StatsCanada today reported that consumer price inflation rose to 5.1% from year-ago levels in January, compared to 4.8% in December. This was higher than expected but still well below US inflation posted at 7.5% for the same period. Undoubtedly, this puts additional pressure on the Bank of Canada to hike the overnight policy rate target in early March when it meets again, despite the disappointing jobs data last month. Even excluding gasoline, the CPI rose 4.3% y/y last month.

Shelter costs rose 6.2% year over year in January 2022, the fastest pace since February 1990. Higher prices for new homes contribute to higher costs associated with the upkeep of a property or the homeowners' replacement cost. Higher home prices also tend to raise other owned accommodation expenses. In contrast, lower interest rates bring borrowing costs down—measured in the CPI through the mortgage interest cost index, which includes new and resale home prices.

The owned accommodation index, which measures the ongoing costs of homeownership, increased 6.1% year over year in January. Homeowners' replacement cost (+13.5%) and other owned accommodation expenses (+14.0%), which includes commissions on the sale of real estate, put upward pressure on shelter prices amid rapid price growth in the housing market throughout the pandemic.

Conversely, mortgage interest costs fell 6.8% year over year in January, putting downward pressure on the shelter index.

Renters also saw a rise in prices, as the rented accommodation index increased 3.2% year over year, contributing to the higher shelter prices Canadians faced in January.

Another highly visible component of rising inflation was the surge in food prices. Shoppers paid more for groceries, as food prices from stores rose faster in January 2022 (+6.5%) than in December 2021 (+5.7%).  Prices for fresh or frozen beef (+13.0%), fresh or frozen chicken (+9.0%), and fresh or frozen fish (+7.9%) rose more in January 2022 compared with December 2021. Margarine (+16.5%) and condiments, spices, and kinds of vinegar (+12.1%) were also up compared with January 2021. Higher input prices and shipping costs because of ongoing supply chain disruptions have contributed to increased food prices. In addition to supply chain disruptions, unfavourable growing conditions have led to higher prices for fresh fruit (+8.2%) and bakery products (+7.4%).

Consumers paid more for alcohol in January 2022, as alcoholic beverages purchased from stores rose 2.9%, following a 1.6% gain in December 2021. Much of this increase stemmed from higher prices for both beer and wine, amid material shortages and increased shipping costs.

Bottom Line

Inflation has now exceeded the Bank of Canada's 1% to 3% target band for 10 consecutive months. Other central banks have already begun to hike overnight rates from their effective lower bound of 25 basis points introduced in March 2020.

The U.S. Federal Reserve is preparing to raise interest rates in March, and last Friday's jobs report fueled speculation it may need to move aggressively. The Bank of England just delivered back-to-back hikes, and some of its officials wanted to act even more forcefully. The Bank of Canada is set for liftoff next month. Even the European Central Bank may get in on the action later this year.

The recent trucker protests and border blockades have further disrupted the fragile auto supply chain. Wages in Canada rose 2.4% y/y, so Canadian households, on average, are seeing their purchasing power diminish.

Markets are pricing in as many as seven increases in borrowing costs over the next 12 months. While the Bank runs the risk of tightening too aggressively, there is little doubt that the emergency monetary easing has run its course. 

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

For Mortgage information including today's Mortgage Rates visit www.jonathansilveira.ca

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 Listings

In 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 Prices

In 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.

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

For Mortgage information including today's Mortgage Rates visit www.jonathansilveira.ca

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 Listings

The 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 Prices

In 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.

By Dr. Sherry Cooper - Chief Economist, Dominion Lending Centre

For Mortgage information including today's Mortgage Rates visit www.jonathansilveira.ca

The Bank of Canada surprised markets today with a more hawkish stance on inflation and the economy. The Bank released its widely anticipated October Monetary Policy Report (MPR) in which its key messages were:

     1. The Canadian economy has accelerated robustly in the second half.

     2. Labour markets have improved, especially in the hard-to-distance sectors. Despite continuing slack, many businesses can't find appropriate workers quickly enough to meet demand.

     4. Disruptions to global supply chains have worsened, limiting production and leading to both higher costs and higher prices.

     5. The output gap is narrower than projected in July. The Bank now expects slack to be absorbed in Q2 or Q3 of next year, one quarter sooner than earlier projected.

