The Slowdown In Canadian Housing Continued in July

General Beata Gratton 17 Aug

The Slowdown In Canadian Housing Continued in July
Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 3.5% nationally from June to July 2021–the fourth consecutive monthly decline. Over the same period, the number of newly listed properties dropped 8.8%, and the MLS Home Price Index rose 0.6% and was up 22.2% year-over-year.

While sales are now down a cumulative 28% from the March peak, Canadian housing markets are still historically quite active (see Chart below). In July, the decline in sales activity was not as widespread geographically as in prior months, although sales were down in roughly two-thirds of all local markets. Edmonton and Calgary led the slowdown, but these cities didn’t experience falling sales until recently. In Montreal, in contrast, where sales began to moderate at the start of the year, activity edged up in July.

The actual (not seasonally adjusted) number of transactions in July 2021 was down 15.2% on a year-over-year basis from the record for that month set last July. July 2021 sales nonetheless still marked the second-best month of July on record.

“While the moderation of sales activity continues to capture most of the headlines these days, it’s record-low inventories that should be our focus,” said Cliff Stevenson, Chair of CREA. Most markets are in sellers’ market territory.
New ListingsThe number of newly listed homes dropped by 8.8% in July compared to June, with declines led by Canada’s largest cities – the GTA, Montreal, Vancouver and Calgary. Across the country, new supply was down in about three-quarters of all markets in July.

This was enough to noticeably tighten the sales-to-new listings ratio despite sales activity also slowing on the month. The national sales-to-new listings ratio was 74% in July 2021, up from 69.9% in June. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, the tightening of market conditions in July tipped a small majority of local markets back into seller’s market territory, reversing the trend of more balanced markets seen in June.

Another piece of evidence that conditions may be starting to stabilize was the number of months of inventory. There were 2.3 months of inventory on a national basis at the end of July 2021, unchanged from June. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is twice where it stands today.
Home PricesThe Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.6% month-over-month in July 2021, continuing the trend of decelerating month-over-month growth that began in March. That deceleration has yet to show up in any noticeable way on the East Coast, where property is relatively more affordable.

Additionally, a more recent point worth noting (and watching) just in the last month has seen prices for certain property types in certain Ontario markets look like they might be re-accelerating. This could be in line with a re-tightening of market conditions in some areas.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 22.2% on a year-over-year basis in July. While still a substantial gain, it was, as expected, down from the record 24.4% year-over-year increase in June. The reason the year-over-year comparison has started to fall is that we are now more than a year removed from when prices really took off last year, so last year’s price levels are now catching up with this year’s, even though prices are currently still rising from month to month.

Looking across the country, year-over-year price growth averages around 20% in B.C., though it is lower in Vancouver and higher in other parts of the province. Year-over-year price gains in the 10% range were recorded in Alberta and Saskatchewan, while gains are closer to 15% in Manitoba. Ontario sees an average year-over-year rate of price growth in the 30% range. However, as with B.C., gains are notably lower in the GTA and considerably higher in most other parts of the province. The opposite is true in Quebec, where Montreal is in the 25% range, and Quebec City is in the 15% range. Price growth is running a little above 30% in New Brunswick, while Newfoundland and Labrador is in the 10% range.
Bottom Line

Sales activity will continue to gradually cool over the next year, but it will take higher interest rates to soften the housing market in a meaningful way. Local housing markets are cooling off as prospective buyers contend with a dearth of houses for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon.

–Dr. Sherry Cooper

Home Prices Mark Fourth Consecutive Monthly Decline From March Peak

General Beata Gratton 17 Aug

Home Prices Mark Fourth Consecutive Monthly Decline From March Peak

Real estate activity and home prices across Canada continue to retreat from their March peak, but record-low inventories are keeping many local markets “extremely unbalanced,” according to the Canadian Real Estate Association (CREA).

The average home price in July was $661,788, up 15.6% year-over-year but down 3.5% from June, marking the fourth consecutive monthly decline. Since March, the average price has fallen 7.7%. Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average price stands at $529,788, up 16.6% from last year.

Home sales are also down, having fallen 28% from the March peak and 15.2% since last year.

“The slowdown we’ve seen in home sales over the last few months has not been surprising, given that the level of activity we were seeing back in March was unsustainable,” Shaun Cathcart, CREA’s Senior Economist, noted in a release.

