For all of 2018, the economy added 163,300 jobs, all of them full-time, for a 0.9% rise representing a significant slowdown from the pace of job growth in 2017 when the economy was much stronger. In 2017, the economy grew at a 3% rate–the strongest in the G7–compared to only about 2% last year. Employment rose by an out-sized 427,300 in 2017 and has average annualized gains of 225,000 workers since 2010.
With the unemployment rate falling to its lowest level since comparable data collection began in January 1976, it is not surprising that labour shortages are emerging and businesses are having trouble filling job openings. What is surprising is the tepid pace of wage growth. Even with the very tight labour market, December’s wage growth reading was a weak 1.49% annual rate, well below the inflation rate (see chart below). Year-over-year average hourly wage growth for permanent workers was only 1.46%, decelerating steadily since its May peak of 3.9%.
In direct contrast, today’s release of nonfarm payroll data in the U.S. for December showed a stellar 312,000 job gain, and average hourly pay improved 3.2% from a year ago–well above the inflation rate–and up from average wage growth of 2.7% at the end of 2017.

December Housing Reports Show Plummeting Home Sales in 2018 in Toronto and Vancouver
In separate releases, the local real estate boards in Canada’s largest housing markets released data this week showing home sales fell to decade lows in 2018 reflecting rising interest rates and stricter mortgage rules.
Sales in the GTA fell 16% in 2018 while the average price declined 4.3%, the Toronto Real Estate Board reported today. That is the worst year for sales in Canada’s largest city since the financial crisis in 2008. In Vancouver, full-year sales fell 32%, the lowest since 2000 and 25% below the 10-year average. Prices in Vancouver for detached homes in some areas dropped at least 10%.
Sales in both cities dived in the first half of 2018 after the federal government imposed more stringent qualifying rules for mortgages. Vancouver sales continued to suffer even while Toronto began to recover in the second half, as the British Columbia government introduced more measures to deter speculation. The BC government in its 2018 budget increased the foreign buyers’ tax and added a speculation tax, which in addition to rising interest rates dampened sales, especially for more expensive single-family homes.
New listings were down in Toronto last month as homeowners have decided to stay put for now rather than attempting to cash out.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canada posted moderate employment gains as the unemployment rate dipped once again to historically low levels, which was the result of fewer people look for work. Despite very tight labour markets and rising job vacancy rates, wage growth weakened in October.
Statistics Canada released data today that showed a moderate 11.2k gain in employment, but also a falling labour force, which was down 18.2k. In consequence, the jobless rate fell back to 5.8% in October, matching a four-decade low. This is consistent with just under 2% economic growth as the Bank of Canada expects. This modest gain in employment suggests the Bank will hold interest rates steady in December, especially given that wage gains have slowed for the fifth consecutive month.
Continuing the see-saw pattern of late, full-time employment was in the driver’s seat, with 33.9k net positions added. Part-time work fell 22.6k. The overall gains were driven by the private sector (+20.3k) as public sector employment pulled back (-30.8k), leaving a 21.8k gain in self-employment.
These indicators are consistent with business surveys that are getting louder in their complaints that it’s difficult to find workers. But there is little evidence that firms are offering better pay to attract and retain employees. Wages were up 2.2% from a year ago, the slowest pace in more than a year and down from as high as 3.9% earlier this year. Wage gains for permanent workers were 1.9%, also the slowest in more than a year. This reduces the likelihood of a rate hike in December. The Bank of Canada’s wage common measure has been more stable at 2.3% so far this year. This is a better indicator of the underlying trend, but no doubt it’s still short of what we would expect at this point in the cycle.
Also, the participation rate fell to 65.2% last month, the lowest level in 20 years as the labour force increased by just 62.5k so far this year–one of the smallest 10-month gains in recent history. It is notable, however, that the participation rate for 25-54 year-olds–the core labour force–rose to a record high.
On a regional basis, employment rose slightly in Saskatchewan, while there was little change in all the other provinces (see table below).
