New down payment rules will go into effective February 15, 2016.

“The Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions,” Finance Minister Bill Morneau said in a release. “They also rebalance government support for the housing sector to promote long-term stability and balanced economic growth.”

The minimum down payment for new insured mortgages will increase from 5% to 10% for the portion of the house price above $500,000, the finance ministry wrote.

For example: A $750,000 home will now require $50,000 down — 5% for the first $500,000 and 10% down for the remaining $250,000.

Properties up to $500,000 will continue to require a minumum of 5% down. Properties in excess of $1 million will still require 20$ down.

The changes are meant to reduce taxpayer exposure while supporting long-term stability of the housing market, according to the ministry.

“This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term,” Morneau said. “It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”

Policy makers still have firepower to spur growth even with borrowing costs near zero, Bank of Canada Governor Stephen Poloz said, citing unconventional policies and fiscal stimulus.

While the central bank doesn’t expect another crisis that will force it to resort to such policies, a number of tools are still available, including charging banks for deposits, forward guidance and asset purchases, Poloz said. Fiscal stimulus could be even more effective than monetary policy in extreme circumstances, he said.

“I certainly hope we won’t ever have to use these tools,” Poloz said Tuesday during a speech in Toronto. “However, in an uncertain world, a central bank has to be prepared for all eventualities.”

While Poloz sought to highlight the hypothetical nature of his comments, the speech comes amid growing concern for Canada’s economy as fresh signs of weakness in China and growing concerns about a global oil glut damp the outlook for commodity-producing nations.

Swaps trading suggests investors are pricing in a 25 percent chance of another rate cut by May, following two reductions this year that brought the benchmark rate to 0.5 percent.

“In short, should the need arise, we’ll be ready,” he said.

Canada was the sole Group of Seven nation that didn’t use the widespread asset purchases known as quantitative easing through the 2008 global financial crisis, in an economy anchored by the world’s safest banks and a stable housing market.

Benchmark Rate

Still, over the past two years the central bank has focused on updating rules first published in 2009 for any use of extraordinary stimulus, incorporating lessons from abroad.

The biggest change is the central bank’s new confidence, based on experiences other countries, it could bring the benchmark interest rate to below zero by charging commercial banks on their deposits. The so-called effective lower bound is the lowest interest rate the central bank could impose and still have financial markets function effectively.

“We now believe that the effective lower bound for Canada’s policy rate is around minus 0.5 percent, but it could be a little higher or lower,” Poloz said. “This suggests that we have more room to maneuver in response to adverse shocks than we believed back in 2009.”

More Comfort

It’s a conclusion that will inform the bank as it considers renewal next year of its five-year mandate, which currently includes an inflation target of 2 percent.

Because potential growth rates are lower since the global crisis, targeting 2 percent inflation means it’s more likely that policy interest rates will fall to zero than in the past. The findings that the central bank’s rates could be negative though may give policy makers more comfort, Poloz said.

“If interest rates can go below zero, you get a bit of room to maneuver on the other side,” Poloz said after the speech in response to a question from the audience.

The speech also marked an endorsement of fiscal stimulus spending during a crisis, at a time when a new Liberal government has come to power promising to ramp up deficits. It is the first by Poloz since the Oct. 19 election that brought Prime Minister Justin Trudeau to power.

“It may sound ironic, but the circumstances under which it may be appropriate to consider unconventional monetary policies are also those under which fiscal policy tends to be most effective,” Poloz said.

2009 Lessons

Other lessons from 2009 are that asset purchases is a tool that “can be effective in extending the central bank’s impact well out on the yield curve.” Forward guidance is a tool that “many have used to good effect,” while policy makers can also target economically important sectors specifically with a tool called “funding for credit,” Poloz said.

Another lesson: there is no pre-determined order in using unconventional policy.

“The effectiveness of each tool will depend on the situation, making it more a matter of choosing the right one at the right time,” Poloz said.

Even with all these tools available, there are still limits, Poloz said.

“Fundamentally, economists have long been aware that the effectiveness of monetary policy has its limits once interest rates reach very low levels,” Poloz said.

There are also clear signs none of this will be necessary, he said. The central bank still forecasts the economy will continue to pick up speed in 2016 and 2017, with a projected return to capacity “around mid-2017.”

“In a world where many economies continue to resort to unconventional monetary policies, Canada’s outlook is encouraging,” Poloz said. “The overall economy is growing again, even as the resource sector contends with lower prices, because the non-resource sectors of the economy are gathering momentum.”

The Canadian economy shed 35,700 jobs in November to reverse a rise in temporary work likely generated by October’s federal election, Statistics Canada said Friday.