“But we are not returning to normal, we are only returning to where we were before COVID, which was a far cry from normal,” he added. “The problem of high housing demand amid low supply has not gone anywhere – it’s arguably worse. And after years of everyone agreeing that medium-density housing was the future, we are still referring to it as the ‘missing’ middle.”

CREA chair Cliff Stevenson said low housing inventory continues to be the key reason for tightness in the market, which is leading to “extremely unbalanced housing markets all over the country.”

New listings were down 8.8%, while housing inventory was unchanged from June at 2.3 months, still just above the all-time record low of 1.7 months in March. Housing inventory is the amount of time it would take to liquidate current inventories at today’s rate of sales.

Cross-Country Roundup of Home Prices

Here’s a look at some more regional and local housing market results for June:

  • Ontario: $835,269 (+18%)
  • Quebec: $449,098 (+15.9%)
  • B.C.: $891,369 (+17%)
  • Alberta: $426,036 (+7%)
  • Barrie & District: $733,900 (+36.6%)
  • Ottawa: $660,400 (+23.3%)
  • Halifax-Dartmouth: $452,285 (+23%)
  • Greater Montreal Area: $496,000 (+23.4%)
  • Victoria: $843,600 (+17.8%)
  • Winnipeg: $318,500 (+12%)
  • Greater Vancouver Area: $1,175,500 (+13.8%)
  • Calgary: $447,600 (+11%)
  • Edmonton: $345,200 (+7.2%)
  • St. John’s: $284,800 (+8.4%)

Reaction to the July Data

Analysts observed that while indicators are backing off from extreme levels, many markets continue to experience record activity.

Sales remain about 10% above pre-COVID levels and 15% higher than the 10-year average, according to BMO senior economist Robert Kavcic.

“From a bigger-picture perspective, we might be close to the point where major pandemic-era rebalancing has run its course—think single-detached versus condos, rural versus urban and cottages versus travel and other spending,” he wrote. “One could argue that some of those shifts went too far during the height of the madness, and we could see some undoing ahead, even if a lot of the underlying change is permanent.”

TD Bank economist Rishi Sondhi, meanwhile, drew attention to the slowing rate of decline in home sales.

“While this would imply less downside for sales on its own, rising bond yields, as assumed in our latest financial forecast, could lead to a further drop in activity moving forward,” he wrote.

“Despite the likelihood of further sales declines, prices should trend higher in coming quarters as markets still remain incredibly tight,” he added. “However, the rate of growth should be much slower compared to earlier in the pandemic, weighed down by tough affordability in several markets and compositional forces (i.e., a rising share of lower-priced units in overall sales).”

–Steve Huebl

Industry Response to New Sept. 30 Holiday and How Some Closings Will be Affected

General Beata Gratton 16 Aug

Industry Response to New Sept. 30 Holiday and How Some Closings Will be Affected

Mortgage lenders, brokers and brokerages across the country are developing contingency plans for clients whose closings will be impacted by the new September 30 holiday.

In May, federal lawmakers passed Bill C-5 to create the National Day for Truth and Reconciliation, a new statutory holiday to commemorate the victims and survivors of residential schools.

The big banks and certain non-bank lenders will be closed on September 30, which means real estate transactions previously scheduled for that day need to be rescheduled.

Other services related to real estate transactions, such as notaries, could also be closed and further impact scheduled closings.

Equitable Bank, for example, will be closed but wouldn’t have been able to meet a September 30 closing date in any matter given its reliance on its big-bank partners for discharges, payments, etc., it confirmed.

“We are actively working with the dozens of affected clients, their mortgage brokers and their solicitors to move September 30 funding dates while attempting to limit any inconvenience caused,” Mahima Poddar, Equitable Bank’s SVP & Group Head, Personal Banking confirmed to CMT in a statement. “Additionally, our teams have all been instructed to avoid a funding date of September 30 going forward.”

First National, Canada’s largest non-bank lender, confirmed it will remain open on that day since its operations are provincially regulated, “unless the provinces where we do business stipulate otherwise,” said Scott McKenzie, Senior Vice President, Residential Mortgages at First National.

“That said, we are mindful that banks and federal government offices will be closed on September 30, and our team has worked proactively and in consultation with our broker partners since the enabling legislation received Royal Assent in early June to move closings away from 9/30,” he added, saying both sides have been accommodating to ensure clients continue to receive the service they expect. “As always, we will do our best to provide responsive service to our mortgage broker partners and customers on this important day.​”

Many brokers, brokerages and large broker networks are responding as well by rescheduling closings as close to the date as possible.