More people were employed in business, building and other support services; wholesale and retail trade; and health care and social assistance. In contrast, there were fewer workers in “other services;” finance, insurance, real estate, rental and leasing; and natural resources. Employment in finance, insurance, real estate, rental and leasing declined by 15,000 in October, offsetting an increase the month before. On a year-over-year basis, employment in the industry was little changed as housing starts, and resales have slowed, especially in B.C. and Ontario.
Bottom Line: Income growth will be crucial in enabling households to manage debt loads in a rising rate environment and by extension a key determinant of the pace of future Bank of Canada interest rate hikes. Today’s jobs report along with other less timely data suggest the Bank of Canada will refrain from raising interest rates in December.
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As was universally expected, the Bank of Canada’s Governing Council hiked overnight rates this morning by 25 basis points taking the benchmark yield to 1-3/4%. This marked the fifth rate increase since the current tightening phase began in July 2017 (see chart below). The central bank stated it would return the overnight rate to a neutral stance, dropping the word ‘gradually’ that was used to describe the upward progression in yields since this process began. Market watchers will certainly note this omission. For the first time in years, the Bank has acknowledged it expects to remove monetary stimulus from the economy entirely.
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As expected, the Bank of Canada held its key overnight rate this morning at 1.5%, asserting that July’s surprising spike in CPI inflation to 3% was in large part because of a jump in airfares. The Bank expects inflation to move back towards 2% in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2%, consistent with an economy that has been bumping up against full capacity for some time. Wage growth, as well, remains moderate.
Incoming information on the global economy is consistent with the Bank’s forecast in the July Monetary Policy Report (MPR). The U.S. economy has been particularly strong, growing at a 4.2% rate in the second quarter. This compares to Canada’s growth rate of 2.9% last quarter, which follows a 1.4% pace of economic expansion in Q1. Second quarter growth in the U.S. was boosted by strong consumer spending and business investment. In Canada, third quarter growth is expected to slow temporarily, mainly because of fluctuations in energy production and exports.
Indeed, this morning, Statistics Canada reported that Canada’s trade deficit all but disappeared. A sharp export gain to the U.S. combined with a decline in imports took Canada’s overall merchandise trade deficit to its lowest level since December 2016.
Canada’s merchandise trade surplus with the U.S., targeted by President Donald Trump in NAFTA negotiations, grew to the widest in a decade. Stats Canada said that gains in global exports were led by automobiles and energy, almost all of which were bound for the U.S. Crude oil led the energy gains as prices rose 9.4% in July. The import decline was driven by aircraft and metal ores.
These figures are likely to impact the resumption of bilateral talks in Washington regarding NAFTA, as the Trump administration has negotiated a new deal with Mexico and has threatened to leave Canada out and impose stiff auto tariffs if Prime Minister Justin Trudeau’s government does not make concessions, especially on dairy supply management and dispute mechanisms.
The Bank of Canada highlighted that “elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower…The Bank is also monitoring the course of NAFTA negotiations and other trade policy development closely, and their impact on the inflation outlook.”
It was wise of the Bank of Canada to hold its powder dry at today’s policy meeting given the continued uncertainty on the NAFTA front. An agreement on NAFTA would provide the central bank with more comfort in moving ahead with a hiking cycle that has already lifted the benchmark overnight rate four times since mid-2017.
Noting that “activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies”, the Bank reaffirmed that the economy is doing well enough to require higher interest rates in the future to achieve the inflation target. Another rate hike could come as soon as the next policy meeting on October 24th.
It is widely expected that a NAFTA deal will have come to fruition by then, opening the way for the Bank to resume monetary tightening. According to Bloomberg News, “Investors see near-certain odds that by October, the Bank of Canada will raise borrowing costs for the fifth time since the hiking cycle began in July 2017, with as many as two additional increases by mid-2019.”

