11 Jul

Bank of Canada Maintains Overnight Rate and Raises 2019 Forecast


Posted by: John Dunford

The Bank of Canada held the target overnight rate at 1.75% for the sixth consecutive decision and showed little willingness to ease monetary policy, as stronger domestic growth offsets the risk of mounting global trade tensions. There has been ongoing speculation that the Bank of Canada would be pushed into cutting interest rates by the Fed. I do not believe the Bank will let the US dictate monetary policy when the Canadian economy is clearly on the mend. To be sure, trade tensions have slowed the global economic outlook, especially in curbing manufacturing activity, business investment, and lowering commodity prices. But the Bank as already incorporated these effects in previous Monetary Policy Reports (MPR) and today’s forecast has made further adjustments in light of weaker sentiment and activity in other major economies.

The Governing Council stated in today’s press release that central banks in the US and Europe have signalled their readiness to cut interest rates and further policy stimulus has been implemented in China. Thus, global financial conditions have eased substantially. The Bank now expects global GDP to grow by 3% in 2019 and to strengthen to 3.25% in 2020 and 2021, with the US slowing to a pace near its potential of around 2%. Escalation of trade tensions remains the most significant downside risk to the global and Canadian outlooks.

The Bank of Canada released the July MPR today, showing that following temporary weakness in late 2018 and early 2019, Canada’s economy is returning to growth around potential, as they have expected. Growth in the second quarter is stronger than earlier predicted, mostly due to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production. Consumption has strengthened, supported by a healthy labour market. At the national level, the housing market is stabilizing, although there remain significant adjustments underway in BC. A meaningful decline in longer-term mortgage rates is supporting housing activity. The Bank now expects real GDP growth to average 1.3% in 2019 and about 2% in 2020 and 2021.

Inflation remains at roughly the 2% target, with some upward pressure from higher food and auto prices. Core measures of inflation are also close to 2%. CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors. As slack in the economy is absorbed, and these temporary effects wane, inflation is expected to return sustainably to 2% by mid-2020.

Bottom Line: The Canadian economy is returning to potential growth. “As the Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.” With this statement, Governor Poloz puts Canadian rates firmly on hold as Fed Chair Jerome Powell signals openness to a rate cut as uncertainty dims the US outlook.

The Canadian central bank is in no hurry to move interest rates in either direction and has signalled it will remain on hold indefinitely, barring an unexpected exogenous shock.

19 Jun

Ottawa to Help First Time Buyers Lower Mortgage Payments


Posted by: John Dunford

A new federal program designed to help middle class families get on the housing ladder is being introduced while the previously announced Shared Equity Mortgage Provider Fund will launch next month.

The federal government has announced that the First-Time Home Buyer Incentive will reduce monthly mortgage payments for first-time buyers without increasing their down payment.

The incentive will allow eligible first-time homebuyers who have the minimum down payment for an insured mortgage with CMHC, Genworth or Canada Guaranty, to apply to finance a portion of their home purchase through a form of shared equity mortgage with the Government of Canada.

For existing homes, the incentive will be 5% while for new homes there will be a 5% or 10% option. The larger share available for new homes aims to boost housing supply.

The program will launch on September 2, 2019, with the first closing on November 1, 2019.

“The First Time Home-Buyer Incentive is designed to benefit those who need more assistance with housing costs, middle class Canadians. Thanks to mortgage payments that are more affordable, many families will have hundreds of dollars more each month in their pockets – money to spend on things like healthy food, sports activities for their kids, or even save for the future.” said Bill Morneau, Minister of Finance.