“Upon learning of the passing of this legislation, we provided internal communications to our brokers and staff and advised them to share the same with all of their referral partners as well,” Mark Kerzner, President and CEO of TMG The Mortgage Group, told CMT. “To avoid any funding delays, we are suggesting that any fundings currently scheduled for September 30 be moved to either September 29, October 1 or any other mutually agreeable date.”

TD Bank, one of the big banks that participates in the broker channel, has circulated a communication to agents confirming it will be observing the new statutory holiday.

“All mortgage closing on this day must be adjusted to the business day before or after September 30, as with other holidays,” the bank said, adding that additional information will be available soon to assist brokers with customer conversations and related operational activities.

CMT reached out to Scotiabank for clarification on its plans, but was told details would be forthcoming.

“Scotiabank will share more details on operations for September 30, 2021, over the coming weeks and will communicate any changes to customers and broker partners,” a bank spokesperson said.

–Steve Huebl

Majority of Canadian Buyers Borrowing Their Maximum Approved Mortgage

General Beata Gratton 20 Jul

Majority of Canadian Buyers Borrowing Their Maximum Approved Mortgage

Soaring home prices over the past year have forced a majority of today’s homebuyers to use the maximum mortgage amounts they’ve been approved for.

More than 65% of recent buyers bought the maximum amount of house they could afford, according to the Canada Mortgage and Housing Corporation’s (CMHC) latest consumer survey.

For about 6 in 10 buyers, that amount was less than $500,000, while 8% of buyers spent over $1 million on their purchases.

Yet, only about a quarter (27%) said they paid more than they had planned on their home, while 20% said they paid less than expected.

“This year’s survey includes important takeaways on affordability and how the market has reacted to the pandemic and current economic conditions,” noted Sam Carnavole, CMHC’s Director of Client Relationship Management.

Key Consumer Mortgage Trends

CMHC’s survey was chock full of data that provided important insight into today’s mortgage consumers. Here are some of the key findings from this year’s survey…

Mortgage Types

  • 70% of mortgage consumers have a fixed-rate mortgage
  • 21% have a variable rate
    • 33% for those aged 18 to 24
  • 6% have a hybrid (combination of fixed and variable)
  • 3% don’t know
  • 56% of borrowers have a 5-year term
    • 8% have a 1- or 2-yr term
    • 16% have a 3-yr term
    • 11% have a 4-yr term
    • 5% have a term greater than 5 years
  • 45% of first-time buyers have an amortization of 25 years or more
  • 41% make monthly mortgage payments (53% of first-time buyers)
    • 13% have semi-monthly payments
    • 26% have bi-weekly
    • 8% have weekly
    • 7% have an accelerated bi-weekly

Prices Paid

  • 31% of buyers were involved in a bidding war during their home purchase
  • 66% believe that the bidding process should be more transparent and that all parties should be privy to the bids submitted
  • 45% said if the bidding process was transparent, they’d be less inclined to use a real estate agent
  • 32% of buyers incurred unexpected housing costs, including:
    • moving expenses (32%)
    • land transfer tax (25%)
    • home inspections (24%)
    • mortgage application fees (14%)
    • mortgage-default insurance (13%)

First-Time Buyers Incentive

  • 72% of first-time buyers were aware of CMHC’s First-Time Home Buyer’s Incentive
  • 74% said they would rather maintain the equity in their home vs. participating in the shared-equity program

Homebuying Process

  • 28% said price/affordability was the top factor when considering buying their current home
    • 13% said type of home
    • 10% said neighbourhood
    • 10% cited living space
    • 4% said proximity to work

Down payments

  • 37% of respondents put down more than 20% of their home value
    • Of those, 28% wanted to avoid paying mortgage default insurance
    • 26% wanted to pay down their mortgage as fast as possible
  • Of those who put down less than 20%, the top reasons were:
    • lack of funds (47%)
    • wanting to keep money for other expenses (33%)
    • comfortable with their current debt obligations (15%)
  • Top sources for down payments included:
    • savings outside of an RRSP (38%)
    • equity from a previous home (25%)
    • RRSP savings (11%)
    • gift from a family member (8%)
    • a new loan (5%)
    • a HELOC (4%)