     6. Given persistent supply constraints and the increase in energy prices, the Bank expects inflation to stay above the control range for longer than previously anticipated before easing back to close to the 2 percent target by late 2022.

     7. The Bank views the risks around this inflation outlook as roughly balanced.

In response to the Bank's revised view, it announced that it is ending quantitative easing, shifting to the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds. The Bank now owns about 45% of all outstanding GoC bonds.

The Bank today held its target for the overnight rate at the effective lower bound of 1/4 percent. While this was widely expected, the Bank adjusted its forward guidance. It moved up its guidance for the first hike in the overnight rate target by three months, from the second half of 2022 to the middle quarters--sometime between April and September.

Canadian bond traders had already bet a rate hike would occur in Q1 or Q2. Nevertheless, bond yields spiked at 10 AM today when the Bank released its policy decision (see chart below).

Bottom Line

Since the Bank last met in early September, the Government of Canada five-year bond yield has spiked from .80% by a whopping 60 basis points to a 1.40%. That is an incredible 75% rise. A year ago, the five-year bond yield was only .37%.

The Bank believes the surge in inflation is transitory, but that does not mean it will be brief. CPI inflation was 4.4% y/y in September and is expected to rise and average around 4.75% over the remainder of this year. Macklem now believes inflation will remain above the Bank's 1%-to-3% target band until late next year.

There is also a good deal of uncertainty about the size of the slack in the economy. This is always hard to measure, especially now when unemployment remains elevated at 6.9%, while sectors such as restaurants and retail are fraught with labour shortages. Structural changes in the labour force are afoot. Many former restaurant employees have moved on or are reluctant to return to jobs where virus contagion risks and poor working conditions. There was also a surge in early retirements during the pandemic and a dearth of new immigrants.

Concerning housing, the MPR says the following: "Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength. New construction will add to the supply of houses and should help soften house price growth".

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

For more information about Mortgages Finance and Real Estate Sales, contact Jonathan Silveira, Real Estate Agent + Mortgage Broker, Phone: 778-861-5467 or by Email: info@jonathansilveira.com

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 Listings

Exacerbating 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 Prices

In 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).

By Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

For more information contact Jonathan Silveira - Real estate Agent + Mortgage Broker - 778-861-5467 - info@jonathansilveira.com - www.jonathansilveira.com

Housing Dampened Economy in Q2

This morning's Stats Canada release showed that the economy unexpectedly contracted in the second quarter by 1.1%, down from the revised 5.5% gain in the first three months of the year. The Canadian dollar dipped on the news to $.7921 as questions of resiliency in the face of the delta variant mount. Economists in a Bloomberg survey were anticipating a 2.5% expansion. Adding to the disappointment, economic growth fell a further 0.4% in July, according to a preliminary estimate.

The weak GDP data reduces the odds of the Bank of Canada tapering their bond purchases at their policy meeting on September 8th. It also highlights the output gap--the degree to which the economy remains below full economic capacity--remains a big issue. The Bank has forecast the gap to close by the middle of 2022. While that remains uncertain, we continue to expect growth to rebound in the third quarter.

Increases in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation were not sufficient to offset the declines in exports (-4.0%) and homeownership transfer costs (-17.7%), which include all costs associated with the transfer of a residential asset from one owner to another.

Housing investment reshapes the economy

Since the third quarter of 2020, housing investment has emerged as the predominant contributor to economic activities and capital stock—with residential capital stock surpassing non-residential capital stock. Moreover, the average housing investment for the previous four quarters was 17% higher than the average over the last five years.

Housing Investment

Both new construction and renovations—the components of residential capital stock—have shown sustained growth since the third quarter of 2020. Because of the ability to work from home, savings from less travel and reduced participation in other activities, low mortgage rates and increases in home equity lines of credit, spending has continued to increase on new houses (+3.2%) and home renovations (+2.4%).

After taking on $62.3 billion of residential mortgage debt in the last half of 2020, households added $84.2 billion more residential housing debt in the first half of 2021.

Supply chain disruptions continue to impact motor vehicles

Shortages of microchips and other inputs curtailed trade in motor vehicles and domestic consumption. Household purchases of new passenger cars (-7.2%) and trucks, vans and sport utility vehicles (-1.6%) decreased, while business investment in medium and heavy trucks, buses and other motor vehicles fell 34.2%. Longer plant shutdowns because of international supply chain disruptions have constrained imports of parts and led to significant decreases in exports. Low production of motor vehicles and parts resulted in an 18.9% drop in exports of passenger cars and light trucks and an 8.7% decline in tires, motor vehicle engines and parts exports. Inventories had another quarter of significant drawdowns in response to supply needs.