The government has clarified that:

  • Doubling the incentive for purchasers of new homes encourages new housing supply.
  • No on-going repayments are required, the incentive is not interest bearing, and the borrower can repay the incentive at any time without a pre-payment penalty.
  • The government shares in the upside and downside of the change in the property value.
  • The buyer must repay the incentive after 25 years, or if the property is sold.
  • The incentive will be available to first-time homebuyers with qualified annual household incomes up to $120,000. At the same time, a participant’s insured mortgage and the incentive amount cannot be greater than four times the participant’s qualified annual household income.
without FTHBI with FTHBI without FTHBI with FTHBI without FTHBI with FTHBI
House Price $200,000 $200,000 $350,000 $350,000 $500,000 $500,000
Down Payment (5%) $10,000 $10,000 $17,500 $17,500 $25,000 $25,000
FTHBI (10%) NA $20,000 NA $35,000 NA $50,000
Insured Mortgage $190,000 $170,000 $332,500 $297,500 $475,000 $425,000
Insured Mortgage + Mortgage Insurance Premium $197,600 $174,760 $345,800 $305,830 $494,000 $436,900
Monthly Payment* $989 $875 $1,731 $1,531 $2,473 $2,187
Savings on Monthly Payment $114 $200 $286
Savings on Yearly Payment $1,372 $2401 $3,430

“Through the National Housing Strategy, more middle-class Canadians – and people working hard to join it – will find safe, accessible and affordable homes. Our proposed measures will reduce the monthly mortgage for your first home by up to $286. This will mean more money in the pockets of Canadians and will help up to an estimated 100,000 families across Canada,” added Jean-Yves Duclos, Minister of Families, Children and Social Development and Minister Responsible for Canada Mortgage and Housing Corporation.

Shared equity fund

As announced in Budget 2019, the government is also introducing the Shared Equity Mortgage Provider Fund, a five-year, $100-million lending fund to assist providers of shared equity mortgages to help eligible Canadians achieve affordable homeownership.

The fund will launch on July 31, 2019 and will be administered by CMHC. It will support an alternative homeownership model targeted at first-time homebuyers, help attract new providers of shared equity mortgages and encourage additional housing supply.

10 Jun

Another Strong Employment Report Signals Rebound In Canadian Economy


Posted by: John Dunford

It appears that the Bank of Canada’s optimism that the Canadian economy’s growth will pick up in the third and fourth quarters of this year is well founded. Not only was the employment report very robust for two consecutive months, but the jobless rate has fallen to its lowest level since at least 1976.

Also, Canada’s trade deficit, reported today, hit a six-month low in April, as exports continue to rebound from a recent slump. Consumer spending and business investment are also making a big comeback. Household spending has accelerated, despite concerns over bloated debt loads, assisted by easing rates on loans, substantial jobs gains, stabilizing housing markets and improving financial markets.

The Bank of Canada forecasts that growth will accelerate to an annualized 1.3% in the second quarter–following the meagre 0.4% expansion in Q1–and pick up further in the second half of this year, before accelerating back to above 2% growth by 2020. This comeback begs the question–why were markets expecting a rate cut by the bank in December? That expectation may well change after this morning’s Statistics Canada releases. Of course, one caveat remains, which is the uncertainty surrounding a trade war with China and Mexico. If the trade situation were to worsen, Canada’s economy would undoubtedly be sideswiped.

Canadian employment rose by 27,700 in May, bring the number of jobs created over the past year to a whopping 453,100. The jobless rate plunged to 5.4%, from 5.7% in April, the lowest in data going back to 1976. Economists had been forecasting employment to rise by only 5,000 last month after Canada recorded a record gain of 106,500 in April. The loonie jumped on the news.

The composition of the job gain was particularly heartening, as the rise was all in full-time employment. On the other hand, jobs by those who are self-employed increased by 61,500–the gig economy is alive and well.

The most substantial job gains were in Ontario and BC.

Wage growth continued to be strong in May as pay gains for permanent workers sere steady at 2.6%.

In direct contrast, the US jobs report, also released today, was weaker than expected. US payrolls and wage gains cooled as Trump’s trade war weighed on the economy. US employers added the fewest workers in three months, and wage gains eased, suggesting broader economic weakness and boosting expectations for a Federal Reserve interest-rate cut as President Donald Trump’s trade policies weigh on growth.

20 May

BoC Says the Housing Market is Still Vulnerable to Household Debt


Posted by: John Dunford

The Bank of Canada released its review of the financial system Thursday and warned that it was important to remain vigilant to the risk of household indebtedness.