Mortgage Sources

  • 42% of mortgage consumers used a mortgage broker to arrange their mortgage
  • Of the remainder, 94% got their mortgage directly from a bank or financial institution
  • Of those who used the services of a mortgage broker:
    • 85% felt a broker would get them the best mortgage rate or deal
    • 84% said the service they received was excellent
    • 85% said using a broker was convenient and saved them time
    • 84% wanted to use a broker that provided advice and recommendations
    • 81% wanted to use a broker that could meet all of their financial needs
    • 79% felt a broker would increase their chances of being approved for their mortgage
  • Homebuyers who used a broker were presented with an average of three rate offers

Mortgage Lenders

  • 61% of borrowers got a mortgage from their existing financial institution
  • 30% of respondents switched lenders for a better interest rate
    • 14% switched for better product terms and conditions
    • 9% wanted better client service from their lender
    • 7% said they switched due to bad client service from their previous lender
  • 33% of consumers were contacted by their mortgage lender after the transaction

Home ownership as an investment

  • 85% agree that home ownership is a good long-term financial investment
  • 81% are confident they have the tools and information to manage their mortgage and debt load
  • 78% believe they got the best mortgage for their needs
  • 77% are comfortable with their level of debt
  • 75% believe their house will increase in value over the next 12 months
  • 70% of consumers say they plan to renovate over the next five years
    • Of those, 18% plan to finance their renovations using a home equity line of credit (HELOC)
    • Another 18% plan to use their credit cards
    • 18% say they will draw from their mortgage
–Steve Huebl

The Latest in Mortgage News: Mortgage Debt Soars as Credit Card Debt Falls to 6-Year Low

General Beata Gratton 16 Jul

The Latest in Mortgage News: Mortgage Debt Soars as Credit Card Debt Falls to 6-Year Low

Canada’s hot housing market was behind a 41.2% annual increase in new mortgages as of the first quarter, Equifax Canada reported.

The average mortgage amount also rose by 20.5% to $326,903.

“Low interest rates and speculation around U.S. inflation impacting our interest rates has fueled mortgage volumes as consumers fear future interest rate hikes,” Rebecca Oakes, AVP of Advanced Analytics at Equifax Canada, said in a release. “Competition among homebuyers is fierce in many markets across the country. We’ll monitor whether [OSFI’s] new mortgage stress test helps to cool off the hot housing market.”

The increased mortgage demand pushed consumer debt in Canada to $2.08 trillion, up 0.62% from the previous quarter and a 4.78% jump from a year earlier.

Meanwhile, a pandemic-induced drop in spending led to credit card debt plummeting to 2015 levels. Equifax said credit card balances dropped an average of 9.9% compared to 2020. “While deferral programs have come to an end for most consumers, government incentives are still in place, which has helped consumers in paying down their credit card debt,” Oakes added.

The average consumer non-mortgage debt now stands at $20,430, a 4.2% drop from Q1 2020.

M3 Group Acquires Outline Financial

M3 Group took another step in its expansion efforts with the addition of Outline Financial to its brokerage brand.

The move follows the company’s recent acquisition of Pinch Financial and the expansion of its National Bank of Canada partnership to Ontario.

Effective immediately, Toronto-based Outline Financial will operate under M3’s Verico banner.

“Professionalism and trust remain core pillars for us, and Outline Financial has an incredible track record of embracing these success principles to drive great results for their brokers,” Luc Bernard, Chairman and CEO of M3 Group, said in a release. “We look forward to leveraging their experience and guidance to continue moving this amazing ecosystem forward.”

The award-winning brokerage, which reports annual mortgage volume of more than $17 billion, will now have access to M3 Group’s offering of products and services, as well as its BOSS submission platform.

CMHC Pulls U-Turn on Mortgage Tightening

The Canada Mortgage and Housing Corporation (CMHC) announced earlier this month that it will be returning to its pre-July 2020 mortgage underwriting practices.

The agency lost about half of its market share among mortgage insurers soon after it  introduced stricter underwriting guidelines last July in response to the pandemic.

Those measures included reducing the maximum total and gross debt service ratios needed for an insured mortgage, increasing the minimum credit score to 680 from 600 and banning non-traditional sources of down payments.

