The decision of the Bank of Canada to hold interest rates at 1% has left economists, lenders and homeowners guessing as to what will happen next.

Governor Stephen Poloz noted that inflation was slightly higher than expected, slack remains in the labour market, and the housing market is moderating as forecast.

However, he gave little guidance on when another rate rise may occur. Instead he said the BoC was cautious while noting that interest rates will need to rise over time.

Reacting to the news, CIBC Economics’ Avery Shenfeld said that rates could rise by just 50 basis points in 2018 even if the BoC decides to make an increase in January rather than CIBC’s forecast for April.

Meanwhile, Alicia Macdonald, principal economist of The Conference Board of Canada was more bullish: “…with the economy growing in step with the Bank’s forecast, economic capacity rapidly diminishing, and an acceleration in wage growth, we expect that the Bank will continue to gradually increase interest rates throughout next year.”

The highly anticipated November Labour Force Survey, released this morning by Stats Canada, surpassed all forecasts breaking multi-year records. Employers added a whopping 79,500 jobs last month, bringing the gains over the past 12 months to nearly 400,000. November’s data posted the most robust job market since the 2008-09 recession as the jobless rate plunged to 5.9% in November, down from 6.3% in October. Average employment growth of 32,500 per month over the last year is the fastest pace since 2007. The 5.9% jobless rate, was only lower for a single month before the recent recession—a time when the economy was operating beyond its longer-run capacity limits.
Employment grew across most industries led by manufacturing, retailing and education. Construction jobs increased for the second consecutive month. The employment increase in November was mainly among private sector employees, as both public sector employment and the number of self-employed was little changed.

The employment gain for November is the 12th straight, the longest since the 14-month span that ended in March 2007.

Some of the most substantial gains were in central Canada, with Quebec’s unemployment rate falling to 5.4%, the lowest level on record back to 1976, and Ontario’s at the lowest level since 2000 at 5.5% (see table below). The national jobless rate of 5.9% has fallen 0.9 percentage points over the past 12 months.

Great news for the consumer was the 2.8% November increase in average hourly earnings, up from 2.4% in October and the fastest rise since April 2016. Much of that increase has come in the last few months as wage growth accelerated sharply—finally a bit of evidence that tight labour market conditions are feeding through to wages. If that trend holds up, it will be hard for the Bank of Canada to remain on the sidelines much longer.

One piece of contrary evidence was a sizeable drop in average hours worked that retraced much of the gain seen in recent months. The Bank of Canada has flagged below-trend hours worked as a sign of labour market slack, but other indicators point to very tight job market conditions. The strength of the job market will no doubt impact the Bank of Canada’s assessment. The Canadian dollar surged on today’s news.

Q3 GDP Growth Slowed

The strong jobs market has been reflected in the rise in consumer spending, noted in another report released today by Stats Canada, helping to offset the slowdown in exports and housing. GDP growth in the third quarter slowed to 1.7%, down sharply from the 4.3% gain in the prior three months. This slowdown was expected as the Q2 pace of expansion was unsustainable. The Bank of Canada estimates that the longer-term potential growth rate is close to 1.7%.

GDP growth in Q3 continued to be concentrated in household spending with a stronger-than-expected 4.0% increase that built onto a 5.0% surge in Q2. Government investment spending also jumped higher, though, and business investment rose for a third straight quarter — albeit at a more modest pace than over the first half of the year. Offset came from a large, but expected, pullback in net trade.

Exports fell sharply in the third quarter subtracting 3.4 percentage points from the growth rate. The decline was mainly attributable to motor vehicles and parts (-9.0%), primarily passenger cars and light trucks. Imports were virtually unchanged.

Household spending represents a record proportion of the overall economy (see chart below). The compensation of employees increased 1.3% in nominal terms in the third quarter, a quicker pace than in the previous 11 quarters. Wages and salaries rose 1.9% in goods-producing industries and 1.1% in services-producing industries. Regionally, Ontario and Quebec continued to fuel wage growth in the third quarter.

Housing investment weakened, posting the first back-to-back quarterly decline in investment in residential structures since the first quarter of 2013. Ownership transfer costs, which reflect activity in the resale housing market fell sharply for the second consecutive quarter.

Monthly GDP data, also released this morning, were perhaps more encouraging than the quarterly data regarding near-term growth implications. September GDP rose a stronger-than-expected 0.2% (nonannualized) to more-than-retrace a 0.1% dip in August. That left somewhat stronger momentum at the end of the quarter than we previously assumed. The data are still pointing to a slowing in underlying GDP growth from the outsized pace from mid-2016 to mid-2017 but is also still fully consistent with the Bank of Canada’s view that growth will be sustained at a modestly above-trend 2% pace going forward.