The bank said that while the mortgage stress test and interest rate hikes have slowed household borrowing and improved credit quality, there are still high levels of indebtedness and a large portion is held by households that are highly indebted.

However, it noted that the share of Canadians falling behind with credit payments is low and steady.

“New measures have curbed borrowing, reduced speculative behaviour in housing markets and made the financial system more resilient. While the fundamentals in the housing sector remain solid overall and the sector should return to growth later this year, we continue to monitor these vulnerabilities closely,” said BoC governor Stephen Poloz.

Another risk to the system

Governor Poloz highlighted rising risk to the financial system from corporate debt, especially among lower-rated companies.

He also said that assessment is needed of the risk from climate change.

The most important risks to Canada’s financial system remain a severe nationwide recession, a large house price correction and a sharp repricing of risk in financial markets.

But the BoC says its recent stress tests found that Canadian banks are in good shape to deal with these scenarios.

“Global uncertainty is rising, and risks to financial stability have edged up in the past year. Still, confidence in the resilience of Canada’s financial system remains high, and we are seeing improvements in some of the key vulnerabilities we’ve been worried about for many years,” said Governor Poloz

16 May

BoC Will Cut Interest Rates Twice This Year Says Capital Economics


Posted by: John Dunford

The Bank of Canada will make two interest rate cuts during 2019 according to Capital Economics.

That’s because BoC governor Stephen Poloz may have underestimated the downturn in the housing market and the wider impact to the economy, senior economist for Canada Stephen Brown told BNN Bloomberg.

He said that with condo presales in Toronto and Vancouver in 2018, developers have found it harder to secure investment in new projects. That, says Brown, is likely to have an impact on employment and consumption, making a big dent in the country’s output.

“Condo developers have to sell about 70% of the units in their condo before they start construction, in order to secure financing,” Brown said. “So the current housing starts represent homes that were actually sold, as pre-construction units, around 18 months ago.”

He noted that the figures he’s looking at are niche and not being widely considered.

On interest rates, Brown and his team are forecasting a drop this year to 1.25% from the current 1.75% which will be facilitated over two rate cuts.

15 May

Trudeau Says New Mortgage Rules Cut Froth in Toronto, Vancouver


Posted by: John Dunford

The Canadian government is monitoring whether tougher mortgage rules are having the desired effect but doesn’t favour allowing longer mortgage terms, Prime Minister Justin Trudeau said.

Trudeau, speaking to an industry group Thursday, was asked about raising the maximum amortization of a mortgage to 30 years, from 25 years, for first-time buyers. The prime minister said he opted instead to introduce a program that sees the government take a stake in some home purchases, as well as increasing the funds a buyer can take from retirement savings.

“We’re looking at things that are not going to disrupt the market in unexpected ways,” Trudeau said at the Canadian Home Builders’ Association conference in Niagara Falls. “We’re listening to everyone about their concerns and we are going to keep watching that stress test and make sure that it is having the desired effect, but we are seeing fewer and fewer people take on those overreaching debt-loads, particularly in the higher sectors of the market.”

Canada’s housing market has been a preoccupation of policymakers for years — grappling with a surge in prices in Vancouver and Toronto, and fears that a bubble could develop. Officials have tightened mortgage eligibility rules and imposed other measures to curb runaway growth. Bank of Canada Governor Stephen Poloz said this week he’s confident the sector will return to growth.

Trudeau said his government tried to take measures that would stabilize Vancouver and Toronto but not “have an overly negative impact elsewhere around the country.”

The tougher stress test for mortgage eligibility was about “taking some of the froth out of those markets but also ensuring that people weren’t stretching themselves further than was wise, particularly given the fact that we can see interest rates rising in the future, and recognizing Canadians carry a high level of personal indebtedness that we need to respond to.”

He acknowledged the industry’s call for 30-year mortgages, but said “yes, it can lower your mortgage payments on a monthly level but actually, overall, increases the amount that you’re going to be paying out in interest over time. Which is why, when we looked at all the different measures we had, we really, really liked the shared equity program.”

