7 Apr

The Bank of Canada Is Seeing “Worrying” Signs About Debt

General

Posted by: John Dunford

The Bank of Canada is seeing “worrying” signs that some Canadians are taking on too much debt to buy into the nation’s hot housing market.

In an interview with the Financial Post, Governor Tiff Macklem said there is evidence that loan levels relative to home values are growing — an indication that some borrowers could be overextending. He also warned people have begun to make purchases based on the belief prices will continue rising.

“Canadians are stretching and that is worrying.” Macklem said. “If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

At the same time, Macklem indicated the central bank can do little given interest rates need to stay low to support the recovery.

His comments come amid increasingly urgent calls from economists for policy makers to cool the market. Over the past week, the Bank of Montreal’s Robert Kavcic and Robert Hogue at Royal Bank of Canada have issued reports warning officials they need to take steps to break the psychology of expecting continued gains in real estate. The ultimate concern is that rapid price appreciation could be destabilizing.

Among policies being suggested are taxes targeting speculators like the one implemented in New Zealand this month, or an end to the longstanding and popular tax exemption for capital gains on primary residences. Another idea getting attention is the elimination of blind bidding for homes that some analysts say unnecessarily inflates prices.

Both Kavcic and Hogue also identified a lack of housing supply as a major driver of the recent run up in home values.

Prime Minister Justin Trudeau’s government plans to introduce a tax on foreign non-resident home owners. Finance Minister Chrystia Freeland said last week she is watching the market closely, without detailing any specific intent to take additional action.

Last week, Canada’s national housing agency added three more cities to its list of markets highly vulnerable to a sharp price drop, including Toronto. Canada Mortgage and Housing Corp. also said the recent broad-based price appreciation means overheating risks are now a national phenomenon, rather than isolated to a few major metropolitan areas.

21 Jan

Bank of Canada Still Expects No Rate Increases Until 2023

General

Posted by: John Dunford

The Bank of Canada, this morning, released its January Monetary Policy Report (MPR), showing they expect to keep overnight interest rates at its “effective lower bound” of 0.25% until 2023 (see chart below). To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its Quantitative Easing (QE) program–buying $4 billion of Government of Canada bonds every week until the recovery is well underway. The central bank indicated it could pare purchases once the recovery regains its footing.

According to the Bank’s press release, “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023.” Officials are apparently optimistic about the economy’s prospects once the vaccine is sufficiently distributed and injected. There is no indication that they are planning additional measures to ease monetary policy.

This is particularly noteworthy for two reasons: 1) some economists had been speculating that the Bank would lower the overnight rate by 10-to-15 basis points to help mitigate the impact of continued and broadening lockdowns; and, 2) others thought the early development of the vaccine would trigger sufficient growth to warrant a rate hike in 2022. In the Bank’s current view, neither is likely to be the case. Why mess with a minute cut in already record-low interest rates when mortgage lending is still strong? The slow rollout of the vaccine and the mounting second wave of cases assure weak economic activity in Canada at least until the second half of this year.

As well, inflation remains surprisingly muted. In a separate release today, Stats Canada revealed that price pressures in Canada unexpectedly slowed in December as the country endured a new wave of lockdowns. After climbing to the highest since the pandemic in November, the latest reading shows price pressures are still well below the Bank of Canada’s 2% target. That’s consistent with the view from policymakers that inflation will remain subdued for some time.

The pandemic’s second wave has hit Canada very hard, and the vaccine rollout has been disappointing (see chart below). Today’s MPR predicts that the economy will contract in the first quarter of this year. Economic weakness could be exacerbated by the Canadian dollar’s strength, which moved to above 79 cents US following today’s BoC announcement. Ten-year yields edged up modestly as well.

Bottom Line

For the year as a whole, economic growth is expected to be around 4% in 2021, compared to a contraction of -5.5% last year. As the inoculated population grows, the Bank forecasts an acceleration in growth to just under 5% in 2022 and a more-normal 2.5% in 2023. According to the January MPR, “The medium-term outlook is stronger than in the October Report because of vaccines’ positive effects, greater fiscal stimulus, stronger foreign demand and higher commodity prices. Meanwhile, potential output has also been revised up, reflecting an improved projection for business investment and less scarring effects on businesses and workers. There is considerable uncertainty around the medium-term outlook for GDP and the path for potential output. Thus, while the output gap is expected to close in 2023, the timing is particularly uncertain.”

Concerning housing activity, the report said, “Demand for housing has continued to show resilience, despite increasing case numbers and tightening restrictions. Housing activity should remain elevated into the start of 2021, supported by low borrowing rates and resilient disposable incomes. Changes in homebuyers’ preferences have also played a role. For example, price growth has been strongest for single-family homes and in areas outside city centres.”

18 Jan

2020 Was a Blockbuster Year for Housing

General

Posted by: John Dunford

Despite the fears leading into the pandemic last Spring, 2020 marked a record number of home resales as new listings lagged and prices climbed. December housing data released by the Canadian Real Estate Association (CREA) today shows national home sales surged 7.2% month-over-month (m-o-m) at a time of the year when housing is normally slow. The chart below shows that resales were impressively above their 10-year average. The seasonally adjusted activity was running at an annualized 714,516-unit pace in December 2020 – the first time on record that monthly sales (at seasonally adjusted annual rates) have ever topped the 700,000 mark.  It was a new record for December by a margin of more than 12,000 transactions. For the sixth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019.

The increase in national sales activity from November to December was driven by gains of more than 20% in the Greater Toronto Area (GTA) and Greater Vancouver.