The Canadian economy’s most significant vulnerabilities remain to be inflamed housing prices and unprecedented household debt levels, according to the latest report from the Bank of Canada.

This is despite several signs that financial risks have begun to ease, the Bank’s study noted.

“Better economic conditions and several new policy measures support prospects for additional progress,” BoC noted in the report, as quoted by the Financial Post.

“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” Governor Stephen Poloz said in a written statement released alongside the Bank’s November Financial System Review.

Read more: Why B20 is a blessing, not a curse

Canada’s economy saw the fastest growth rate among G7 countries with its 4% growth in the first half of 2017. The surge was driven in part by some fiscal stimulus measures introduced by Ottawa, along with higher business investment, improved exports, and consumption spending. However, this trend is expected to wind down by the end of the year and through to 2019.

Meanwhile, the rate of borrowing has increased by around 5% per cent compared to a year ago, significantly outstripping wage growth. Household debt levels have ballooned in response to outsized growth of real estate prices, especially in markets like Vancouver and Toronto.

However, the BoC report noted that recent developments might suggest that policy changes like mortgage stress tests have started to reduce Canada’s financial risks. The bank said that the tightened rules introduced by the Superintendent of Financial Institutions (OSFI) will restrict as much as 10% of prospective Canadian homebuyers, representing approximately $15 billion in loans every year.

The Organisation for Economic Co-operation and Development (OECD) agreed with the assessments in its November economic outlook, which warned that the red-hot housing market and burgeoning household debt levels remain key risks to the economy.

The OECD added that the impact of Vancouver’s foreign buyers’ tax has diminished, suggesting that Toronto’s tax could have a similarly limited effect on prices.

“Provincial government measures have also temporarily slowed house price growth, but some – notably Ontario’s expanded rent controls – risk discouraging the supply of new housing. Macro-prudential policies will need to be tightened further if rapid increases in house prices and debt resume.”

The Bank of Canada has released its latest assessment of the financial system and has once again highlighted risk from mortgages.

While the overall tone of the report is positive – “Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” said Governor Stephen S. Poloz – mortgages are a notable worry.

The governor said that there has been a shift in mortgage activity with an improvement in the quality of new high-ratio mortgages (downpayment less than 20%) but an apparent rise in low-ratio loans being issued to highly indebted households.

The BoC says that the tighter lending rules which come into force in just over a month are expected to mitigate that risk over time.

The bank also expects the policy measures taken to cool the housing markets in the Greater Toronto Area and Greater Vancouver Area should begin to ease activity, noting that price increases are continuing to be driven by the growing economy and tight supply of homes.

The once-hot real estate market cooled considerably in 2017, and with Guideline B20 on the horizon, all indications are that it will stay that way.

It is expected that first-time homebuyers will bear the brunt of B20 more than anybody else, and according to Sherwood Mortgage Group’s president, that could result in a noticeable decline in market activity.

“It will be isolated to certainly individuals, mostly first-time buyers,” said Anthony Contento. “Will there be a drop? Possibly. I’d anticipate anywhere between five and 10%, but our real estate will continue to surge, interest rates will continue to stay low, and we’ll make up the difference on the majority of the other purchasers out there.”

Ontario’s Fair Housing Plan, introduced in April, slowed down the overactive market, which might have been necessary from a consumer standpoint, but it’s remained inert ever since.

Contento says that, under the circumstances, things could have been worse.

“We didn’t see much increase this year, with the changes that came about in the mortgage industry,” he said. “Given the changes, I’m quite happy with the way we did. Consumer confidence dropped throughout the year, and that was a bit of an indication that we’d have a drop, or flatline, in sales, so I’m pleased with the way we’ve performed. I wouldn’t say I’m ecstatic, but certainly pleased we haven’t lost much.”

Mortgage Edge’s Owner, John Bargis, says they’ve had a strong year, even if conditions have been less than ideal. In particular, he noticed monoline lenders being muscled, however, he believes they’ll show resilience in the face of B20.

“The year was really good,” said Bargis. “There was a redistribution of volume between lenders. We managed to still support our monoline lenders, although there was a noticeable shift in volume to balance sheet lenders. We also saw a more aggressive presence from the credit unions as well.