11 May

Blockbuster April Jobs Report Signals The Economy Has Turned The Corner


Posted by: John Dunford

Canada posted a record job gain last month, along with a decline in the jobless rate and a pick-up in wages, providing the strongest signal yet that the economy is coming out of a six-month slowdown. Other data this week portend a rebound in economic activity, including a strong bounce-back in exports and a surge in housing starts.

Statistics Canada announced this morning that employment rose by a whopping 106,500 in April, the biggest one-month gain since the start of this data series in 1976. This was dramatically above the median forecast of economists of 12,000 net new positions. The Canadian jobless rate fell a tick to 5.7%, near a four-decade low.

This report showed broadly based strength across regions, sectors and provinces. Full-time jobs jumped by 73,000, part-time positions rose as well by 33,600.

On a year-over-year basis, employment grew by 426,000 (+2.3%), with gains in both full-time (+248,000) and part-time (+179,000) work. Over the same period, total hours worked were up 1.3%.

Employment increased in Ontario, Quebec, Alberta, and Prince Edward Island. It declined in New Brunswick and was little changed in the other provinces. Quebec posted an unemployment rate of 4.9%, the lowest in recorded history. Jobs in Alberta gained steam following two months of little change.

Employment gains were spread across several industries: wholesale and retail trade; construction; information, culture and recreation; “other services”; public administration; and agriculture. At the same time, employment decreased in professional, scientific and technical services.

Construction punched above its weight for the first time in many months. Gains were concentrated in Ontario and British Columbia. This likely foreshadows a stronger spring season in existing home sales.
Provincial Unemployment Rates
(% 2019, In Ascending Order)

Province                                      April     March
British Columbia                        4.6            4.7
Quebec                                         4.9            5.2
Manitoba                                     5.2            5.0
Saskatchewan                             5.4            4.9
Ontario                                         6.0            5.9
Alberta                                          6.7            6.9
Nova Scotia                                 6.9            6.2
New Brunswick                          8.0            7.9
Prince Edward Island               8.6            8.9
Newfoundland and Labrador 11.7            11.5

For many months the labour market strength has been the mainstay of the economy. Many had warned as recently as last month that Canada could be headed for recession amid a perfect storm of negative factors — falling oil prices, volatile financial markets, higher interest rates, cooling housing markets and global trade tensions. But many of these elements have begun to dissipate.

Exporters showed across-the-board resiliency in March after shipments tumbled in February. Toronto’s housing market, the country’s largest, is stabilizing after a recent slump. There are also signs consumers continue to spend and borrow, aided in large part by the buoyant labour market, even amid worries about the outlook.

Even wages have strengthened. Pay gains for permanent employees rose to 2.6% year-over-year, the sharpest rise since August. Total hours worked also increased, rising by 1.3% annually in April, up from 0.9% in March. Youth unemployment fell to record lows.

Bottom Line: This very positive report opens up the possibility that the Bank of Canada might take a more hawkish stance at their next meeting. It might well be that a rate hike sometime later this year is no longer off the table. One critical uncertainty, however, is the heightened trade war between the US and China. If the two sides hike tariffs sharply, a possibility given the current sabre rattling, Canada’s economy could once again be hit in the cross-fire.

7 May

Canadian City Sees 183% Surge in Foreign Buyer Investment


Posted by: John Dunford

Foreign Investment in Montreal’s property market surged a whopping 183% in 2018 over the previous year—the likely the result of foreign buyer taxes in Toronto and Vancouver.

“It’s not a coincidence that after the foreign investor taxes in Toronto and Vancouver, interest moved to the Montreal market,” said Altus Group’s Senior Director of Innovation and Growth Strategies Vincent Shirley. “Foreign investors originally looked at the Vancouver and Toronto markets but they also recognized Montreal as a discounted market. There are more factors involved than just that: The fundamentals in Montreal are really strong right now and the job market is very good too.”