“We are taking this action because our July 2020 underwriting changes were not as effective as we had anticipated and we incurred the cost of a decline in our market share,” CMHC said in a release. “A healthy market share is an important consideration as it helps us fulfill the financial stability aspect of our mandate. We aim to maintain enough presence to be able to: a) step in to support financial stability and b) absorb additional market share as required.”

Private mortgage insurer Sagen reported a rise in market share to about 43%, up from 30-35% a year ago, while Canada Guaranty confirmed its share rose to around 30%, up from mid-20% a year earlier.

This means CMHC will once again consider a Gross Debt Service (GDS) ratio up to 39% (up from 35%) and Total Debt Service (TDS) ratio up to 44% (up from 42%) for borrowers who “have a strong history of managing their payment obligations.” The minimum credit score needed to be approved by CMHC will return to 600 from 680.

–Steve Huebl

Canada’s Housing Market “Slowly Getting Back to Normal”

General Beata Gratton 15 Jul

Canada’s Housing Market “Slowly Getting Back to Normal”

Home prices are down for the third consecutive month since reaching a peaking in March, according to the Canadian Real Estate Association.

While the average national home price of $679,051 is still up nearly 26% compared to a year ago, it’s down 1.3% from May and has retreated 5.3% from the high of $716,828 reached in March. Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average price still stands at $544,051, up 26.1% from last year.

Home sales were also down in the month, falling 8.4% from May, but is up 13.6% year-over-year.

Canada national home sales in June 2021

CREA Chair Cliff Stevenson noted that while things have “noticeably calmed down” in the last few months, he warns that there is still a supply shortage in many parts of the country.

Even though housing inventory is slowly building, the June reading of 2.3 months is still only a slight improvement from the all-time record low of 1.7 months reached in March. Housing inventory is the amount of time it would take to liquidate current inventories at today’s rate of sales.

“…while the frenzy and emotion of earlier in the pandemic seem to have dissipated for now, the key ingredients of a seller’s market are all still in place,” said CREA’s senior economist Shaun Cathcart, noting that the break in population growth experienced during the pandemic is likely coming to an end.

“It’s a long road to get back to normal, and for many housing markets, the main issue is that supply shortages are as acute as ever,” he added.

Cross-Country Roundup of Home Prices

Here’s a look at some more regional and local housing market results for June:

  • Ontario: $857,754 (+26.1%)
  • Quebec: $452,732 (+22.4%)
  • B.C.: $909,810 (+22.1%)
  • Alberta: $432,159 (+12.3%)
  • Barrie & District: $728,200 (+38.5%)
  • Ottawa: $671,400 (+27.9%)
  • Halifax-Dartmouth: $468,790 (+27.9%)
  • Greater Montreal Area: $498,900 (+27.4%)
  • Victoria: $829,600 (+17%)
  • Winnipeg: $324,900 (+15%)
  • Greater Vancouver Area: $1,175,100 (+14.5%)
  • Calgary: $445,000 (+12%)
  • Edmonton: $345,600 (+8%)
  • St. John’s: $277,500 (+5.9%)

Where does the housing market go from here?

Despite the monthly decline in home sales and average prices, the market still remains strong by historical standards, with June results setting an all0time record for the month, according to Scotiabank’s Farah Omran.

Even so, she notes that the market is “displaying signs of fatigue” and homebuying preferences are started to shift back from the pandemic-driven need for more space. Additionally, many buyers are likely changing their focus to vacations and increased travel over the summer as restrictions continue to ease, Omran noted in a research note.

“Don’t mistake this for a finish line to the rally, however, as persistent tightness in the market, despite the decline in sales, continues to push prices upward, albeit at a slower pace,” she wrote.

BMO’s Robert Kavcic agreed, pointing to the persistence of historically strong demand that will continue to support current prices for the timebeing.

“We believe that sales activity will continue to gradually cool in the year ahead, but it’s going to take higher interest rates to soften the market in a meaningful way,” he wrote.

–Steve Huebl

The Slowdown In Canadian Housing Continued in June

General Beata Gratton 15 Jul

The Slowdown In Canadian Housing Continued in June

 

Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 8.4% nationally from May to June 2021, marking the third consecutive monthly decline. Over the same period, the number of newly listed properties fell 0.7%, and the MLS Home Price Index rose 0.9%, a marked deceleration from previous months.

Activity nonetheless remains historically high, but in contrast to March’s all-time record, it is now running closer to levels seen in the first half of 2020. While sales are now down a cumulative 25% from their peak, and below every other month in the last year, June transactions still managed to set a record for that month (see chart below).