Double-digit household savings rate continues

The modest rise in household spending (+0.7%, in nominal terms) was outpaced by growth in disposable income (+2.2%), leaving households with more net savings than in the previous quarter. Household incomes were primarily bolstered by employees' rising compensation and increasing transfers received from the government, which were partially offset by a 2.8% rise in personal income taxes.

Consequently, the savings rate reached 14.2%—the fifth consecutive quarter with a double-digit savings rate—as various pandemic-related restrictions and uncertainty continued to limit the scope of household consumption. The household savings rate is aggregated across all income brackets; in general, savings rates are greater in higher income brackets.

Bottom Line

Today's release is, in some respects, 'ancient history.' It is still widely expected that the economy will rebound in the third quarter. With the surge in household savings and continued growth in personal disposable income, pent-up demand is likely to boost consumption for the remainder of this year. All eyes will be on the August employment report released Friday, September 10th. The Bank of Canada will likely continue to proceed cautiously. Another tapering of the bond-buying program will come under scrutiny, and forward guidance will continue to suggest no rate hikes until the second half of next year.   

By Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. (See Today's Mortgage Rates by Term)

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.”  That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

By Dr. Sherry Cooper

Chief Economist, Dominion Lening Centres

Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Home buyer demand has returned to more historically typical levels in Metro Vancouver over the last three months.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential home sales in the region totalled 2,333 in September 2019, a 46.3 per cent increase from the 1,595 sales recorded in September 2018, and a 4.6 per cent increase from the 2,231 homes sold in August 2019.

Last month’s sales were 1.7 per cent below the 10-year September sales average.

“We’re seeing more balanced housing market conditions over the last three months compared to what we saw at this time last year,” Ashley Smith, REBGV president said. “Home buyers are more willing to make offers today, particularly in the townhome and apartment markets.”

There were 4,866 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in September 2019. This represents a 7.8 per cent decrease compared to the 5,279 homes listed in September 2018 and a 29.9 per cent increase compared to August 2019 when 3,747 homes were listed.

The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 13,439, a 2.7 per cent increase compared to September 2018 (13,084) and a 0.3 per cent increase compared to August 2019 (13,396).

For all property types, the sales-to-active listings ratio for September 2019 is 17.4 per cent. By property type, the ratio is 12.7 per cent for detached homes, 18.9 per cent for townhomes, and 21.9 per cent for apartments.

Generally, analysts say that downward pressure on home prices occurs when the ratio dips below 12 per cent for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.

“This is a more comfortable market for people on both sides of a real estate transaction,” said Smith. “Home sale and listing activity were both at typical levels for our region in September.”

The MLS® Home Price Index composite benchmark price for all residential homes in Metro Vancouver is currently $990,600. This represents a 7.3 per cent decrease over September 2018 and a 0.3 per cent decrease compared to August 2019.

Sales of detached homes in September 2019 reached 745, a 46.7 per cent increase from the 508 detached sales recorded in September 2018. The benchmark price for a detached home is $1,406,200. This represents an 8.6 per cent decrease from September 2018 and is virtually unchanged compared to August 2019.

Sales of apartment homes reached 1,166 in September 2019, a 43.6 per cent increase compared to the 812 sales in September 2018. The benchmark price of an apartment property is $651,500. This represents a 6.5 per cent decrease from September 2018 and a 0.4 per cent decrease compared to August 2019.

Attached home sales in September 2019 totalled 422, a 53.5 per cent increase compared to the 275 sales in September 2018. The benchmark price of an attached home is $767,500. This represents a 7.2 per cent decrease from September 2018 and a 0.6 per cent decrease compared to August 2019.

By the Real Estate Board of Greater Vancouver | October 2, 2019.

Recently, the federal government released more information about the First-Time Home Buyer Incentive Program. 

→ For complete details click here.

In its fourth fiscal plan, the Trudeau government spent its entire revenue windfall leaving the deficit projection little changed. In this election budget, Finance Minister Bill Morneau announced $22.8 billion over six years in new spending initiative mostly for homebuyers, students and seniors. Trudeau promised in his first budget to have eliminated all red ink by this year. He will instead head for an October election with an annual deficit of nearly $20 billion. Ottawa is projecting a string of double-digit deficits through the end of 2022.