“There are certainly going to be further challenges. Monolines will be able to retain a good chunk of their business as a result of B20, because of more stringent qualifications for anybody looking for a refinance or a switch in transfer, but they should be able to retain a good bit of their mortgage book.”

Bargis thinks the government is trying to regulate more industries, and while he wouldn’t rule out further intervention into the mortgage industry in the near future, he hopes for more transparent consultations.

“Do I think the government should have consulted more with the industry? Absolutely—that’s where they fell short,” he said. “A lot of rules they’re implementing are certainly favouring the banks, for sure. You can see that in the numbers. Going forward in 2018, there needs to be awareness that strength in lender relationships is critical for the success for any brokerage.”

The banks of mom and dad, however, aren’t getting any regulatory breaks, and Contento thinks they’ll be under even further strain before the year’s over.

“With the changes that are coming about, it looks like there might be a rush until the end of the year with a lot of people anticipating what it might mean for them, given that there are still a lot of first-time buyers in the market and it will probably affect them more than anybody else,” he said. “The bank of mom and dad will probably have to dig deeper into their pockets to help them.”

The share of Canada’s population that is not able to access acceptable housing has remained stable over the past decade.

Data from CMHC and Statistics Canada reveals that 1.7 million Canadian households were in core housing need in 2016, amounting to 12.7%, around the same as in 2006.

“While the proportion of Canadian households living in core housing need has remained stable over the last ten years, different trends exist among provinces and territories,” said Benjamin Williams, Director, Housing Indicators and Analytics. “Between 2011 and 2016, housing conditions have worsened in the Prairies region and in Ontario, and improved in Quebec, British Columbia and in most of the Atlantic region. Core housing need was prevalent in the territories; the rate in Nunavut remained the highest in the country at 36.5%.”

The need is higher in Ontario which accounts for all of the CMAs with the highest core housing except for Vancouver and Victoria.  1 in 7 of Ontario’s households were in core housing need last year, up 130,000 from 2011 with the share reaching 15.3%. In Toronto the rate in 2016 was 1 in 5 households.

Vancouver’s share was 14.9% in 2016 although that was a decrease from 2011.

Rising shelter costs have contributed to a rise in core housing need in all provinces with an increase except for Alberta according to census data.

The era of mortgage rates trending lower is coming to an end and some homeowners will struggle to afford payments.

The warning comes in a report from ratings firm DBRS which says that owners will find renewal rates edging higher and will experience a “payment shock” having become used to lower rates when renewing.

The biggest wake up call will be for those that last renewed their mortgage in the last five years while rates were trending lower. They will realize the impact of two BoC interest rate hikes this year and the likelihood of more in 2018.

DBRS calculates that a 1% rise in mortgage rates would mean a 9% increase in monthly payments for a loan with 20 years left. A 3% rise in rates would add 29% to the monthly payment.

The firm’s Sohail Ahmer told the HuffPost Canada that households should be ready to absorb mortgage payment increases of 15-20%

OSFI has announced steps to reduce risks in the uninsured mortgage space. Siddall pointed out that these measures apply only to the federally-regulated financial institutions. He is concerned about the increasing levels of riskier mortgage activity by non-federally-regulated financial institutions.

The measures introduced by the federal government in October of last year to tighten insured mortgage lending qualifications mainly by stress-testing applicants at the 5-year posted mortgage rate, rather than the contract rate, has slowed insured mortgage lending volumes by 25%, which is in line with CMHC expectations. Average property selling prices have fallen commensurately as well.

But with so much attention paid to the imprudent borrower, I think it is important to note that the vast majority of Canadians manage their finances in a responsible manner. For example, roughly 40% of homeowners are mortgage-free and one-third of all households are totally debt-free. Another 25% of households have less than $25,000 in debt, so 58% of Canadian households are nearly debt free. Hence, mortgage delinquency rates are extremely low. In addition, two-thirds of outstanding mortgages are fixed rate, which mitigates the risk of rising mortgage rates over the near term.

So here we are in the lead-up to the January 1, 2018 implementation of the new OSFI B-20 regulations requiring that uninsured borrowers be stress-tested at a mortgage rate 200 basis points above the contract rate. It has been widely expected that home sales would jump before yearend in advance of the new ruling and indeed they have. Even so, activity remains well below peak levels earlier this year and prices continue to fall in the Greater Toronto Area (GTA) for the sixth consecutive month. Indeed, national home sales were down 8.6% year-over-year in October, led by a whopping 18.4% plunge in Ontario (see chart below).