For the second month in a row, sales were lower in every province. The steepest drops were in B.C. (-14.6% m/m) and the Atlantic provinces (down a combined 9.8% m/m). In Ontario, sales fell 9.0% m/m. They posted a much smaller 1.9% m/m drop in Quebec.

June’s decline was helped along by stricter stress test rules implemented at the beginning of the month. We expect these rules to continue to weigh on demand in the near term, although the amount of tightening this time around (+46 bps) pales in comparison to early 2018 (+220 bps), the last time the rules were changed.

The actual (not seasonally adjusted) number of transactions in June 2021 was up 13.6% on a year-over-year basis.

“While there is still a lot of activity in many housing markets across Canada, things have noticeably calmed down in the last few months,” said Cliff Stevenson, Chair of CREA. “There remains a shortage of supply in many parts of the country, but at least there isn’t the same level of competition among buyers we were seeing a few months ago.”

 

 

New Listings

The number of newly listed homes edged back a slight 0.7% in June compared to May. In contrast to the past year’s synchronicity in demand and supply trends, the little-changed national new supply figure in June reflected a mixed bag of results, with about half of local markets seeing gains – welcome news for frustrated buyers.

The national sales-to-new listings ratio was 69.2% in June 2021, the lowest reading since last August. That said, the long-term average for the national sales-to-new listings ratio is 54.6%, so it remains historically high; although, it has been steadily moderating since peaking at 90.8% back in January (see chart below).

Based on a comparison of sales-to-new listings ratio with long-term averages, more than half of all local markets were in balanced market territory in June, measured as being within one standard deviation of their long-term average. The was a significant shift compared to most of the past year which saw a majority of markets well into seller’s market territory.

There were 2.3 months of inventory on a national basis at the end of June 2021, up from 2.1 months in May and up from an all-time record-low of just 1.8 months in March. That said, it is still very much in sellers’ market territory. The long-term average for this measure is a little over 5 months.

 

 

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.9% month-over-month in June 2021, continuing the trend of decelerating month-over-month growth that began in March. That deceleration was initially seen more so on the single-family side; although, that trend is now also playing out in the townhome and apartment segments.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 24.4% on a year-over-year basis in June. Based on data back to 2005, this was another record year-over-year increase; although, given how price growth took off in July of last year, this June 2021 reading may end up being the peak for year-over-year growth.

Looking across the country, year-over-year price growth is averaging around 20% in B.C., though it is lower in Vancouver and higher in other parts of the province. Year-over-year price gains in the 10% range were recorded in Alberta and Saskatchewan, while gains are closer to 15% in Manitoba. Ontario is seeing an average year-over-year rate of price growth in the 30% range, however, as with B.C., gains are notably lower in the GTA and considerably higher in most other parts of the province. The opposite is true in Quebec, where Montreal is in the 25% range and Quebec City is in the 15% range. Price growth is running a little above 30% in New Brunswick, while Newfoundland and Labrador are in the 10% range.

 

 

 

Bottom Line

Since peaking in March, home sales are down 25% from the inferno levels early this year, but demand is still historically strong. Despite the steep pullback, seasonally adjusted sales are roughly 18% above pre-pandemic trends. When the economy opens fully and immigration resumes, the underlying fundamentals for housing demand will rise, especially as university students return to campus living, and adult children move into their own nests.

Sales activity will continue to gradually cool over the next year, but it will take higher interest rates to soften the housing market in a meaningful way.

Condo sales in markets such as Toronto and Vancouver have picked up from their pandemic lows in recent months. This is the polar opposite of what happened earlier in the pandemic, when sales of relatively expensive detached units dominated, raising average prices. Moving forward, if condos consume a rising share of the overall sales pie (perhaps through strong demand for these units, slowing sales of detached houses, or some combination of both), compositional effects could continue to weigh on average prices.

-Dr. Sherry Cooper

Bank of Canada Tapers Bond-Buying Again.

General Beata Gratton 14 Jul

Bank of Canada Tapers Bond-Buying Again.