The key debt-to-GDP ratio is expected to be 30.8% this fiscal year and edges downward only very slowly to 30% over the four-year forecast horizon.

Today’s budget offered help to young homebuyers, many of whom find it very difficult to afford to purchase in some of our more expensive cities. There were two measures targeted at first-time homebuyers:

In a very dovish statement, the Bank of Canada acknowledged this morning that the slowdown in the Canadian economy has been deeper and more broadly based than it had expected earlier this year. The Bank had forecast weak exports and investment in the energy sector and a decline in consumer spending in the oil-producing provinces in the January Monetary Policy Report. However, as indicated by the mere 0.1% quarterly growth in GDP in the fourth quarter, the deceleration in activity was far more troubling. Consumer spending, especially for durable goods, and the housing market were soft despite strong jobs growth. Both exports and business investment were also disappointing. Today’s Bank of Canada statement said, “after growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.”

As was unanimously expected, the Bank maintained its target for the overnight rate at 1-3/4% for the third consecutive time and dropped its earlier reference for the need to raise the overnight rate in the future to a neutral level, estimated at roughly 2-1/2%. The Bank also added an assertion that borrowing costs will remain below neutral for now and “given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, the Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

At the same time, Governor Poloz seems reluctant to abandon entirely the idea that the next step is likely higher — making him a bit of an outlier among industrialized economy central bankers.

We are left with the view that the Bank is unlikely to hike interest rates again this year. The global economy has slowed more than expected and central banks in many countries, including the U.S., have moved to the sidelines. Market interest rates have already dropped reflecting this reality.

According to Bloomberg News, “swaps trading suggests investors are giving zero probability that the Bank of Canada will budge rates, either higher or lower, from here. The Canadian dollar extended declines after the decision, falling 0.7 percent to C$1.3438 against the U.S. currency at 10:04 a.m. Yields on government 2-year bond dropped 6 basis points to 1.68 percent.”

February Cold Chills Toronto and Vancouver Housing Markets While Montreal Continues Strong

The Bank of Canada left the overnight benchmark policy rate at 1-3/4%, as expected. In another dovish statement, the Bank of Canada acknowledged a slowdown in global economic activity and highlighted that oil prices are roughly 25% lower than what they had assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflected sustained increases in U.S. oil supply and increased worries about global demand, especially in light of a potential U.S.-China trade war (see oil chart below).

The Bank also commented that these worries had been mirrored in bond and stock markets. Credit spreads off Treasuries have widened, and stock markets have sold off around the world (see chart below). Equity prices and bond yields have declined in the face of market unease over global growth. Volatility has risen, and corporate credit spreads have widened sharply. A tightening of corporate credit conditions is particularly evident in the North American energy sector reflecting the decline in oil prices. 

Weak oil prices negatively impact the Canadian economic outlook and “transportation constraints and rising production have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices. While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.” 

The Bank acknowledged that the economy is running close to potential, unemployment is at a 40-year low and trade will likely improve with the weak dollar, the trade deal with Mexico and the U.S. (now dubbed “CUSMA”) and federal tax measures to target investment. Nevertheless, consumer spending and housing investment “have been weaker than expected as housing markets adjust to to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Household spending will be dampened further by slow growth in oil-producing provinces.”

The contribution to average annual real economic growth from housing investment has been revised down to -0.1% this year from the +0.1% forecast in October. 

The Bank of Canada revised down its forecast for real GDP growth in 2019 to 1.7%–0.4 percentage points lower than the October outlook. According to the Bank, “This will open up a modest amount of excess capacity, primarily in oil-producing regions. Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1% in 2020.”

Inflation remains close to 2%, the central bank’s target, having fallen to 1.7% in November, due to lower gasoline prices. While low gasoline prices will depress inflation this year, the weak Canadian dollar will have an offsetting impact on the CPI. On balance, the bank sees inflation returning to around 2% by late this year.

Considering all of these factors, the Governing Council continues to judge that the benchmark policy rate will need to rise over time to a neutral range to achieve the inflation target. “The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.”