On a year-over-year basis (y-o-y), activity rocketed upward by 47.2% as interest rates hit record lows, housing needs changed owing to the pandemic, and supply was insufficient to meet demand. The housing boom occurred despite the fall in population growth, reflecting the dearth of new immigration. The yearly change in population growth in Canada nosedived in 2020 after climbing powerfully in the prior four years. Despite this headwind, for 2020 as a whole, 551,392 homes traded hands over Canadian MLS® Systems – a new annual record. This is an increase of 12.6% from 2019 and stood 2.3% above the previous record set in 2016.

New Listings

“The stat to watch in 2021 will be new listings, particularly in the spring – how many existing owners will put their homes up for sale?” said Shaun Cathcart, CREA’s Senior Economist. “We already have record-setting sales, but we know demand is much stronger than those numbers suggest because we see can see it impacting prices. On New Year’s Day, there were fewer than 100,000 residential listings on all Canadian MLS® Systems, the lowest ever based on records going back three decades. Compare that to five years ago, when there was a quarter of a million listings available for sale. So we have record-high demand and record-low supply to start the year. How that plays out in the sales and price data will depend on how many homes become available to buy in the months ahead. Ideally, we’d like for households to be able to find and acquire the homes that best suit their needs and for housing to remain affordable, but the fact is we’re facing a major supply problem in 2021.”

The number of newly listed homes climbed by 3.4% in December, led by more new listings in the GTA and B.C. Lower Mainland, the same parts of Canada that saw the biggest sales gains in December.

With sales up by more than new supply in December, the national sales-to-new listings ratio tightened to 77.4% – among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.2%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 30% of all local markets were in balanced market territory in December, measured as being within one standard deviation of their long-term average. The other 70% of markets were above long-term norms, in many cases well above.

There were just 2.1 months of inventory on a national basis at the end of December 2020 – the lowest reading on record for this measure. At the local market level, 29 Ontario markets were under one month of inventory at the end of December.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.5% m-o-m in December 2020. Of the 40 markets now tracked by the index, only one was down between November and December.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13% on a y-o-y basis in December – the biggest gain since June 2017 (see chart below).

Home price activity largely reflected the desire of home purchasers to move away from city centres to a greener, less-expensive suburbs and exurbs now that telecommuting appears to be a sustainable option, at least part-time.

The largest y-o-y gains – above 30% – were recorded in Quinte & District, Simcoe & District, Woodstock-Ingersoll and the Lakelands region of the Ontario cottage country (see the table below for details).

Y-o-y price increases in the 25-30% range were seen in Bancroft and Area, Grey Bruce Owen Sound, Kawartha Lakes, North Bay, Northumberland Hills and Tillsonburg District.

This was followed by y-o-y price gains in the range of 20-25% in Barrie, Hamilton, Niagara, Brantford, Cambridge, Huron Perth, Kitchener-Waterloo, London & St. Thomas, Southern Georgian Bay and Ottawa.

Prices were up in the 15-20% range compared to last December in Oakville-Milton, Peterborough and the Kawarthas, Montreal and Greater Moncton.

Meanwhile, y-o-y price gains were in the 10-15% range in the GTA and Mississauga, Quebec City, and the 5-10% range across B.C., and in Regina, Saskatoon, Winnipeg and St. John’s NL.

Alberta still lagged owing to the still-negative oil market scene, where home prices were up only 1.5% and 2.7% in Calgary and Edmonton, respectively.

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in sales activity mix from one month to the next.

The actual (not seasonally adjusted) national average home price was a record $607,280 in December 2020, up 17.1% from the same month last year.

Bottom Line

Housing strength is largely attributable to record-low mortgage rates and strong demand for more spacious accommodation by households that have maintained their income level during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, non-essential retail and tourism-related sectors. These are the folks that can least afford it and typically are not homeowners.

We end 2020 with the national average home price up 17.1%–a dramatic surge rather than the 9-18% decline forecast by CMHC last March. Moreover, 2021 is likely to be another strong year for housing.  It would not surprise me if annual sales reached a new high in 2021, especially in the first half of the year. There will, however, be cooling signs as the year progresses and especially into 2022. Firstly, supply constraints are a major factor as new listings remain low relative to demand. As well, the pandemic-induced changes in housing needs will have a waning effect over time. As vaccine injections rise across the country and we return to a new normal, interest rates will creep up moderately. This along with higher home prices will slow the pace of activity as affordability erodes.

There will be mitigating factors in 2022: the number of new immigrants is slated to rise to roughly 500,000 that year and demand for short-term Airbnb rentals will rise sharply as tourism revives.

14 Dec

Bank of Canada Confirms Commitment To Low Interest Rates

General

Posted by: John Dunford

Despite the good news on the vaccine front since the Governing Council’s last meeting in late October, the Bank of Canada reasserted its commitment to provide extraordinary monetary policy support for many months to come. The statement released today reiterated that the Bank will hold the policy interest rate at its effective lower bound of 0.25% “until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”  Although inflation in October picked up, it was mainly because of higher prices for fresh fruits and vegetables. The Bank’s policy statement said that measures of core inflation are all below 2%, and “considerable economic slack is expected to continue to weigh on inflation for some time.”  The economy will continue to require this stimulus until 2023–as stated in the most recent (October) Monetary Policy Report (MPR).

The central bank will reassess the outlook when it meets again on January 20 when it releases the next full update of its outlook for the economy and inflation, including risks to the projection, in the January MPR.

