While central banks hold overnight rates at record lows, anchoring short-term interest rates and the prime rate, mid-to-long-term government yields have been rising since early this month. As the chart below shows, the 5-year Government of Canada bond, upon which mortgage rates are generally tethered, are currently at 0.69%, up 27 basis points since January 29th. This is the highest 5-year yield since late-March 2020.  Canadian bond yields have increased more than in the US, perhaps due to the surge in commodity prices, most notably oil, which has climbed 16.9% in just the past month, taking the year-to-date gain to 27%.

Growing government debt arising from fiscal measures to cushion the blow of the pandemic and stimulate the economy has set the stage for higher government bond yields in much of the developed world.

Inflation concerns are mounting. In a rare move, yesterday Statistics Canada revised up its estimate of core inflation–unveiled only five days ago–from 1.5% to 1.77%. The result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The core CPI is the Bank of Canada’s preferred measure of underlying inflation, and it has rattled markets that it now appears to be running at nearly a 1.8% year-over-year pace.

While inflation is expected to accelerate in the coming months on higher energy costs, policymakers led by Governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy. Despite a temporary pickup early this year, the Bank of Canada doesn’t anticipate inflation will sustainably return to its 2% target until 2023. Macklem speaks in Calgary later today, and he is likely to suggest that the Canadian economy is still far from an inflationary threshold.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far beyond other countries in the vaccine rollout.

The biggest vaccination campaign in history is currently underway. More than 209 million doses have been administered across 92 countries, according to data collected by Bloomberg News. The latest pace was roughly 6.24 million doses a day. Israel has administered more than 82 doses of vaccine per 100 people, the UK is at 27.5, and the US is at 19.3. Canada, on the other hand, has administered only 4.1 doses per 100 people, now ranking 43rd in the world (see chart below).

This slow start to the rollout likely portends a longer period of economic underperformance.

Bottom Line

Some upward pressure on fixed mortgage rates might be in store, although the Big Five Banks have yet to respond, and the qualifying rate remains at 4.79%, well above contract rates. Without any prospect of near-term tightening by the Bank of Canada, variable rate mortgage rates–typically tied to the prime rate–will remain stable. But mortgage rates have moved up at some of the non-bank lenders. No question, the economy’s trajectory and interest rates will be linked to the return to the ‘new normal’ following the pandemic. Good news on the pandemic front inevitably means higher mortgage rates in 2022-23–if not sooner.

Today the Canadian Real Estate Association (CREA) released statistics showing national home sales hit another all-time high in January 2021. Canadian home sales increased 2.0% month-on-month (m-o-m) building on December’s 7.0% gain. On a year-over-year (y-o-y) basis, existing home sales surged 35.2%. As the chart below shows, January activity blew out all previous records for the month.

The seasonally adjusted activity was running at an annualized pace of 736,452 units in January, significantly above CREA’s current 2021 forecast for 583,635 home sales this year. Sales will be hard-pressed to maintain current activity levels in the busier months to come, absent a surge of much-needed new supply; However, that could materialize as current COVID-19 restrictions are increasingly eased and the weather starts to improve.

A mixed bag of gains led to the month-over-month increase in national sales activity from December to January, including Edmonton, the Greater Toronto Area (GTA), and Chilliwack B.C., Calgary, Montreal and Winnipeg. There was more of a pattern to the declines in January. Many of those were in Ontario markets, following predictions that sales in that part of the country might dip to start the year with so little inventory currently available and many of this year’s sellers likely to remain on the sidelines until spring.

Actual (not seasonally adjusted) sales activity posted a 35.2% y-o-y gain in January. In line with activity since last summer, it was a new record for January by a considerable margin. For the seventh straight month, sales activity was up in almost all Canadian housing markets compared to the same month the previous year. Among the 11 markets that posted year-over-year sales declines, nine were in Ontario, where supply is extremely limited at the moment.

CREA Chair Costa Poulopoulos said, “The two big challenges facing housing markets this year are the same ones we were facing last year – COVID and a lack of supply. It’s looking like our collective efforts to bring those COVID cases down over the last month and a half are working. With luck, some potential sellers who balked at wading into the market last year will feel more comfortable listing this year.”