Bottom Line: The Bank of Canada for the first time admits in today’s MPR that the slowdown in the housing market has been more dramatic than the Bank’s staff had expected. The January MPR states, “provincial and municipal housing market policies, the tighter mortgage finance guidelines and higher mortgage rates continue to weigh on housing activity. Slowing of activity in some markets has been associated with less speculative activity. As a result, it is difficult to evaluate the sensitivity of non-speculative demand to the various policy changes. Monthly indicators have signalled that spending on housing likely contracted again in the fourth quarter. Weaker-than-expected housing activity in recent months and staff analysis suggest that the combined effect of tighter mortgage guidelines and higher interest rates has been larger than previously estimated. The Bank will continue to monitor developments in housing markets to assess how construction is adjusting to the shift in demand toward lower-value units.”

The Bank see less urgency to raise interest rates as the economy copes with slumping oil prices and weak housing markets. The five interest rate hikes since mid-2017 are having a more substantial impact on spending than the Bank expected. A short-term pause in rate hikes is now likely. The economy slowed considerably in the fourth quarter of last year, which will continue in the first quarter of this year owing to the decline in oil prices and the Alberta government’s implemented oil production cuts.

While it is unlikely that the Bank is finished its tightening this cycle, expect rates to remain steady until we see solid evidence of a rebound in the oil sector and in housing as interest-rate sensitivity of Canadians is at historical highs

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

At the start of every New Year, pundits posit the forecast as everyone wonders what the year will bring. While no one has a crystal ball, here are some fundamentals at play this year:

1). Canada’s economy will continue to under perform the U.S. as growth slows to 1-3/4% in 2019 compared to just over 2% in 2018. For the U.S., where budget deficits have been rising sharply with the 2018 tax cuts, growth this year will hit about 2.4% compared to nearly 3% last year–an over-heated economy to say the least.

2.) Canada’s population growth will lead the G7 by a wide margin. In 2018, Canada’s population was on track to increase 1.4%, the most robust pace in 18 years and double the 0.7% rate for the U.S., which was the G7 country with the next-highest population growth rate. Despite this, spending did not rise —auto sales fell on an annual basis for the first time since 2009, while home sales had their second biggest slide in the past 20 years. Per capita GDP growth in Canada this year will under perform most of the G7.

Strong (net) immigration accounted for almost half (45%) of Canada’s population increase last year. That contribution will only grow since Ottawa has committed to boosting its annual immigration target from 310,000 new permanent residents in 2018 to 331,000 this year (up 6.7%) and to 350,000 by 2021. About two-thirds of 2019’s expansion will come from the immigration programs that target highly skilled workers aimed at addressing labour shortages across Canada.

As well, the number of non-permanent residents reached an all-time high of 166,000 last year accounting for one-third of the growth in the population. This group includes temporary foreign workers, international students and asylum seekers. All three categories soared, reflecting strong demand for skilled labour, Canada’s growing reputation as a desirable place to obtain post-secondary education, and increases in cross-border refugee claimants.

3.) Canadian consumers are tapped out as debt levels remain high, interest rates edging upward and credit is less readily available. Boomers are wary that their homes are worth less than what they were counting on as Canada’s two largest housing markets experienced decade-low sales last year with softer prices especially at the pricier end of the single-family home market. First-time buyers might have more homes to choose from in some markets, but regulators have tightened qualification rules. Foreign buying has slowed owing to foreign purchaser taxes in Toronto and Vancouver and speculation taxes in Vancouver.

4.) The Fed and the Bank of Canada will raise rates in 2019 by more than the market currently expects. Market participants in recent weeks have reduced expectations for rate hikes by both central banks to barely one increase apiece. More likely, both the Fed and the BoC will raise the benchmark overnight rate twice each this year. Even with these actions, monetary policy in both countries will be slightly accommodating with interest rates still below neutral levels.

5.) Even with only modest rate increases in 2019, consumers will be impacted because they are so heavily exposed to debt. Economists at the Royal Bank estimate that the average household faces a $1,000 hit from rate hikes. This would imply that the average household principal and interest payment will increase by 7.6% in 2019.

6.) This effect will be offset by stronger wage growth as labour markets continue to tighten. Labour shortages will finally add to wage growth. The unemployment rate hit a record low in December, yet wage growth had slowed to only 1.5% year-over-year, well below inflation. Over the next decade, more than 270,000 people will retire from the Canadian labour market every year. Immigrants and temporary workers will replace some of these retirees, but not all.

Recent data suggest that the quit rate–the proportion of the labour force that leaves their jobs voluntarily–is rising. This portends higher wage rates going forward.