Dr. Sherry Cooper

The city’s upward trend continues, perhaps indicating that the market has come back to life…
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As we said last month, April is usually the start of a spring housing market ramp-up, but this year the new mortgage stress test and rising mortgage rates have continued to be a negative factor. Those expecting an early-stage pick-up marking an end to the payback for sales pulled forward into the fourth quarter of last year have been sorely disappointed. With another month of data released by the Canadian Real Estate Association (CREA) on Friday, it is evident that the disappointing housing picture continued in May. There is no indication of any real rebound in home resale activity through May.

National home sales via the Canadian MLS Systems remained little changed from April to May. Having slipped 0.1% lower, it marked the lowest level for national sales activity in more than five years. Slightly more than half of all local housing markets reported fewer sales in May compared to April, led by the Okanagan region, Chilliwack and the Fraser Valley, together with the Durham region of the Greater Toronto Area (GTA) and Quebec City. Declines in activity were offset by gains in Calgary, Thunder Bay, Brantford, London and St. Thomas, Oakville-Milton and the Quinte Region west of Kingston. A small increase in GTA sales also supported the national tally.

On a positive note, sales have stabilized suggesting that buyers could be adjusting to the impact of tighter mortgage rules and higher interest rates. After all, sales did climb 1.6% in Toronto, after falling to recession-era lows in April.

Still, CREA cut its 2018 sales forecast to 459,500 nationwide, which would represent an 11% decline from the 2017 pace. In March, the group had predicted a 7.1% slide.

Existing home sales in Canada remain stuck at a six-year low of 436,500 units on a seasonally adjusted annualized basis in May, representing the fifth consecutive monthly decline. The stress test, along with higher mortgage rates and new market-cooling measures in British Columbia continue to keep homebuyers on the sidelines. Not even a material rise in new listings (up 5.1%) enticed them back into play. Activity was at a virtual standstill last month in all three of Canada’s largest markets— Vancouver, Toronto and Montreal.

Actual (not seasonally adjusted) activity was down 16.2% compared to May 2017 and reached a seven-year low for the month. It also stood 5.5% below the 10-year average for the month of May. Activity came in below year-ago levels in about 80% of all local markets, led overwhelmingly by those in and around the Lower Mainland of British Columbia and the Greater Golden Horseshoe (GGH) region in Ontario.

“This year’s new stress-test became even more restrictive in May since the interest rate used to qualify mortgage applications rose early in the month,” said, Gregory Klump, CREA’s Chief Economist. “Movements in the stress test interest rate are beyond the control of policymakers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”

New Listings
The number of newly listed homes rose 5.1% in May but remained below year-ago levels. New listings rose in about three-quarters of all local markets, led by Edmonton, Calgary, Montreal, Quebec City, Ottawa and the GTA.
With new listings up and sales virtually unchanged, the national sales-to-new listings ratio eased to 50.6% in May compared to 53.2% in April and stayed within short reach of the long-term average of 53.4%. Based on a comparison of the sales-to-new listings ratio with its long-term average, about two-thirds of all local markets were in balanced market territory in May 2018. There were 5.7 months of inventory on a national basis at the end of May 2018. While this marks a three-year high for the measure, it remains near the long-term average of 5.2 months.

Home Prices
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose only 1.0% y/y (year-over-year) in May 2018, marking the 13th consecutive month of decelerating y/y gains. It was also the smallest annual increase since September 2009.
Decelerating year-over-year home price gains largely reflect trends among GGH housing markets tracked by the index. While home prices in the region have stabilized and begun trending higher on a monthly basis, rapid price gains recorded one year ago have contributed to deteriorating y/y price comparisons. If recent trends remain intact, year-over-year comparisons will likely improve in the months ahead.
Condo apartment units again posted the most substantial y/y price gains in May(+12.7%), followed by townhouse/row units (+4.9%). By contrast, one-storey and two-storey single-family home prices were down (-1.5% and -4.7% y/y respectively), very much in line with what we saw last month.