Despite the good news regarding the vaccine, other recent developments weigh heavily on the economy. Canada has been hard hit by the second wave in Covid cases (see chart below). The daily number of cases have averaged just over 6,000 in the past week. According to the Public Health Agency of Canada, Covid-19 cases are on pace to exceed 20,000 a day at the current rate of spread. Provinces all over the country have imposed aggressive new restrictions to slow the spread of the virus.

New lockdown measures are having a crippling effect on non-essential retailers and restaurants during the all-important holiday season. The government announced aggressive fiscal policy measures last week to cushion the blow on businesses and households. Indeed, among all the G7 countries, Canada’s fiscal response has been the most aggressive.

As well, according to Bloomberg News, Canada has reserved more vaccine doses per person than anywhere, as PM Trudeau has accelerated plans to start giving shots.  “The first Canadians will be vaccinated next week if we have approval from Health Canada this week,” Trudeau told reporters in Ottawa. “This will move us forward on our whole timeline of vaccine roll out and is a positive development in getting Canadians protected as soon as possible.”

The Canadian dollar has also risen to a two-year high of over 78 cents US, which the Bank says is in large measure a reflection of broadly based US dollar weakness.

Quantitative Easing Continues

Another potential drag on the Canadian economy is the rise in market rates of interest triggered by the welcome news of a successful vaccine. The Bank of Canada is responding by purchasing at least $4 billion a week in longer-term Government of Canada bonds. For example, the GoC 5-year yield has risen from a low of 31 basis points in the past six months to a current level of just under 50 basis points. No doubt, quantitative easing has dampened the upward trend and will continue to do so.

If the Bank decides that additional monetary support is needed in January, it is more likely to come via a boost to GoC bond purchases than an adjustment in the overnight rate.

In his testimony before the House of Commons finance committee on Nov. 26, Governor Tiff Macklem acknowledged market distortions could occur once the bank’s share of government bond holdings grows beyond 50%. As shown in the chart below, the Bank currently holds about 34% of the market, and if buying continues apace,  CIBC economists estimate the Bank would own 48% by the end of 2021.

Bottom Line: Interest rates will remain low for the foreseeable future. The pandemic will largely determine the growth of the economy and the government’s response. Experts suggest that the second wave will last through the winter and that a widely dispersed vaccine will not be available until the second half of 2021.

9 Dec

Bank Of Canada Keeps Overnight Rate Frozen At Effective Lower Bound

General

Posted by: John Dunford

In today’s policy announcement, the Bank of Canada stood by its pledge to hold its key overnight interest rate at 0.25%.

“The rebound in the global and Canadian economies has unfolded largely as the Bank had anticipated in its October Monetary Policy Report,” the bank said. “More recently, news on the development of effective vaccines is providing reassurance that the pandemic will end and more normal activities will resume, although the pace and breadth of the global rollout of vaccinations remain uncertain.”

As new waves of COVID-19 infections are likely to take place, the bank’s accommodative policy is expected to continue improving financial conditions and providing support across most regions.

“Stronger demand is pushing up prices for most commodities, including oil,” the banks said. “A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.”

Economists have predicted that the BoC will freeze the rate at its effective lower bound of 0.25% for at least two years. The central bank is also likely to continue its bond purchasing program at its current pace of $4 billion per week.

“The Canadian economy’s recovery from the pandemic crisis will be a drawn-out and patchy process that requires exceptional monetary support from ultra-low interest rates and unprecedented use of quantitative easing for some time to come,” said Angelo Melino, professor at the University of Toronto.

“We think fears that excessive monetary stimulus will stoke higher inflation are misplaced and expect inflation will remain subdued, with a greater risk of deflation due to weak aggregate demand and slack in the economy,” said Tony Stillo, director of economics for Canada at Oxford Economics.

The bank said that its next scheduled overnight rate announcement will be on January 20, 2021.

3 Dec

Federal Fiscal Update–Finance Minister Freeland’s Debut

General

Posted by: John Dunford

Justin Trudeau’s government, which has delivered the biggest COVID-19 fiscal response in the industrialized world, announced plans for another dose of stimulus and vowed to continue priming the pump as long as needed.

Finance Minister Chrystia Freeland unveiled $51.7 billion of new spending over two years in a mini-budget Monday, led by an enhanced wages subsidy for business. Freeland also pledged, without detailing, another $70 billion to $100 billion of additional stimulus over three years to spur the recovery.

But the finance minister clearly heeded calls for fiscal prudence. She put off any major structural spending announcements, promised any additional stimulus will be temporary and introduced new taxes on digital giants including Netflix, Amazon, and Airbnb, to help pay for it all.

“Our government will make carefully judged, targeted and meaningful investments to create jobs and boost growth,” Freeland said. It will provide “the fiscal support the Canadian economy needs to operate at its full capacity and to stop COVID-19 from doing long-term damage to our economic potential.”

Freeland revised higher the nation’s projected deficit this year to $381.6 billion, or 17.5% of GDP. That’s up from a deficit of 1.7% of GDP last year. According to estimates from the International Monetary Fund, no major economy will show a bigger fiscal swing in 2020.

The budgetary red ink is projected at $121 billion next year, before any additional stimulus. In total, spending linked to the government’s COVID response accounted for C$75 billion of this year’s deficit, and C$51 billion next year.

Based on Monday’s projections, the deficit is seen gradually narrowing to about $51 billion in two years and $25 billion by 2025.

The planned stimulus over the next three years will total no more than 4% of GDP, which the document said is in line with the Bank of Canada’s estimate of the level of slack in the economy. Freeland said, “fiscal guardrails” tied to the labour market would help determine the extent of the additional stimulus.