7.) Rising interest rates will squeeze government spending for the feds and provinces with significant debt loads. Ottawa will spend more on debt payments than any other program except elderly benefits.

8.) Corporate balance sheets will be negatively impacted by higher interest rates as Canadian companies borrowed more heavily than their international counterparts. Canadian companies remain less competitive as their productivity growth has lagged their global competitors. Efforts to improve Canadian competitiveness are in process but have yet to show meaningful results. This has been a secular problem for Canada.

9.) Canada could be caught in the crosshairs of a U.S.-China trade war, but free-trade deals with Europe (CETA) and China (CPTPP) will reap benefits, particularly as the U.S. continues to alienate many of its allies and trading partners. Canada must diversify trade away from the U.S., particularly in the oil sector, which requires massive infrastructure spending. No longer can we count on exports of oil and transportation products to the U.S. to be the mainstay of Canadian global trade.

10). Comparable to last year, housing in 2019 will not fuel Canada’s national economy, thanks to macroprudential policy measures and modestly higher interest rates. Housing accounted for a record-high percentage of overall economic growth and job creation until early last year.We are barely off those peak levels now, so any slowdown in housing activity will have a disproportionately large negative impact on the economy–the flip side of its disproportionate expansionary impact over much of the prior decade.

Bottom Line: Sales to new listings have stabilized in Toronto, but continue to decline in Vancouver. Population growth in Vancouver has under performed Toronto’s for two years, while supply, mainly in the high-rise segment, has risen sharply. In consequence, the number of completed and unabsorbed units in Vancouver continues to increase, while that measure is still trending downward in Toronto. The sector of most significant weakness in Toronto will continue to be in the pre-sale low-rise market where there remains considerable excess supply.

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

The supply of homes for sale continued to increase across the Metro Vancouver* housing market in September while home buyer demand remained below typical levels for this time of year.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential property sales in the region totalled 1,595 in September 2018, a 43.5 per cent decrease from the 2,821 sales recorded in September 2017, and a 17.3 per cent decrease compared to August 2018 when 1,929 homes sold.

Last month’s sales were 36.1 per cent below the 10-year September sales average.

“Fewer home sales are allowing listings to accumulate and prices to ease across the Metro Vancouver housing market,” Ashley Smith, REBGV president-elect said. “There’s more selection for home buyers to choose from today. Since spring, home listing totals have risen to levels we haven’t seen in our market in four years.”

There were 5,279 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in September 2018. This represents a 1.8 per cent decrease compared to the 5,375 homes listed in September 2017 and a 36 per cent increase compared to August 2018 when 3,881 homes were listed.

The total number of properties currently listed for sale on the MLS® system in Metro Vancouver is 13,084, a 38.2 per cent increase compared to September 2017 (9,466) and a 10.7 per cent increase compared to August 2018 (11,824).

For all property types, the sales-to-active listings ratio for September 2018 is 12.2 per cent. By property type, the ratio is 7.8 per cent for detached homes, 14 per cent for townhomes, and 17.6 per cent for condominiums.

Generally, analysts say that downward pressure on home prices occurs when the ratio dips below the 12 per cent mark for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.

“Metro Vancouver’s housing market has changed pace compared to the last few years. Our townhome and apartment markets are sitting in balanced market territory and our detached home market remains in a clear buyers’ market,” Smith said. “It’s important for both home buyers and sellers to work with their Realtor to understand what these trends means to them.”

The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $1,070,600. This represents a 2.2 per cent increase over September 2017 and a 3.1 per cent decrease over the last three months.

Sales of detached properties in September 2018 reached 508, a 40.4 per cent decrease from the 852 detached sales recorded in September 2017. The benchmark price for detached properties is $1,540,900. This represents a 4.5 per cent decrease from September 2017 and a 3.4 per cent decrease over the last three months.

Sales of apartment properties reached 812 in September 2018, a 44 per cent decrease compared to the 1,451 sales in September 2017. The benchmark price of an apartment property is $687,300. This represents a 7.4 per cent increase from September 2017 and a 3.1 per cent decrease over the last three months.

Attached property sales in September 2018 totalled 275, a 46.9 per cent decrease compared to the 518 sales in September 2017. The benchmark price of an attached unit is $837,600. This represents a 6.4 per cent increase from September 2017 and a two per cent decrease over the last three months.