New Listings

The dearth of new listings continues to be the biggest problem in the housing market. As we move into the spring market and continue to see fewer COVID cases, the likelihood is that new supply will emerge. But for now, the number of newly listed homes plunged 13.3% in January, led by double-digit declines in the GTA, Hamilton-Burlington, London and St. Thomas, Ottawa, Montreal, Quebec and Halifax Dartmouth.

With sales edging higher and new supply falling considerably in January, the national sales-to-new listings ratio tightened to 90.7% – the highest level on record for the measure by a significant margin. The previous monthly record was 81.5%, set 19 years ago. The long-term average for the national sales-to-new listings ratio is 54.3%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 20% of all local markets were in balanced market territory in January, measured as being within one standard deviation of their long-term average. The other 80% were above long-term norms, in many cases well above. This was a record for the number of markets in seller’s market territory.

There were only 1.9 months of inventory on a national basis at the end of January 2021 – the lowest reading on record for this measure. At the local market level, some 35 Ontario markets were under one month of inventory at the end of January.

Low available supply is the reason property values will continue to go up. Strong demand pre-pandemic and the historic market rally since summer have cleaned up inventories in many parts of the country. Relative to the 10-year average, active listings had plummeted between 50% and 61% in Ontario, Quebec and most of Atlantic Canada, and 29% in BC by the late stages of 2020. And that’s despite a surge in downtown condo listings since spring in Canada’s largest cities. With so few options to choose from (outside downtown condos), buyers will continue to compete fiercely. Buyers in the Prairie Provinces, and Newfoundland and Labrador, however, will feel less pressure to outbid each other given supply isn’t quite as scarce in these markets.

Home Prices

Viewed from another angle, sellers enter 2021 holding a powerful hand when setting prices in most of Canada. We see this continuing during most of 2021. We expect provincial sales-to-new listings ratios—a reliable gauge of price pressure—to generally stay above the threshold (0.60) where sellers have historically yielded more pricing power. In several cases (including BC, Ontario and Quebec), ratios are well above the threshold, providing plenty of buffer against demand-supply conditions flipping in favour of buyers.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.9% m-o-m in January 2021. Of the 40 markets now tracked by the index, prices were up on a m-o-m basis in 36.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13.5% on a y-o-y basis in January – the biggest gain since June 2017.

The largest y-o-y gains – above 30% – were recorded in the Lakelands region of Ontario cottage country, Northumberland Hills, Quinte & District, Tillsonburg District and Woodstock-Ingersoll.

Y-o-y price increases in the 25-30% range were seen in Barrie, Niagara, Grey-Bruce Owen Sound, Huron Perth, Kawartha Lakes, London & St. Thomas, North Bay, Simcoe & District and Southern Georgian Bay.

Y-o-y price gains followed this in the range of 20-25% in Hamilton, Guelph, Oakville-Milton, Bancroft and Area, Brantford, Cambridge, Kitchener-Waterloo, Peterborough and the Kawarthas, Ottawa and Greater Moncton.

Prices were up 16.6% compared to last January in Montreal. Meanwhile, y-o-y price gains were in the 10-15% range on Vancouver Island, Chilliwack, the Okanagan Valley, Winnipeg, the GTA and Mississauga. Prices rose in the 5-10% range in Victoria, Greater Vancouver, Regina and Saskatoon. Home prices were up 2% and 2.2% in Calgary and Edmonton, respectively.

Bottom Line

The rollercoaster that was 2020 left Canada’s housing market more or less where it started the year: full of bidding wars, escalating prices and exasperated buyers unable to find a home they can afford. The pandemic changed some dynamics—it drove many buyers to the suburbs, exurbs and beyond, ground immigration to a virtual halt, triggered a downturn in big cities’ rental markets and caused households to build up their savings—but it didn’t dial down the market’s heat.

The marked shift in housing strength from urban centres–Toronto, Vancouver, Montreal–to perimeter cities is ongoing. For example, Toronto’s prices are up ‘only’ 11.9% y-o-y, but Barrie (+27%) and London (26%) have far outpaced these gains.

Condo price growth has slowed to just 3.1% y-o-y, or a record 14.3 percentage points below the price gains in single-detached homes. That’s by far the widest gap in 20 years and reflects the hunt for space and social distancing.

Housing starts (reported yesterday by CMHC) surged to 282,428 annualized units in January, the second-highest monthly posting since 1990. This figure could be distorted upward by the unseasonably mild January weather in much of the country. But the new high in starts is in line with record sales and solid building permits.