Among the measures announced today, Freeland boosted the government’s wage subsidy program (Canada Emergency Wage Subsidy, CEWS) to cover as much as 75% of payroll costs for businesses and extended its commercial rent subsidy and lockdown support top-ups until March. Both were slated to run out on December 20. The current cap on CEWS was 65%.

The federal government plans to create a new funding program to help restaurants, tourism companies and other businesses in industries hardest hit by COVID-19.

The Highly Affected Sectors Credit Availability Program (HASCAP), which was announced in the government’s fiscal update Monday, will offer eligible businesses loans of up to $1 million, with a 10-year term.

The money will be lent by banks or other financial institutions, but guaranteed by the federal government.

“We know that businesses in tourism, hospitality, travel, arts and culture have been particularly hard-hit. So we’re creating a new stream of support for those businesses that need it most — a credit availability program with 100-per-cent government-backed loan support and favourable terms for businesses that have lost revenue as people stay home to fight the spread of the virus,” Finance Minister Chrystia Freeland said in her prepared speech to the House of Commons.

Establishing a national childcare plan is a key long-term goal, with Freeland vowing a detailed plan in next year’s budget. In her forward to the fiscal update, she described the daycare strategy as “a feminist plan” that also “makes sound business sense.”

As a start, the Liberals are proposing in their fiscal update to spend $420 million in grants and bursaries to help provinces and territories train and retain qualified early childhood educators.

The Liberals are also proposing to spend $20 million over five years to build a child-care secretariat to guide federal policy work, plus $15 million in ongoing spending for a similar Indigenous-focused body.

The money is designed to lay the foundation for what will likely be a big-money promise in the coming budget.

Current federal spending on child care expires near the end of the decade, but the Liberals are proposing now to keep the money flowing, starting with $870 million a year in 2028.

There is also money for action on climate change. The government allocated C$2.6 billion in grants for homeowners to improve efficiency and $150 million over three years for electric vehicle charging stations.

The government also detailed some help for the hard-hit tourism sector, including funding for airports. But with Transport Minister Marc Garneau’s negotiations with airlines underway, there is no specific money for carriers including Air Canada and WestJet Airlines Ltd.

Bottom Line

There will continue to be great concern about the largest budget deficits since World War II. Does Canada really need the proportionately largest COVID fiscal response in the industrialized world?  The outlook is somewhat less dire than when the government released a fiscal snapshot in July. The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, although the second wave of pandemic and ensuing restrictions undoubtedly will topple economic activity this quarter.

There is little worry that the government can sustain a massive deficit this year. It can, given low debt levels entering the crisis and historically low interest rates. But now that it has no fiscal guardrails, there’s a risk debt-to-GDP will continue to rise in the medium term if it continues to spend ambitiously.

The government is adding a new revenue source by taxing large digital companies. Still, in time, with this level of spending, they will be tempted to raise taxes on domestic sources, for example, hikes in the GST and higher capital gains taxes. This would be misguided, given the fragility of the recovery.

There is a greater risk that the government is overdoing the stimulus with vaccines on the horizon than undergoing it. Canada’s programs have been generous and household-focused compared to our G7 peers. The government must be strategic in assuring that new program spending is focused on future growth, beyond the pandemic, so that our debt-to-GDP will resume its downward trend. The risk is that once created; it is difficult to rein in spending.

17 Nov

Canadian October Home Sales Slipped for the First Time Since April

General

Posted by: John Dunford

Today’s release of October housing data by the Canadian Real Estate Association (CREA) shows national home sales fell 0.7% month-over-month (m-o-m) from September’s record high (see chart below). This is the first decline in five months, as market conditions remained tight and prices continued to rise. Competition remains intense in the detached-home market and townhouses, but condo apartment sales have slowed as new listings surge, especially in the Greater Toronto Area (GTA).

The small change from September to October reflected gains in about half of all local markets offset by declines in the other half. Among the larger markets, activity was up in Montreal, the Fraser Valley, Calgary and Edmonton. By contrast, sales fell back in the GTA, Hamilton-Burlington, Ottawa and Greater Vancouver.

Actual (not seasonally adjusted) sales activity posted a 32.1% y-o-y gain in October. It was a new record for that month by a margin of more than 14,000 transactions. For the fourth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019. Among the few markets that were down on a year-over-year basis, it is possible for the handful that is in Ontario simply do not have the supply at the moment.

This year, some 461,818 homes have traded hands over Canadian MLS® Systems, up 8.6% from the first 10 months of 2019. In fact, it was the second-highest January-October sales figure on record, trailing only 2016. It is possible that 2020 could prove itself to be a record year for housing activity–certainly in opposition to what many thought when the pandemic hit in March. There is no doubt that COVID-19 has caused many households to uproot and change homes based on their altered lifestyle and working situation. Much of this activity would not have happened had the pandemic not struck.

New Listings

The number of newly listed homes climbed 2.9% in October. The overall gain in new supply in October was driven by more new listings in the GTA, B.C.’s Lower Mainland and Ottawa. As with sales activity, actual (not seasonally adjusted), new listings set a new record for October; however, it was by far less of a margin than sales. Meaning market conditions are still very tight in many parts of the country.

The Toronto Real Estate Board reported that the pace of annual sales growth far outstripped growth in new listings in the detached market segment. Conversely, the condominium apartment market segment experienced more than double the new listings than in October 2019, whereas sales were only up by 2.2% over the same period (see chart below).