Benchmark home prices in May were up from year-ago levels in 8 of the 15 markets tracked by the index (see Table below).
Composite benchmark home prices in the Lower Mainland of British Columbia continue to trend upward after having dipped briefly in the second half of 2016 (Greater Vancouver (GVA): +11.5% y/y; Fraser Valley: +20.6% y/y). Apartment and townhouse/row units have been mainly driving this regional trend while single-family home prices in the GVA have stabilized. In the Fraser Valley, single-family home prices have also started rising.
Benchmark home prices were up by 11.5% on a y/y basis in Victoria and by 18.1% elsewhere on Vancouver Island.

Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.8%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -5.4% y/y; Oakville-Milton: -5.9% y/y; Barrie and District: -6.3% y/y). This reflects rapid price growth recorded one year ago and masks recent month-over-month price gains in these markets.
Calgary and Edmonton benchmark home prices were down slightly on a y/y basis in May (Calgary: -0.5% y/y; Edmonton: -0.9% y/y), while prices in Regina and Saskatoon were down more noticeably from year-ago levels (-6.2% y/y and -2.7% y/y, respectively).

Benchmark home prices rose by 8.2% y/y in Ottawa (led by a 9.5% increase in two-storey single-family home prices), by 6.7% in Greater Montreal (driven by a 7.3% increase in two-storey single-family home prices) and by 4.3% in Greater Moncton (led by a 4.8% increase in townhouse/row unit prices).

Bottom Line
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada has taken a very cautious stance. However, at their last meeting, monetary policymakers have signalled that a rate hike is coming, likely when they next meet on July 11.
Five-year fixed mortgage rates have already risen roughly 110 basis points, while rates for new variable mortgages rose by close to 40 basis points. Since the implementation of new mortgage standards, nonprice lending conditions for mortgages and home equity lines of credit have also tightened.

In the Bank of Canada’s recently released Financial System Review, the central bank analysts observed that the updated Guideline B-20, which took effect at the beginning of this year, “is dampening credit growth and improving the quality of new mortgage lending, especially in regions with the highest house prices. For example, because of the new mortgage interest rate stress test, the size of a 5-year, fixed-rate mortgage with a 25-year amortization that a median-income borrower in Canada can qualify for dropped by about $82,000 to $373,000. The stress test will have more significant effects in markets such as the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), where house prices are higher relative to incomes and low-ratio mortgages are more common.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

As expected, the Bank of Canada held rates steady at 1.25% for the third consecutive month but said that first-quarter growth was stronger than expected and that developments since April suggest that higher interest rates will be warranted.

The first quarter GDP numbers are out tomorrow morning, and it’s clear the Q1 growth will be above the 1.3% figure the Bank projected in the April Monetary Policy Report. This opens the door for a rate hike possibly as soon as the next meeting on July 11. The Canadian dollar rallied on this news as many feared that the Bank was behind the curve in responding to a recent rise in overall inflation–induced by higher gasoline prices–and very tight labour markets.
Uncertainty remains on the NAFTA front, dampening global business investment. Canadian firms long for a bright and stable resolution of trade conflicts with the U.S., which continues to be elusive. Business investment picked up in the first quarter and the Business Outlook Survey released in late June will give the central bank a window on business intentions before the next policy meeting.
Concerning the housing market, the Bank’s press release noted that “Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.”
Not everyone shares this optimism. The past week’s bank earnings releases show that mortgage originations have slowed considerably from year-ago levels and some have suggested that weak activity will prevail for the rest of the year.

The posted mortgage-rate, which is used to qualify borrowers, has risen to 5.34%, making it more difficult for some to gain approval, particularly at the federally regulated lenders. Variable mortgage rates are much lower as the gap between fixed and floating rates has hit historical highs.
Bottom Line: The central bank statement was much more hawkish than expected suggesting we are on target for a rate hike in July and another one is likely in October as well.