According to Altus Group’s Montreal Flash Report 2019, year-over-year investment property sales volume in the city increased 18% last year, hitting $6.5 billion, thanks in large part to renewed interest in Montreal Island properties located downtown and on either side of Mount Royal. Sales volume on the Island of Montreal reached $785 million.

The report also noted that almost half of total new condominium sales last year were concentrated in downtown Montreal, while the rest of Montreal Island received about one-third.

“There is a lot of job creation on Montreal Island and demographics are very strong,” said Shirley. “We had a lot of structural issues for about 40 years with a very high unemployment rate, but we’ve seen it go down the last two or three years. There’s a lot of compression with the unemployment rate and now we’re at 6% or so, but it’s forecasted to go down to 5.5% next year because job creation is very strong, as are prospects for future employment.”

In fact, Montreal is becoming a leading hub for artificial intelligence and its pharmaceutical sector is also robust. Shirley noted that Montreal’s universities serve as pipelines for those industries in particular.

Even more prominent is Montreal’s port, which is, bar none, Canada’s busiest.

“Montreal’s port accepts over 75% of commodities that come through all Canadian ports,” said Shirley. “A lot of venture capital is invested in Montreal’s technology and AI industries and our pharmaceutical sector is very strong.”

Despite Montreal’s good fortunes after decades of political upheaval surrounding language and Quebec’s place within Canada, there is reason for slight consternation. The Montreal municipal government intends to implement the so-called “20-20-20 rule,” says Shirley.

“It’s going to be 20% social housing, 20% affordable housing, and 20% family housing,” he said. “The real estate industry understands affordability and inclusionary zoning is important, but we just want to make sure the push for it doesn’t disturb the economics of Montreal and development doesn’t go into the suburbs.”

18 Apr

Economists Rule Out Rate Change Next Week


Posted by: John Dunford

The Bank of Canada will announce its April interest rate decision next week but a survey shows little expectation that it will make a change.

Nine out of 10 economists including those from TD, Laurentian, the Conference Board of Canada and University of Manitoba – expect that the BoC will leave rates unchanged at 1.75%.

“All combined, the global slowdown and specific factors weighing down on Canadians households and the oil sector are justifying to keep the overnight rate at current level,” said Sebasiten Lavoie, chief economist at Laurentian Bank Securities.

However, the poll by Finder.com found that Atif Kubursi of Economic Research Ltd. and McMaster University, is predicting a rate cut, citing “sluggish growth and poor export performance.”

While the others are ruling out a cut in April, four now believe Governor Poloz could announce one in July and longer term we could see a 1.15% rate within the current cycle.

Recession fears

While a rate hold and cut will be good news for the housing market, the underlying reasons for economists making their predictions is more concerning.

Canada is either somewhat or very likely to go into recession in the next 12 months, according to half of the panellists.

“Uncertainty remains elevated, and recent trends (January notwithstanding) have been quite weak – domestic demand contracted over the latter half of 2018. Retail sales remain soft, as do housing markets,” said Brian DePratto, senior economist at TD Economics.

The panel expects the CMHC First Home Buyers Incentive to have either marginal or little to no impact on housing affordability but they believe that property prices will stabilise by the end of the year. Montreal house prices are expected to increase the most

9 Apr

IMF Says Canada’s Housing Market is Risky, Similar to the Bust


Posted by: John Dunford

The International Monetary Fund has expressed concern about rising risk in the Canadian housing market.

The IMF’s Global Financial Stability Report says that the risk has grown over the past two years and is near to levels seen during the financial crisis of the last decade.

However, there’s a major difference between then and now; the action taken by Canadian regulators to ensure that the financial system is robust and able to withstand another crisis.

While the B-20 mortgage guidelines – and the stress test in particular – has many critics, the IMF says that tougher mortgage policy and measures such as foreign buyers’ taxes, are the correct ones to protect the financial system from downside risks from the housing market.

Canada up, USA down
While Canada’s housing market has become riskier, the report says that the US risk is lower than it was due to declining levels of household debt and prices more in line with income.

But it says that Canadian markets have become riskier, especially Hamilton, Toronto, and Vancouver.