“Competition between buyers of single-family homes, and particularly detached houses, remained strong last month and continued to support double-digit annual rates of price growth in many GTA neighbourhoods. In contrast, condo buyers have benefitted from much more choice compared to last year. Pre-COVID polling had already pointed to an increase in investor selling in 2020. The pandemic only added to this trend with a stall in economic growth and a halt to tourism impacting cashflows for many investors,” said Lisa Patel, TRREB’s President.

The dearth of tourists has devastated the short-term rental condo market, many of which are listed on Airbnb. And a dramatic decline in immigration hurt the long-term condo rental space. Rents overall have fallen in the GTA, and many investors are trying to sell. As well, many buyers of yet-to-be-delivered new condos are trying to flip their contracts. The federal government initiatives to increase immigration in 2021, if successful, will help remediate this situation. Still, tourism will not open back up until a vaccine is widely distributed around the world. There has been some good news on that front.

With new supply up in October and sales relatively little changed, the national sales-to-new listings ratio eased to 74.3% – still among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.1%.

Based on a comparison of sales-to-new listings ratio with long-term averages, about a third of all local markets were in balanced market territory in October, measured as being within one standard deviation of their long-term average. The other two-thirds of markets were above long-term norms, in many cases well above.

There were just 2.5 months of inventory on a national basis at the end of October 2020 – the lowest reading on record for this measure. At the local market level, some 18 Ontario markets were under one month of inventory at the end of October.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1% m-o-m in October 2020. Of the 39 markets now tracked by the index, all but one were up between September and October (see table 1 below).

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 10.9% on a y-o-y basis in October – the biggest gain since July 2017.

The largest y-o-y gains – more than 25% – were recorded in Ontario’s Quinte & District and Woodstock-Ingersoll.

Y-o-y price increases in the 20-25% range were seen in Ottawa, London & St. Thomas, Tillsonburg District and some Ontario cottage country areas.

Y-o-y price gains followed this in the range of 15-20% in Barrie, Hamilton, Niagara, Guelph, Bancroft and Area, Brantford, Cambridge, Huron Perth, Kitchener-Waterloo, North Bay, Peterborough and the Kawarthas, Simcoe & District, Montreal and Greater Moncton.

Prices were up in the 10-15% range compared to last October in the GTA, Oakville-Milton, Mississauga and Northumberland Hills.

Meanwhile, y-o-y price gains were in the 5-10% range in Greater Vancouver, the Fraser Valley, the Okanagan Valley, Regina, Saskatoon, Winnipeg and Quebec City. Gains were less than 4% in Victoria and elsewhere on Vancouver Island, as well as in St. John’s, and prices were just inside positive territory y-o-y in Calgary and Edmonton.

The actual (not seasonally adjusted) national average home price set another record in October 2020, coming in at $607,250. This was up 15.2% from the same month last year.

Bottom Line

Housing strength is largely attributable to record-low mortgage rates and pent-up demand by households that have maintained their income level during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, and travel sectors. These are the folks that can least afford it and typically are not homeowners. The good news is that the housing market is contributing to the recovery in economic activity.

Since Pfizer’s announcement that they have a highly effective vaccine in the works, interest rates in the US have edged upward. This has been mitigated in part by the dramatic surge in COVID cases worldwide and tighter restrictions on activity. This morning, Modernal Inc. said its COVID-19 vaccine was 94.5% effective in preliminary analysis of a large late-stage clinical trial, another sign that a fast-paced hunt by scientists and pharmaceutical companies is paying off with potent new tools that could help control a worsening pandemic. This great news has pushed up the US and Canadian bond yields, leading many to suggest that a rise in mortgage rates can’t be far behind. Stock markets are rising sharply, especially in the US, where they are hitting new record highs.

The 5-year Government of Canada bond yield is currently at .45%. It had been as low as .39% recently and .28% over the past year. The good news on the vaccine front may well be overblown given that expanded pandemic restrictions and record cases will dampen economic activity well through the winter months, mitigating the upward pressure on rates. Any mortgage rate increases will be 10 basis points or less, although discounts might start to disappear.

9 Nov

Canada’s Jobs Recovery Slowed in October With New Pandemic Restrictions

General

Posted by: John Dunford

The October Labour Force Survey, released this morning by Stats Canada, showed an employment increase of 83,600–well below the 378,000 gain in September and average monthly gains of 395,000 over the past six months (see chart below). Several provinces tightened public health restrictions last month in response to a spike in COVID-19 cases. These measures were targeted at indoor restaurants and bars, and gyms.

Most of the job gains last month were in full-time work. Among those who worked at least half their usual hours, the number working from home increased by 150,000. Working remotely continues to be an important adaptation to COVID-19 health risks, with 2.4 million Canadians who do not normally work from home doing so in October.

The unemployment rate was little changed at 8.9% in October but remained well-below the May peak of 13.7%. In addition to the unemployed, 540,000 Canadians wanted to work in October but did not search for a job, down 39,000 from September and continuing a downward trend from a peak of 1.5 million in April. If people in this group were included as unemployed, the adjusted unemployment rate in October would be 11.3%.

Long-term joblessness—defined as unemployed and looking for work or temporary layoff for 27 weeks or more— increased again in October. Not surprisingly, more than half (53.3%) of the long-term unemployed were living in a household reporting difficulty meeting necessary expenses. As of October, the long-term unemployed totalled 448,000, or one-quarter of all unemployed people. September and October increases in long-term unemployment are by far the sharpest recorded since comparable data became available in 1976.

