis, the number of transactions last month was down 17.5%. Nevertheless, it was still the second-highest sales figure ever for the month of September.

“September provided another month’s worth of evidence from all across Canada that housing market conditions are stabilizing near current levels,” said Cliff Stevenson, Chair of CREA. “In some ways that comes as a relief given the volatility of the last year-and-a-half, but the issue is that demand/supply conditions are stabilizing in a place that very few people are happy about. There is still a lot of demand chasing an increasingly scarce number of listings, so this market remains very challenging.”

Housing supply remains a major constraint, forcing many buyers to either pay up for scarce properties or to remain on the sidelines. This is particularly troublesome for first-time homebuyers as mortgage rates are coming under renewed upward pressure as inflation concerns have forced yield curves to steepen and longer-term bond yields to rise worldwide.

New ListingsExacerbating supply problems, the number of newly listed homes fell by 1.6% in September compared to August, as gains in parts of Quebec were swamped by declines in the Lower Mainland, in and around the GTA and in Calgary.

With sales up and new listings down in September, the sales-to-new listings ratio tightened to 75.1% compared to 73.2% in August. The long-term average for the national sales-to-new listings ratio is 54.8%.

Based on a comparison of sales-to-new listings ratio with long-term averages, a small but growing majority of local markets are moving back into seller’s market territory (see chart below). As of September, it was close to a 60/40 split between seller’s and balanced markets.

There were 2.1 months of inventory on a national basis at the end of September 2021, down slightly from 2.2 months in August and 2.3 months in June and July. This is extremely low and indicative of a strong seller’s market at the national level and in most local markets. The long-term average for this measure is more than 5 months.

Home PricesIn line with tighter market conditions, the Aggregate Composite MLS® Home Price Index (MLS® HPI) accelerated to 1.7% on a month-over-month basis in September 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 21.5% on a year-over-year basis in September, up a bit from the 21.3% year-over-year gain recorded in August.

Looking across the country, year-over-year price growth is creeping up above 20% in B.C., though it is lower in Vancouver (13.9%), on par with the provincial number in Victoria, and higher in other parts of the province (see table below).

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while gains are into the low double digits in Manitoba.

Ontario saw year-over-year price growth pushing 25% in September; however–as with B.C.–big, medium and smaller city trends, gains are notably lower in the GTA (19.0%) and Ottawa (16.4%), around the provincial average in Oakville-Milton (26.9%), Hamilton-Burlington (26.5%) and Guelph (26.4%), and considerably higher in many of the smaller markets around the province.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 12.7%. Price growth is running a little above 30% in New Brunswick (higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 12% year-over-year (a bit lower in St. John’s).

Bottom Line

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 level. Liberal Party election promises do not address these issues.

It is noteworthy that while Canada suffers one of the most acute housing shortages, housing affordability is getting worse in many OECD countries (see chart below).

Adding to the affordability problem, interest rates have bottomed as an inflation-induced selloff in bonds mount despite the assertion of most central banks that inflation is temporary. Very recently, Governor Tiff Macklem admitted that inflation is likely to remain a problem until the end of the year.

Some of the inflation is coming from disruptions on the supply side emanating from Covid-related disruptions, which may work themselves out in time. However, they’re still getting worse, and many suggest the timeline could be much longer than just this year. In addition, extreme weather events and climate change initiatives–both of which are more or less permanent–have also boosted inflation pressure. Consumer demand for goods and housing and business capital expenditures have surged in the face of labour shortages. Wage rates are beginning to rise. All of this has raised prices spilling into next year. Higher interest rates are likely sustainable even though the Bank of Canada and the Federal Reserve will likely hold overnight rates steady for the next year (see charts below).

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
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