For policymakers, it doesn’t appear that there’s much interest in leaning against a sector that is helping to prop up the economy, especially with years of tightening mortgage rules already in place.

There appears to be little on the horizon to stop sales or prices from reaching new heights in 2021. Yet, cooling signs will emerge as the year progresses, which will come into fuller view next year. The foremost restraining factors will be a rise in new listings, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.

This morning, Statistics Canada released the January 2021 Labour Force Survey showing the negative economic impact of extended lockdowns in Ontario and Quebec. The closing of all in-person dining, nonessential retail, recreational facilities and personal care services in these provinces and Alberta and Manitoba took its toll on the labour markets.

Employment fell by 212,800 (-1.2%) in January, much weaker than generally expected. Losses were entirely in part-time work–full-time jobs actually rose 12,600–and were concentrated in the Quebec and Ontario retail trade sectors. As a result, hours worked somehow managed to rise 0.9% in the month.

Friday’s report wipes out months of gains, leaving employment about 4.5% shy of February 2020 pre-COVID levels.

The decline in January followed a revised 52,700 drop (-0.3%) in December and brought employment to its lowest level since August 2020.

Once again, job losses were heavily concentrated in retail and wholesale trade and hotels and restaurants. It is worth noting that 8 of the 16 industrial sectors saw job gains last month.

The unemployment rate rose 0.6 percentage points to 9.4%, the highest rate since August. That unemployment rate is now 3.7 ppts above the pre-COVID level, while the U.S. rate of 6.3% is 2.8 ppts higher over that period. This second consecutive monthly increase brought the unemployment rate to its highest level since August 2020. The number of long-term unemployed (people who have been looking for work or have been on temporary layoff for 27 weeks or more) remained at a record high (512,000)—a reminder that as unemployment has increased in recent months, many people affected by the initial COVID-19 economic shutdown have yet to return to work.

Still, Canada’s labour market is faring better now than it did during the first wave of restrictions in March and April when employment fell by 3 million.

By April 2020–one month into the pandemic–5.5 million workers had been directly affected by the initial widespread COVID-19 economic shutdown, which resulted in a drop in employment of 3.0 million and an increase in COVID-related absences from work of 2.5 million. In January, the equivalent number of affected workers was 1.4 million, including a decrease in employment of 858,000 and a COVID-related increase in absences of 529,000.

Once again, declines in employment occurred mostly among youth and women in the core working age of 25 to 54. These groups also recorded large decreases in part-time employment during the initial downturn in March and April 2020, reflecting that they are more likely to work part-time in industries directly affected by COVID-19 public health measures, including retail trade, and accommodation and food services.

Some industries with a high proportion of full-time employment—including professional, scientific, and technical services; finance, insurance, real estate, rental and leasing—have recovered to pre-COVID employment levels in recent months and were unchanged in January.

Among Canadians who worked at least half their usual hours, the number working from home increased by nearly 700,000 to 5.4 million in January, surpassing the previous high of 5.1 million in April during the first wave of the COVID-19 pandemic.

Average hourly wages bounced up again to 6.2% y/y, but that strength is due to the loss of lower-paying jobs in the retail and restaurant industries.

The employment losses were entirely in the two provinces that had the toughest restrictions—Ontario and Quebec—as jobs rose in 7 of the 10 provinces. The table below shows the jobless rate fell in Alberta, New Brunswick, Nova Scotia, Manitoba, PEI and Saskatchewan.

Bottom Line

With the decline in COVID cases in recent weeks, there is some hope that restrictions will be eased. Quebec has already announced it will start to loosen some restrictions on gyms, restaurants and bars in the coming days, and Ontario is on pace to reopen more schools. However, public health officials warn that new variants of the virus remain a risk and urge for continued lockdowns.

There is no question that the bright light at the end of the very dark pandemic tunnel is a widely distributed vaccine. On that score, Canada is faring badly. The Biden administration is working hard to step-up vaccine distribution, but Canada apparently placed its vaccine orders well after the US and UK. Production issues have harshly slowed Canada’s supply of vaccines. While the US and UK have already broadened distribution to all people aged 65 and over, Canada hasn’t even finished vaccinating health care workers and long-term care residents. Reports suggest that significantly more supply will not be forthcoming until April.

The chart below describes the Canadian vaccine rollout. We now rank 34th in the world in terms of total vaccination doses administered per 100 people.