The number of public-administration jobs fell by 32,500 in November to offset an October increase of 32,000 positions in the same category, the federal agency found in its monthly job-market survey.

The worse-than-expected drop in jobs helped nudge November’s unemployment rate up one-tenth of a percentage point to 7.1 per cent.

“The November decline in public administration was seen across all provinces,” Statistics Canada said in the report.

“The decrease was concentrated among survey interviewers and statistical clerks, an occupational group that corresponds with the type of work done during the election.”

Historically, the agency has detected similar, temporary spikes in employment during election and census periods.

A consensus of economists had estimated the country would lose 10,000 jobs last month and for the unemployment rate to hold firm at seven per cent, according to Thomson Reuters.

The November data found the overall number of part-time positions declined by 72,300 compared to the previous month, while full-time jobs climbed by 36,600.

Regionally, Alberta saw its jobless rate jump from 6.6 per cent to seven per cent – the province’s highest level since April 2010 – as 14,900 fewer people were working there.

That drop in the number of jobs was the biggest decline from October to November of any province in the report.

The economy in the resources-producing province, which saw the bulk of its November losses concentrated in its services sector, has struggled as global commodity prices remain stubbornly low.

Looking across Canada, Manitoba, New Brunswick and Prince Edward Island all registered drops in employment, while other provinces saw little change from October.

Overall, by industry, the number of people in Canada holding natural resources-related positions remained virtually flat, while the manufacturing sector added 17,400 jobs.

Canada’s services sector dropped 82,000 positions, including the significant decline in public-administration work. That industry also lost 15,600 jobs in wholesale and retail trade, 11,900 in the category of information, culture and recreation and 11,200 in finance, insurance, real estate and leasing.

The country also saw declines in employee positions with drops of 21,200 jobs in the public sector and 40,800 in the private sector. However, 26,300 more people said they were self-employed.

The survey found the November youth unemployment rate hit its lowest level since 2008, as it dropped to 12.7 per cent, from 13.3 per cent the previous month.

The rate decrease, however, came despite the fact the economy lost 23,600 net positions for young workers aged 15 to 24. The change was partly due to the fact fewer youths said they were participating in the labour market in November.

In the October jobs report, Statistics Canada found that the overall employment number eclipsed 18 million last month for the first time. The November losses, however, pushed that figure back down to 17,986,800.

In October, the survey reported that the labour force had ballooned by 44,400 net jobs thanks to the increase in temporary public-administration work likely connected to the federal election.

The Liberal government could be about to impose tougher restrictions on homebuyers by raising the minimum downpayment for a government-insured mortgage. Mortgage expert Robert McLister says that there could be a sliding scale of downpayment requirements depending on the price of the home. The Huffington Post reports that it could mean a 10 per cent minimum for those buying a home of $700,000 or more; which would particularly hit those in Toronto and Vancouver where average prices are already above that level. Those buying a home above $501,000 would have to find 7 per cent as a minimum. The Finance Department told HuffPost Canada that it does not comment on unconfirmed policy options but that it regularly reviews policies in consideration of the housing market and wider economy.

The Bank of Canada kept the key overnight interest rate unchanged at 0.5 percent as expected, as the Federal Reserve is poised to hike rates for the first time in nearly 10 years. The Bank’s decision did not, however, reflect complacency with the state of the Canadian economy, but rather a hand-off to the much ballyhooed fiscal stimulus in the coming year by the new Liberal government. With interest rates so close to the zero lower bound, it’s a good thing that firepower will be coming from another source. This is no time for misplaced fiscal austerity. If anything, the risk is that the government won’t do enough to reboot economic activity, paranoid about looming deficits and the erroneous assumption that tax hikes for the rich will somehow help the economy or address income inequality.

The Canadian economy, though improved from the first-half rout, is on very shaky ground. The third quarter GDP figures released this week showed a rebound to a 2.3 percent annual growth pace, largely the result of an improvement in exports–not surprising given the robust demand for autos in the U.S. and the weakness in the Canadian dollar. But the September data for GDP by industry was very troubling as real gross domestic product fell 0.5 percent following three consecutive monthly increases, primarily as a result of declines in mining, quarrying and oil and gas extraction and, to a lesser extent, manufacturing weakness.

Another pocket of vulnerability in the recent data was in the finance and insurance sector, which has declined for two consecutive months. This is particularly troubling as the major Canadian banks have announced expected layoffs in their Canadian operations for this year and next. With interest rate-spread compression and a weak economy, all the banks are in cost-cutting mode in this country. Mortgage rates have clearly bottomed despite the Bank of Canada’s inaction.