The Bank of Canada raised rates three times since the middle of last year as the economy moved closer to full capacity. But the Bank has been in a holding pattern since January cautiously waiting to see the results of trade negotiations and the degree of the slowdown in housing.

These factors will determine the pace of future rate hikes with the Bank estimating its neutral rate is 3%, more than double the current overnight rate. The Bank will only very gradually approach that level, mindful of the impact on an overly indebted household sector.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Data released today by the Canadian Real Estate Association (CREA) show a small uptick in home sales nationally in March, their first monthly increase in three months. This comes on the heels of a more than 19% decline in the previous two months as the tighter mortgage stress-testing rules at federally regulated lenders have reportedly impacted one in three potential buyers. The uptick in March sales suggests that the housing market is beginning to move beyond the payback period for activity pulled forward at the end of last year ahead of the new rules introduced on January 1, 2018.

The outlook for the housing market is likely to be uneven as the new market-cooling measures announced in the BC budget are poised to lengthen the adjustment process in that province. Indeed, home sales in Vancouver are still declining as resales dropped 8.6% in March from the prior month while benchmark prices again edged up 1.1%. Vancouver has not seen so few homes change hands since 2013. The February BC budget introduced a new speculation tax as well as an expanded foreign buyers tax, and a tax hike on home sales and school taxes for properties worth more than $3 million.

For the country as a whole, existing home sales inched up 1.3% from February to March. Nevertheless, national sales activity in the first quarter slid to its lowest quarterly level since the first quarter of 2014.
March sales were up from the previous month in over half of all local housing markets, led by Ottawa and Montreal. Monthly sales gains were offset by declines in B.C.’s Lower Mainland, the Okanagan Region, Chilliwack, Calgary and Edmonton.

Actual (not seasonally adjusted) activity was down 22.7% from record activity logged for March last year and marked a four-year low for the month. It also stood 7% below the 10-year average for the month. Activity came in below year-ago levels in more than 80% of all local markets, including every major urban centre except Montreal and Ottawa. The vast majority of year-over-year declines were well into double digits.
“Government policy changes have made home buyers and sellers increasingly uncertain about the outlook for home prices,” said CREA President Andrew Peck. “The extent to which these changes have impacted housing market sentiment varies by region,” he added.

“Recent changes to mortgage regulations are fueling demand for lower-priced homes while shrinking the pool of qualified buyers for higher-priced homes,” said Gregory Klump, CREA’s Chief Economist. “Given their limited supply, the shift of demand into lower price segments is causing those sale prices to climb. As a result, ‘affordably priced’ homes are becoming less affordable while mortgage financing for higher priced homes remains out of reach of many aspiring move-up homebuyers.”

New Listings
The number of newly listed homes rose 3.3% nationally in March. However, new listings have not yet recovered from the 21.1% plunge recorded between December 2017 and January 2018–the most substantial month-over-month decline on record according to the CREA. With sales up by less than new listings in March, the national sales-to-new listings ratio eased to 53% in March. The long-term average for the measure is 53.4%.

Based on a comparison of the sales-to-new listings ratio with its long-term average, more than 60% of all local markets were in balanced market territory in March 2018. There were 5.3 months of inventory on a national basis at the end of March 2018 – unchanged from February, when it reached the highest level in two-and-a-half years. The long-term average for the measure is 5.2 months.

Home Prices
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose 4.6% y/y in March posting the 11th consecutive deceleration in y/y gains. This continued the trend that began last April when the province of Ontario announced its new housing measures that included a 15% tax on nonresident foreign homebuyers. The slowing y/y home price growth mainly reflects the trend for the Greater Golden Horseshoe. Prices in that region have stabilized or begun to show tentative signs of moving higher in recent months; however, year-over-year comparisons are likely to continue to deteriorate further due to rapid price gains posted one year ago.