Job Gains Slow in Central Canada

Employment increased in the wholesale and retail trade industries in Ontario, two sectors largely unaffected by new COVID-19 restrictions. After five months of gains totalling 154,000, employment in Ontario’s accommodation and food services was virtually unchanged in the month and remained 15.7% below its pre-COVID February level. Employment declined in transportation and warehousing.

Following five consecutive months of gains, employment was little changed in Quebec in October, and the unemployment rate edged up 0.3 percentage points to 7.7%. Employment gains spread across several services-producing industries were partly offset by a drop of 42,000 in the accommodation and food services industry. The public health alert level in Montréal and Québec City was raised to “red” on October 1, which led to the closure of indoor restaurants and many cultural facilities. Travel between regions in the province was also discouraged. Over the subsequent two weeks, several other Quebec regions went to red alert, and additional measures were introduced.

Employment Grows in Alberta and BC

In British Columbia, employment grew by 34,000 (+1.4%) in October, adding to gains over the previous five months (+302,000). The unemployment rate fell for the fifth consecutive month, down 0.4 percentage points to 8.0% in October. In Vancouver, employment increased by 52,000 (+3.8%) and was within 4.3% of its pre-COVID level.

In Alberta, employment rose by 23,000 (+1.1%), the fifth increase in six months. Following large employment losses earlier this year, Calgary has posted four consecutive employment gains since summer, totalling 101,000 (+13.6%). Recent employment increases in Edmonton have been more modest, up 60,000 (+9.0%) since summer.

October employment gains in Alberta were spread across several industries, including healthcare and social assistance, transportation and warehousing, and wholesale and retail trade. Employment in natural resources edged up in the month but was down 5.2% on a year-over-year basis.

Employment Increases in Newfoundland and Labrador and PEI

In Newfoundland and Labrador, employment grew (+5,900) in October, while the unemployment rate fell 2.0 percentage points to 12.8%. Employment was also up in Prince Edward Island (+900), while the unemployment rate was virtually unchanged at 10.0%.

Hard-Hit Sectors of the Economy

The accommodation and food services industry were most directly affected by the recent tightening of public health measures—and, for the first time since April, employment declined in this industry in October. Employment in the arts, entertainment, and recreation sectors was farther from pre-COVID levels than any other sector in August. The next few months will shed light on the impact of public health restrictions on employment in this sector, which, like the accommodation and food services industry, has strong ties to travel and tourism.

With restrictions on travel and gathering still in place, the continuing impact of COVID-19 has been much more significant for the transportation of people than of goods. For example, the August Survey of Employment, Payrolls and Hours found that payroll employment in transit and ground passenger transportation was down by 17.8% from February to August, while payroll employment in truck transportation—primarily for goods—was down 7.9% for the same period. Similarly, in August, major Canadian airlines carried 86.8% fewer passengers than 12 months earlier, and Canadian railways carried 14.7% less freight.

In construction, employment was little changed for the third consecutive month in October, following increases totalling 190,000 (+16.2%) from April to July. Employment in construction was 7.5% (-112,000) below its February level in October. Recent data on housing stats showed a decline of 5.0% from September 2019 to September 2020, following two months of strong year-over-year increases.

Employment Growth Resumed in Retail Trade

Following a pause in September, employment growth resumed in retail trade, rising by 31,000 (+1.4%) in October, with most of the increase in Ontario. From February to April, employment declined by over one-fifth (-22.9%; -517,000) due to retail businesses’ closures during the first wave of COVID-19. In October, public health measures associated with the second wave did not include retail businesses’ requirements to close. Employment in this industry was 5.1% (-115,000) below its pre-COVID level and down by 2.4% (-54,000) compared with October 2019.

The Winners

Employment exceeded pre-COVID levels in three industries in October—wholesale trade; professional, scientific and technical services; and educational services.

In wholesale trade, employment increased by 15,000 (+2.3%) in October, driven by Alberta increases. Employment in this industry was 5.6% (+35,000) above its February level. The wholesale trade release’s latest results show that sales increased for the fourth consecutive month in August and were 1.7% above pre-COVID-19 levels.

Employment rose for the fourth consecutive month in professional, scientific and technical services, up 42,000 (+2.7%) in October and led by Ontario (+23,000). With this gain, this industry’s employment was 3.3% (+51,000) higher than its pre-COVID level. Job security among employees in this industry includes computer systems design and related services; architecture, engineering and related services; and legal services tend to be higher than in other industries.

Employment was little changed in educational services in October but exceeded its February level by 2.8% (+39,000). Compared with October 2019, employment in this industry increased by 32,000, in part a reflection of some jurisdictions increasing staffing levels to support classroom adaptations brought on by COVID-19.

Compared with other industries, a relatively high share of workers in educational services (25.8% in 2019) is temporary employees, reflecting the relatively high prevalence of teaching staff hired on a contract basis. While the number of temporary employees decreased markedly following the initial COVID-19 economic shutdown, it had rebounded in October (little changed on a year-over-year basis, not seasonally adjusted), helping to boost overall employment in the industry. Permanent employees in educational services also contributed to the recovery of this industry on a year-over-year basis. In October, the number of permanent employees was up 5.6% compared with 12 months earlier (not seasonally adjusted).

Bottom Line

The economic recovery remains dependent on the evolution of the pandemic. It is likely that extensive lockdown measures, such as the widespread closures imposed early in the pandemic, will not be reintroduced. However, more localized and moderate containment measures will ebb and flow. The Bank of Canada suggests that vaccines and effective treatments will be widely available by mid-2022, at which time the direct effects of the pandemic on economic activity will have ended. However, households’ precautionary behaviour and the effects of the uncertainty surrounding COVID-19 are likely to linger.