Oil and other commodity prices have continued to fall, to the surprise of the Bank of Canada. This marked further deterioration in Canada’s terms of trade is depressing net exports and the damage done to our labour markets and cancelled investment projects–not to mention the Canadian stock market–is far from over. The negative backdrop in Alberta, Saskatchewan and Atlantic Canada is now quite evident in the slowdown in housing activity in those regions. Not only have home sales and house prices edged downward, but a telling leading indicator–rental vacancy rates–have risen sharply in some key resource centres (see chart below). 

Note that despite the strong pace of condo construction in both Toronto and Vancouver, rental vacancy rates remain extremely low in both cities.

The Bank of Canada expects GDP growth to moderate in the fourth quarter and to grow at a rate “above potential” in 2016. Given that the Bank’s estimate of potential GDP growth in Canada is just under 2 percent, this is hardly a positive outlook. I expect Q4 GDP growth of only about 1 percent, which will not be enough to prompt a rate cut, but will certainly weigh on the Canadian dollar as the U.S. moves to hike interest rates at the next Fed policy announcement on December 16. Canadian growth next year will likely be around 2 percent, compared to an estimated mere 1.1 percent this year.

Friday’s employment report for November in both the U.S. and Canada will be telling. Clearly, as the Bank said, “policy divergence is expected to remain a prominent theme.”  Easing by the European Central Bank tomorrow; tightening by the Fed in two weeks; and, the Bank of Canada on hold for the foreseeable future.

The BoC announced its latest target for the overnight rate Wednesday morning.

The Central Bank decided to maintain its overnight rate at ½% Wednesday morning, citing economic growth that is in line with its October Monetary Policy Report. Still, economic recovery has not been strong enough to warrant a rate increase.

“In Canada, the dynamics of growth have been broadly in line with the Bank’s MPR outlook. The economy continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade,” the Bank said in a release. “This adjustment is being aided by the ongoing US recovery, a lower Canadian dollar and the Bank’s monetary policy easing this year. The resource sector is still contending with lower prices for commodities. In non-resource sectors, exports are picking up, particularly in exchange rate-sensitive categories.”

However, cuts in resource-sector spending  has impacted business investment, according to the central bank.

“The labour market has been resilient at the national level, although with significant job losses in resource-producing regions,” the Bank of Canada said. “The Bank expects GDP growth to moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016.  While bond yields are slightly higher, financial conditions remain accommodative in Canada.”

The Bank believes inflation risks remain balance. Still, it has identified vulnerabilities in the housing sector.

The BoC announced its latest target for the overnight rate Wednesday morning.

The Central Bank decided to maintain its overnight rate at ½% Wednesday morning, citing economic growth that is in line with its October Monetary Policy Report. Still, economic recovery has not been strong enough to warrant a rate increase.

“In Canada, the dynamics of growth have been broadly in line with the Bank’s MPR outlook. The economy continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade,” the Bank said in a release. “This adjustment is being aided by the ongoing US recovery, a lower Canadian dollar and the Bank’s monetary policy easing this year. The resource sector is still contending with lower prices for commodities. In non-resource sectors, exports are picking up, particularly in exchange rate-sensitive categories.”

However, cuts in resource-sector spending  has impacted business investment, according to the central bank.

“The labour market has been resilient at the national level, although with significant job losses in resource-producing regions,” the Bank of Canada said. “The Bank expects GDP growth to moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016.  While bond yields are slightly higher, financial conditions remain accommodative in Canada.”

The Bank believes inflation risks remain balance. Still, it has identified vulnerabilities in the housing sector.

Oil at $35 a barrel for a period of five years would trigger a 26 percent collapse in Canadian home prices, according to stress tests run by Canada’s housing agency.

The results were part of a slide presentation Evan Siddall, chief executive officer at Canada Mortgage & Housing Corp., gave Monday to a private audience in New York. The “Stress tests – Financial impacts” slide included five scenarios, one of which was called “Oil Price Shock,” which also predicts the unemployment rate would peak at 12.5 percent. Spokesman Charles Sauriol said later in an e-mail the scenario assumes oil at $35 a barrel over five years. The “Base Case” scenario calls for housing prices to climb 9.1 percent and joblessness to peak at 6.6 percent.

Crude oil traded at $41.60 a barrel at 3:21 p.m. in New York, and is set to average below$50 for a fourth month, amid record supplies. Siddall wasn’t available for comment after his presentation. He’s due to speak Thursday in Montreal.

Global Deflation

CMHC’s “US-style Housing Correction” scenario produced a 30 percent fall in home prices and 12 percent peak unemployment. The biggest hit to housing occurred under the “Global Deflation” scenario, where prices plunged 44 percent. That would also be the worst case for the labor market, pushing unemployment up to 16 percent.