Bank of Canada ‘On the Vanguard’ of Unwinding Stimulus

The Bank of Canada raised its inflation forecast in the newly released July Monetary Policy Report (MPR), making it one of the most hawkish central banks in the world. The Bank announced its third action to reduce its emergency bond-buying stimulus program by one-third. The central bank was among the first from the advanced economies to shift to a less expansionary policy last April when it accelerated the timetable for a possible interest-rate increase and pared back its bond purchases. In today’s press release, the Bank announced it would adjust its quantitative easing (QE) program again to a target pace of $2 billion per week of Government of Canada bond purchases–down $1 billion from its prior target of $3 billion per week. This puts upward pressure on bond yields, all other things constant. No doubt, the federal government’s funding of the enormous Covid-related budget deficits has been abetted by the central bank’s bond-buying.

The pace of purchases of Canadian government bonds was as high as $5 billion last year. The central bank acquired a net $320 billion of the securities since the start of the Covid-19 pandemic. The bank owns about 44% of outstanding Canadian government bonds.

The Bank of Canada has said it wants to stop adding to its holdings of government bonds before it turns its attention to debating rate increases. Still, officials chose not to accelerate the projected timeline for a possible hike today.

In holding the overnight rate at the effective lower bound of .25%, the Governing Council reaffirmed its “extraordinary forward guidance” that the Canadian economy still has considerable excess capacity. The recovery continues to require extraordinary 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% inflation target is sustainably achieved,” the central bank said in the policy statement. In the Bank’s July projection, this happens sometime in the second half of 2022.

Swaps trading suggests investors are fully pricing in a rate hike over the next 12 months and a total of four over the next two years, which would leave Canada with one of the highest policy rates among advanced economies. This puts the Bank of Canada ahead of the Fed in raising interest rates. Chair Powell told Congress today that the US economy isn’t ready for bond tapering. “Reaching the standard of ‘substantial further progress’ is still a ways off,” he said in prepared remarks. In the U.S., investors aren’t pricing in any rate hike over the next year and only two over the next two years. July Monetary Policy Report

The Bank revised its forecast for Canadian GDP growth this year from 6.5% in the April MPR to 6.0% because of the more restrictive third-wave pandemic lockdown in the second quarter. Growth is now expected to pick up strongly in the third quarter of this year. Consumer confidence has returned to pre-pandemic levels, and a high share of the eligible population is vaccinated. As the economy reopens, consumption is expected to lead the rebound, increasing spending on services such as transportation, recreation, and food and accommodation.

Housing resales have moderated from historically high levels but remain elevated (Chart below). Other areas of housing activity—such as new construction and renovation—remain strong, supported by high disposable incomes, low borrowing rates and the pandemic-related desire for more living space.

 

 

CPI Inflation Boosted By Temporary Factors

The Bank revised up its inflation forecast for this year but asserted once again that inflation would return to 2% in 2022. This is a controversial call consistent with central-bank mantras around the world. The BoC said, “Three sets of factors are leading to this temporary strength. First, gasoline prices have risen from very low levels a year ago and are above their pre-pandemic levels, lifting inflation. Second, other prices that had fallen last year with plummeting demand are now recovering with the reopening of the economy and the release of pent-up demand. Third, supply constraints, including shipping bottlenecks and the global shortage of semiconductors, are pushing up the prices of goods such as motor vehicles.

The BoC expects CPI inflation to ease by the start of 2022 as the temporary factors related to the pandemic fade. Economic slack becomes the primary factor influencing the projection for inflation dynamics thereafter. The uncertainty around the outlook for the output gap and inflation remains high. Because of this, the estimated timing for when slack is absorbed is highly imprecise. In the projection, this occurs sometime in the second half of 2022. After declining to 2% during 2022, inflation is expected to rise modestly in 2023 as the economy moves into excess demand. The excess demand and resultant increase in inflation to above target are expected to be temporary. They are a consequence of Governing Council’s commitment to keeping the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.

Inflation is expected to return toward the target in 2024. The projection is consistent with medium- and long-term inflation expectations remaining well-anchored at the 2% target. Both businesses and consumers view price pressures as elevated in the near term. A large majority of respondents to the summer 2021 Business Outlook Survey now expect inflation to be above 2% on average over the next two years. Nonetheless, firms view higher commodity prices, supply chain bottlenecks, policy stimulus and the release of pent-up demand as largely temporary factors boosting inflation higher in the near term.

Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but for now, bond markets seem willing to accept their view. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .936%. As well, the Canadian dollar has weakened a bit, to US$0.7993, since the release this morning of the BoC policy statement. The loonie, however, remains among the strongest currencies this year vis a vis the US dollar.