Nationally, apartment condo units continued to show the highest y/y price gains in March (+17.8%), followed by townhouse/row units (+9.4%), one-storey single family homes (+1.3%). Two-storey single-family homes prices were down from a year ago (-2.0%), continuing the trend of the past year. Despite having stabilized over the second half of last year, y/y declines for single-family home prices may persist over the first half of 2018.
In the GTA, the Composite MLS HPI rose 3.2% y/y, which was driven by an 18.8% y/y rise in condo apartment prices and 7.5% growth in townhouse prices. Single-family detached home prices were down slightly compared to February 2017.

Benchmark home prices in March were up from year-ago levels in 9 out of the 14 markets tracked by the MLS® HPI (see the table below). Composite benchmark home prices in the Lower Mainland of British Columbia continued to trend higher after having dipped briefly during the second half of 2016 (GVA: +16.1% y/y; Fraser Valley: +24.4% y/y). Apartment and townhouse/row units have been driving this regional trend in recent months while single-family home prices in the GVA have held steady. In the Fraser Valley, single-family home prices have also begun to rise.
Benchmark home prices continued to rise by about 15% y/y in Victoria and by roughly 20% elsewhere on Vancouver Island.

Within the Greater Golden Horseshoe region of Ontario, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+7.5%). Meanwhile, home prices in the GTA and Oakville-Milton were down in March compared to one year earlier (GTA: -1.5% y/y; Oakville-Milton: -7.1% y/y). These declines primarily reflect price trends one year ago and mask evidence that home prices in the region have begun trending higher.
Calgary and Edmonton benchmark home prices were little changed on a y/y basis (Calgary: +0.3% y/y; Edmonton: -0.5% y/y). Prices in Regina and Saskatoon remained down from year-ago levels (-4.6% y/y and -3.4% y/y, respectively).

Benchmark home prices rose by 7.7% y/y in Ottawa (led by an 8.6% increase in two-storey single-family home prices). Prices shot up by 6.2% in Greater Montreal (driven by a 7.4% increase in two-storey single-family home prices) and by 4.9% in Greater Moncton (led by a 6.3% increase in one-storey single-family home prices).

Bottom Line
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious.

Only 20% of investors expect the Bank of Canada to hike interest rates when they meet again on Wednesday. However, Governor Poloz will likely return to the rate-hike path in the second half of this year as inflation and growth are beginning to move higher. On a year-over-year basis, all measures of inflation have risen to the 2% range, and inflation will likely climb above the Bank’s 2% target pace in coming months, while growth should also return to an above-2% pace after a recent slowdown.

The Bank has maintained a cautious stance for months as inflation averaged only 1.6% last year, and the economy decelerated more than expected in the second half, amid signs that indebted households had begun slowing consumer spending. The economy grew at an annualized pace of 1.7% in the fourth quarter, versus economist expectations for 2% growth. Third-quarter gross domestic product growth was also revised lower.

After leading the Group of Seven in growth last year, the Canadian economy has lost momentum reflecting the slowdown in housing and longstanding productivity underperformance. The U.S. economy recorded growth rates of 3.2% in the third quarter and 2.5% in the last three months of 2017. Canada hasn’t trailed the U.S. in growth to this extent since early 2015, and the gap could well widen with this year’s U.S. tax cut favouring corporations.

But the environment is changing as inflation is likely to average 2.3% in the second quarter and 2.4% in the third as oil prices continue to rise. Nevertheless, most economists expect only two rate hikes this year–in July and October. That, of course, can change with incoming data surprises.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The January 1 implementation of the new OSFI B-20 regulations requires that uninsured mortgage borrowers be stress-tested at a mortgage rate 200 basis points above the contract rate at federally regulated financial institutions. It is no surprise that home sales rose in advance of the new ruling in November and December. Even so, activity remains below peak levels earlier in 2017 and prices continued to fall in the Greater Toronto Area (GTA) and in Oakville-Milton, Ontario for the eighth consecutive month. Prices also fell last month in Calgary, Regina, and Saskatoon–cities that have suffered the effects of the plunge in oil and other commodity prices beginning in mid-2014.