The price of an average home in the country rose 8.3 percent to C$452,552 ($339,000) in October from a year earlier, according to the Canadian Real Estate Association. In Vancouver, prices jumped 16 percent and in Toronto, the country’s largest city, they increased 7.4 percent.

Other slides showed Canada’s home price growth since the 2008 recession has outpaced that of the U.S., Australia, and the U.K. It also reiterated risks to housing include high debt-to- income and concentration of net worth in housing.

Finance Minister Bill Morneau said today that Canada’s budget is deeper in the red than we were told in the 2015 budget as the economy’s performance has disappointed. He also revised down the government’s outlook for the economy over the next year. According to the Minister, the federal books are short roughly $3 billion in the current fiscal year and $3.9 billion in 2016-17, with deficits continuing through 2018-19–a significantly gloomier fiscal picture than was painted by the Conservatives and even by the most recent report of the Parliamentary Budget Committee.

However, a large portion of this worsened outlook is because the Liberals chose to adjust down their forecasts of economic growth to levels well below the downwardly revised levels predicted by private-sector economists, effectively adding a contingency reserve.

This lower growth forecast adds C$1.5 billion to the projected deficit for 2015-16 and $3.0 billion for each of the five years from 2016-17 on.

Without that economic adjustment, the deficits would be $1.5 billion for 2015-16 and $3.0 billion for each of the five years from 2016-17 on. Nevertheless, all of these projections exclude the Liberals’ impending budgetary stimulus initiatives.

When quizzed by reporters, Morneau would not say whether he remained committed to no more than an annual budget deficit of no more than $10 billion over the next three years. He provided no specifics on exactly what the update portends for the upcoming budget—the timing of which was not released—but asserted that the government would stimulate the economy in a prudent manner.

Analysis

I agree that there are downside risks to the global and Canadian economies. Canada has suffered a severe blow with the dramatic and sustained fall in oil and other commodity prices, the impact of which has not yet been fully felt throughout the economy. Minister Morneau agreed that further reductions in employment and activity in the resource sector are coming in contrast to what the former government and the Bank of Canada have asserted.

Canada’s federal balance sheet is in great shape thanks to years of austerity beginning in the 1990s. Our structural deficit has been obliterated, helped by the secular decline in interest rates. Moreover, our debt-to-GDP ratio is barely above 30%, at the bottom of the Organization for Economic Cooperation and Development (OECD) countries performance. The proposed deficit of $10 billion is only 0.5% of Canadian GDP—an extremely low number by global standards, well-below the level in the U.S. of about 2.4%.

Canada’s economy is in need of fiscal stimulus. The risk is too little, too late—not, an overflow of red ink. The U.S. made of mistake of insufficient government stimulus in the aftermath of the financial crisis. Canada should not make the same mistake now.

We have been hard hit by external forces that have driven down a very important sector of our economy. The hard won gains on the fiscal front give us the bandwidth to now take significant action to reboot economic activity and to improve our productivity and competitiveness over the next decade. We should seize that opportunity, which will no doubt entail running budget deficits in the near term of more than $10 billion.

(Bloomberg) — Canada’s finances are taking a bigger hit than projected from the oil-price slump, putting the country on pace for red ink even before Prime Minister Justin Trudeau kicks off his plan for deficit spending.

After a surplus of C$1.9 billion ($1.4 billion) in the last fiscal year, the latest finance department projections are for a C$3 billion deficit in the fiscal year that began in March, followed by deficits of C$3.9 billion in 2016, C$2.4 billion in 2017 and C$1.4 billion in 2018. Canada is on track to run surpluses in 2019 and 2020, according to figures released Friday by Finance Minister Bill Morneau in Ottawa.

The fiscal update includes more conservative revenue assumptions than in the previous government’s April budget to take into account growing risk to the outlook. The projections are also worse than those made by the Liberals in their platform for the Oct. 19election, which included additional measures between 2016 and 2018 worth about C$25 billion.

Friday’s update — which doesn’t reflect any new measures – – suggests Trudeau will need to bring the country deeper into deficit than he had campaigned on, if the Liberals plan to move ahead with new stimulus spending aimed at kick-starting Canada’s stagnant economy.

The department’s figures suggest economic developments since April will result in an erosion of fiscal room of about C$6 billion annually over the next five years from what the previous government projected. The differing assumptions about revenue, though, inflate the gap between the last budget and Friday’s update by as much as C$3 billion.

Crude — one of Canada’s top exports — has slumped about 47 percent in the past year amid speculation a surplus will persist as the Organization of Petroleum Exporting Countries continues to pump above its quota. Benchmark contracts for West Texas Intermediate dipped below $40 a barrel on the New York Mercantile Exchange this week for the first time since August.

The finance department assumes an average price for WTI of $49 in 2015 and $54 in 2016.