The pandemic is also likely to have persistent effects on the preferences and behaviours of consumers and businesses. This could lead to lasting changes to the economy’s structure and could weigh on its potential output. The sizes and timing of such effects are difficult to estimate precisely. Given these considerations, the outlook for Canadian and global economic activity remains unusually uncertain.

The most recent COVID Consumer Spending Tracker, produced by the RBC economics group, that second wave worries have shifted more spending online. Household, clothing, and retail spending held steady, while travel spending continued to decline. Spending on dining out edged downward last month as cooler whether rendered outdoor dining less appealing. Entertainment expenditures ticked downward as well.

The regional real estate boards in Vancouver, Toronto and Montreal recently released their October housing reports showing continued sales activity and upward price prices except in the condo space, particularly smaller condos that were bought on spec for the rental market. With the nosedive in tourism, the short-term rental market has collapsed. Many of these former Airbnb properties are either for sale or have moved into the long-term rental space, driving down prices. The dearth of immigration this year has also exacerbated the decline in rent. Condo listings are rising faster than sales in many regions. In contrast, lower rise properties remain in very tight supply, and prices continue to rise. We will provide more details on housing trends with the release of the CREA data late next week.

29 Oct

Bank of Canada Recalibrates Quantitative Easing

General

Posted by: John Dunford

As expected, the Bank held its target overnight rate at the effective lower bound of 25 basis points with the clear notion that negative policy rates are not in the cards. Instead, the central bank will continue to rely on large-scale asset purchases–quantitative easing (QE). The central bank is recalibrating its QE program as promised in recent weeks. In mid-October, it announced that it would end its Repo, Bankers Acceptance and Canada Mortgage Bond purchases this month, as they are no longer needed to assure liquidity in those markets. The volumes of purchases have declined sharply since April. This move will have minimal impact on market interest rates.

The Governing Council announced today it would also gradually reduce purchases of federal government bonds from at least $5 billion to at least $4 billion per week. “The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.”

The PC opposition party has been warning Governor Macklem of the risks of financing Trudeau’s government spending. But the Bank has little alternative but to step-up its buying of newly issued benchmark bonds–those currently being sold by the government, as opposed to older debt that is becoming increasingly illiquid. As reported in Bloomberg News, “It means the bank’s quantitative easing program will increasingly mirror government debt sales at a time when opposition lawmakers are warning it against directly financing Prime Minister Justin Trudeau’s fiscal agenda.” (See chart below). The Bank already owns more than a third of all outstanding Government of Canada debt, proportionately more than most central banks because Canada ran budget surpluses, which paid down debt for so long.

Virtually every major central bank in the world is conducting an emergency QE program in response to the COVID-19 crisis. The Bank of Canada says its QE program reinforces its commitment to hold interest rates at historic lows over the next few years until the annual inflation rate is sustainably at its target 2% level. Today’s October Monetary Policy Report indicates they will likely keep the overnight rate at 0.25% until 2023.

The central bank has no intention of paring back stimulus, with risks to the economy growing amid the second wave of COVID-19 cases. “As the economy recuperates, it will continue to require extraordinary monetary policy support,” the bank said. “We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

October Monetary Policy Report

  • Following the sharp bounce back in growth that occurred when containment measures were lifted, and the economy reopened, the Canadian economy transitioned to a slower, more protracted recuperation phase of its recovery. The recovery phases are proceeding largely as described in the July Report, though the initial rebound was stronger than expected. Furthermore, the near-term slowing in the recuperation phase is likely to be more pronounced due to the recent increase of COVID-19 infections.
  • There is ongoing and significant slack in the Canadian economy. The gap between the actual output and the economy’s potential output is not expected to close until 2023. The economy is progressing unevenly, with some sectors and workers disproportionately affected by the virus–particularly those in accommodation, food, arts, entertainment and recreation, as well as global transportation. Many of those hardest-hit are low-income workers.
  • Oil prices remain below pre-pandemic levels and are assumed to remain around current levels, hitting Alberta hard.
  • Ongoing slack in the economy is expected to continue to hold inflation down into 2023.

The Bank of Canada’s forecast for Canadian growth is shown in the table below. The economic recovery is projected to be prolonged, underpinned by policy support but largely influenced by the evolution of the virus, ongoing uncertainty and structural changes to the economy. These changes could result in longer-term shifts of workers and capital across different regions and sectors of the economy. This adjustment process weighs on the Bank’s estimates of potential growth.

After declining by about 5 1/2 percent in 2020, the economy is expected to expand by almost 4 percent on average in 2021 and 2022. Two factors will likely lead to quarterly patterns of growth that are unusually choppy: localized outbreaks and containment measures and varied recovery rates across industries.

Inflation is expected to remain below the lower end of the Bank’s inflation-control target range of 1 to 3 percent until early 2021, largely due to the effects of low energy prices. Subsequently, inflation is anticipated to be within the target range, but economic slack will continue to put downward pressure on inflation throughout the projection period.

The Reopening Phase Was Strong But Uneven

Growth is estimated to have rebounded strongly in the third quarter, reversing about two-thirds of the decline observed in the first half of the year.  A sizable bounce back in activity resulted from a rebound in foreign demand, the release of pent-up demand for housing and some durable goods, and robust policy support.