-Dr. Sherry Cooper

 

Canada’s Jobs Recovery Resumed in June as Lockdown Began to Ease

General Beata Gratton 12 Jul

Canada’s Jobs Recovery Resumed in June as Lockdown Began to Ease

This morning, Statistics Canada released the June 2021 Labour Force Survey showing employment rose 230,700 (1.2%) in June, rebounding from a cumulative decline over the previous two months of 275,000. Total hours worked were little changed. The national unemployment rate fell 0.4 percentage points to 7.8%.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.

The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.

Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

Gains were driven by private-sector employees, while self-employment declines.

The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

The employment rate remains below pre-pandemic levels.

To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

Number of Canadians who worked from home drops by nearly 400,000 

Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.

 

 

Bottom Line 

The jobs report is the last major piece of economic data before next week’s Bank of Canada policy decision, where it’s expected to continue paring back its stimulus efforts. The Bank of Canada is among the first from advanced economies to shift to a less expansionary policy, having already cut its purchases of Canadian government bonds to $3 billion weekly from a peak of $5 billion last year.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.

-Dr. Sherry Cooper

Homebuyers Shun CMHC’s First-Time Home Buyer Incentive

General Beata Gratton 23 Jun

Homebuyers Shun CMHC’s First-Time Home Buyer Incentive

The federal government’s First-Time Home Buyer Incentive (FTHBI) was meant to offer a path to homeownership for those unable to tap the “Bank of Mom and Dad” for down payment assistance.

But first-time buyers have largely rejected the equity-sharing program that was first unveiled in September 2019, according to data tabled in Parliament and published by iPolitics.

Now halfway through the $1.25-billion three-year program managed by the Canada Mortgage and Housing Corporation (CMHC), only 14% of funds ($178 million) have been doled out to support first-time buyers.

That translates to 9,804 buyers who have taken advantage of the program so far, well short of the 100,000 buyers the government expected to assist over the life of the FTHBI.

The program involves the federal government contributing between 5% and 10% of a first-time buyer’s down payment. In exchange, the government gets an equal stake in the home’s equity, sharing in future gains or losses in value until the loan is repaid after 25 years or when the home is sold.

Of those participating in the program, the most common mortgage value is between $150,000 and $350,000, according to iPolitics. Just four successful applications were for a mortgage valued between $450,000 and $500,000.

In May of this year, the government announced changes to the program that would allow first-time buyers in Toronto, Vancouver and Victoria to qualify under the program for purchases up to $722,000, up from the roughly $505,000 limit in place for buyers in the rest of the country. The data published by iPolitics only goes to March 31, and wouldn’t include any applications that came in after the qualification changes in May.

The figures showed that homebuyers in Edmonton participated in the program more than any other city by a long-shot, at 1,288 successful applications, with Calgary a distant second at 636 applications. Toronto had just 39 homebuyers qualify for the program to date, while Vancouver saw nine and Victoria had just five.

Here’s a breakdown of successful FTHBI applications by city:

 

Courtesy: iPolitics.ca

Overall, Quebec has seen the highest number of participants at nearly 3,800, followed by Alberta with about 2,800. Another 770 came from Ontario and 342 were from B.C.

FTHBI Has Been Criticized From the Start

From day one, the First-Time Home Buyer Incentive had its critics. They argued that the program was ill-conceived, due largely to the fact there was virtually no industry consultation, and that it’s largely a government subsidy for those who can already qualify for a house.

But one of the biggest knocks against the FTHBI is that most first-time buyers can qualify for a larger mortgage if they don’t participate in the program.

“All eligible participants would actually be able to borrow more using a traditional 5% down insured mortgage,” Mortgage Professionals Canada President and CEO Paul Taylor told CMT previously. That’s even after the government’s tweaks that took effect in May, allowing participants in Toronto, Vancouver and Victoria to borrow up to 4.5 times their household income, up from four times.

As a result, Taylor noted the program doesn’t really create any new market entrants. “It provides an option for those who already qualify, in very specific parameters, to reduce their monthly payments at the tradeoff of home equity,” he said.

And if the current participation numbers are any indication, it appears most first-time buyers are opting for alternative ways to achieve home ownership—despite the hurdles—rather than sharing their home equity with the government through the FTHBI.

–Steve Huebl

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