Toronto single-family house prices were down 10.7% over the past six months ending October 31 (see chart below). GTA condo prices have fared better, up 2.6% since late April, but the rise is minuscule in comparison to the booming price gains evidenced before the Ontario government’s ‘Fair Housing Plan’ that introduced, among other things, a 15% tax on non-resident foreign purchases of homes.

According to statistics released today by the Canadian Real Estate Association (CREA), national home sales rose 0.9% from September to October–the third such monthly uptick–but remained almost 11% below the record set in March. Activity in October was up from the previous month in about half of all local markets, led by the Greater Toronto Area (GTA) and the Fraser Valley, together with some housing markets in the Greater Golden Horseshoe region.

On a year-over-year basis, sales were down 4.3% last month, extending the year-over-year declines to seven consecutive months. The decrease in sales from year-ago levels occurred in slightly more than half of all local markets, led overwhelmingly by the GTA and nearby cities.

“Newly introduced mortgage regulations mean that starting January 1st, all home buyers applying for a new mortgage will need to pass a stress test to qualify for mortgage financing,” said CREA President Andrew Peck. “This will likely influence some home buyers to purchase before the stress test comes into effect, especially in Canada’s pricier housing markets.”

“National sales momentum is positive heading toward year-end,” said Gregory Klump, CREA’s Chief Economist. “It remains to be seen whether that momentum can continue once the recently announced stress test takes effect beginning on New Year’s day. The stress test is designed to curtail growth in mortgage debt. If it works as intended, Canadian economic growth may slow by more than currently expected.”

Balanced Markets Though New Listings Fall

The number of newly listed homes eased by 0.8% in October following a jump of more than 5% in September. The national result was influenced most by declines in new supply in London-St. Thomas, Calgary and Greater Vancouver.

With sales up slightly and new listings having eased, the national sales-to-new listings ratio rose to 56.7% in October from 55.7% in September. A national sales-to-new listings ratio of between 40% and 60% is consistent with a balanced national housing market, with readings below and above this range indicating buyers’ and sellers’ markets respectively. According to the sales-to-new listings measure, housing markets in both Toronto and Vancouver remain balanced. As the charts below show, the Toronto market shifted dramatically from a seller’s market following the April provincial housing measures.

The number of months of inventory is another measure of the balance between housing market supply and demand, representing how long it would take to liquidate current stocks of unsold homes at the current rate of sales activity. There were five months of inventory on a national basis at the end of October, unchanged from the previous two months and roughly at par with the long-term average.

In the Greater Golden Horseshoe region including and surrounding Toronto, the number of months of inventory was 2.5 months, up sharply from the all-time low of 0.8 months in February and March. However, it remains below the region’s long-term average of 3.1 months.

Price Gains Diminish Nationally

Price appreciation continued to moderate year-over-year. The Aggregate Composite MLS® Home Price Index (HPI) rose by 9.7% year-over-year (y-o-y) in October 2017, representing a further deceleration in y-o-y gains since April and the smallest increase since March 2016. The slowdown in price gains mainly reflects softening price trends in Greater Golden Horseshoe housing markets tracked by the index. Price appreciation was strongest in condos and weakest in single-family benchmark homes, which continues the trend in place since May 2017.

In October, apartment units again posted the most substantial y-o-y gains (+19.7%), followed by townhouse/row units (+13.2%), one-storey single family homes (+6.3%), and two-storey single family homes (+5.8%). The price appreciation in single-family homes was at its lowest level since March 2015.

The MLS® Home Price Index provides the best way of gauging price trends because average price trends are prone to be strongly distorted by changes in the mix of sales activity from one month to the next.

The governor of the Bank of Canada said that inflation will continue to be driven by the same fundamental forces even as the global economy evolves.

Stephen Poloz told an audience of the CFA Montréal and the Montreal Council on Foreign Relations that inflation has not met targets because of the excess supply in many economies after the Great Recession.

But he hit back at those who say soft inflation means targeting that element of the economy is ineffective.

“Fundamentally, we know how inflation works,” the Governor said. “The laws of supply and demand have not been repealed.”

Mr Poloz said that slow wage growth is due to slack in the labour market and changing demographics among several reasons and is not evidence that inflation is less affected by fundamentals.

He added that globalization and digitalization are likely having an impact on inflation but do not yet materially add to the bank’s understanding of inflation.

“The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today. And Canadians can be confident that it will continue to work for years to come,” said the governor.