Housing activity recovered sharply in the third quarter, supported by historically low financing costs, resilient incomes for higher-earning households, and extra sales and construction that made up for delayed spring activity (Chart 7). By September, cumulative resales are estimated to have compensated for the missed activity during the normally busy spring market. Housing activity may also be benefiting from changes in preferences. In particular, more than one-quarter of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic. The strength of the housing market recovery, combined with a tight resale market, has led to the rapid growth of house prices in some markets. In contrast to the appreciation of house values observed in Toronto and Vancouver in 2016, price growth has been strongest in markets with moderate loan-to-income ratios, such as Ottawa, Montréal and Halifax.

Bottom Line

Interest rates will remain low for the foreseeable future. The pandemic will largely determine the growth of the economy and the government’s response. Experts suggest that this second wave will last for much of the winter and that a widely dispersed vaccine will not be available until at least well into 2021. As tough as that is to take, Canada is still doing a better job of containing the virus than the US, UK and the Euro area. Output is likely to remain below pre-pandemic levels everywhere through the end of 2022, the Bank of Canada’s forecast horizon.

27 Oct

Bank of Canada Will Stop Buying Canada Mortgage Bonds

General

Posted by: John Dunford

This Wednesday, the Bank of Canada will release its interest rate announcement and the October Monetary Policy Report. Most people expect the overnight rate to remain at 0.25%, where it has been since the pandemic hit. A few have suggested that the Bank could take a page from Australia and reduce overnight rates by 15 basis points. I don’t think so.

Canada’s economy is not as similar to Australia’s as you might think. Yes, both countries speak mostly English, are commodity exporters, and have a currency called the dollar. But that is where the similarities end. Australia is largely a supplier to China and East Asia, while the US dominates Canada’s exports. And our major resource is oil rather than metals. Most importantly, the Bank of Canada believes that lower rates would not be helpful, given the squeeze they put on the banking system’s workings.

The Bank has committed to staying at 0.25% until economic conditions would be consistent with a sustained 2% inflation rate. With the second wave of COVID cases and rolling shutdowns upon us, the economic rebound will slow in the coming quarters. Moreover, it is unlikely we will see inflation averaging above 2% or higher through 2022. The base case forecast for overnight rates by the Bank of Canada will remain at 0.25% until 2023 unless we see a miraculous end to the pandemic far sooner than most experts predict.

Where the Bank will make policy changes is in quantitative easing–the buying of financial assets to improve liquidity in financial markets. The Bank’s Governing Council has, for months, hinted at the need for the current structure of the QE program to be “calibrated.” While there have been few details on what this means, we interpret it to imply a move away from a QE program supporting ‘market-functioning’ to one that attempts to achieve a ‘monetary policy objective.’ To some degree, this has already started.

On October 15, the Bank announced it would retire the Repo purchase program, the Bankers’ Acceptance purchase Facility and the Canadian Mortgage Bond Purchase Program (CMBP). These areas of the Canadian fixed income market are fully functioning at present, and the Bank likely felt ongoing support was no longer necessary. The end of the CMBP got the attention of some mortgage market participants who argued it spelled the end of declining mortgage rates. I think this is a misinterpretation of the Bank’s actions.

As the chart below shows, the use of the CMBP has waned considerably since its introduction in March. It just isn’t needed any longer to assure liquidity in the CMB market. Since August, lenders have only been using about $70 to $190 million per week of the BoC’s $500 million capacity. The last time lenders fully utilized, it was in April when the emergency program was clearly needed. Ending this program should have little impact on mortgage rates.

“As overall financial market conditions continue to improve in Canada, usage in several of the Bank of Canada’s programs that support the functioning of key financial markets has declined significantly,” the Bank said in announcing the changes. The program, designed to provide much-needed liquidity to the banking system to keep credit flowing during the worst of the crisis, has “fallen into disuse as the stresses from the pandemic eased, and markets became much more self-sufficient.”

The move follows the bank’s decision a month ago to reduce its purchases of federal government treasury bills and similar short-term provincial money market debt, citing improvements in the health of short-term funding markets.

The CMB purchase program is also dwarfed by the Bank’s Government Bond Purchase Program (GBPP), as the chart below shows. “The central bank has pledged repeatedly that it will maintain the highest-profile of its emergency asset-buying programs – its minimum $5-billion-a-week purchases of Government of Canada bonds – until the [economic] recovery is well underway. It has also so far maintained its two programs to purchase provincial and corporate bonds, even though both programs’ demand has been far below original expectations.

Mortgage rates in Canada have an 85% correlation with the 5-year Government of Canada bond yield, which has fallen sharply over the course of the pandemic crisis.

Bottom Line

Of the three programs being wound down in the bank’s latest announcement, the biggest is the expanded term repo program, under which the central bank has purchased more than $200-billion of the short-term bank financing instruments since mid-March. The program hasn’t generated any purchases since mid-September.

The Bankers’ Acceptance Purchase Facility, involving short-term credit instruments typically used in international trade financing, was used heavily when introduced in March. Still, it hasn’t been tapped at all since late April. The central bank made about $47-billion in purchases under the program. However, all of those purchased assets have since reached maturity, meaning the central bank is no longer holding any bankers’ acceptances on its balance sheet.

The Canada Mortgage Bond Purchase Program predates the pandemic, but the Bank of Canada ramped up its purchases dramatically during the crisis. Since mid-March, it has accumulated about $8-billion of the bonds under its emergency measures through twice-weekly purchases directly from Canada Mortgage and Housing Corp. The size of the bank’s typical purchases in the past couple of months has been less than a quarter of what it was routinely buying in the spring.

These changes in the QE program will have little impact on interest rates and mortgage markets.