Mortgage Rates Are Rising
Ever since the release of exceptionally strong yearend employment data for Canada on January 5th, there has been a widespread expectation that the Bank of Canada would hike the target overnight interest rate by 25 basis points this Wednesday, taking it to 1.25 percent. Indeed, market rates have already risen in response to this expectation. The Royal Bank was the first to hike its posted 5-year fixed mortgage rate to 5.14 percent last Thursday, up from 4.99 percent. Other banks quickly followed suit.

It used to be that a hike in the posted rate was of little consequence because borrowers’ contract rates were typically much lower. However, government regulations put in place in October 2016 now force borrowers with less than a 20 percent down payment to qualify at the posted rate. And the new OSFI regulations effective this year now require even those with more than a 20 percent down payment to qualify at a rate 200 basis points above the contract mortgage rate at federally regulated financial institutions.

It has been four years since the posted five-year fixed mortgage rate exceeded 5 percent. And it has been nearly a decade since homebuyers had to qualify at contract mortgage rates that high–when government stress-testing rules didn’t exist. A decade ago, house prices in Canada’s major cities were substantially lower. Indeed, as the table below shows, house prices in the Greater Vancouver Region, Fraser Valley and the Lower Mainland of British Columbia have increased by nearly 80 percent in just the past five years. In the GTA, home prices are up over 60 percent over the same period. These price gains dwarf income increases by an enormous margin. So clearly, housing affordability has plummeted and the combination of tightening regulations and rising interest rates will no doubt dampen housing activity.

This is one factor that could weaken the case for a Bank of Canada rate hike this week. Another is the potential failure of NAFTA negotiations–a threat to three-quarters of Canada’s exports. Additionally, inflation remains low and wage gains–though rising–are still quite moderate.

Hence the case for a Bank of Canada rate hike this week is not incontestable.
U.S. market interest rates have risen significantly this year, and many bond traders are now forecasting the end of the secular bull market in bonds as the U.S. economy approaches full-employment and fiscal stimulus (the recent tax cuts) will boost the federal budget deficit.

December Home Sales Rise
The Canadian Real Estate Association (CREA) reported today that national home sales jumped 4.5% from November to December–their fifth consecutive monthly increase. Activity in December was up in close to 60% of all local markets, led by the GTA, Edmonton, Calgary, the Fraser Valley, Vancouver Island, Hamilton-Burlington and Winnipeg.
While activity remained below year-ago levels in the GTA, the decline there was more than offset by some sizeable y-o-y gains in the Lower Mainland of British Columbia, Vancouver Island, Calgary, Edmonton, Ottawa and Montreal.

New Listings Shot Up
Many sellers decided to list their properties ahead of the mortgage rule changes. The number of newly listed homes rose 3.3% in December. As in November, the national increase was overwhelmingly due to rising new supply in the GTA. New listings and sales have both trended higher since August. As a result, the national sales-to-new listings ratio has remained in the mid-to-high 50% range since then.

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. That said, the balanced range can vary among local markets.

Considering the degree and duration that the current market balance is above or below its long-term average is a more sophisticated way of gauging whether local housing market conditions favour buyers or sellers. Market balance measures that are within one standard deviation of the long-term average are generally consistent with balanced market conditions. Based on a comparison of the sales-to-new listings ratio with its long-term average, more than two-thirds of all local markets were in balanced-market territory in December 2017.

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents how long it would take to liquidate current inventories at the current rate of sales activity.

There were 4.5 months of inventory on a national basis at the end of December 2017. The measure has been moving steadily lower in tandem with the monthly rise in sales that began last summer.

The number of months of inventory in the Greater Golden Horseshoe region (2.1 months) was up sharply from the all-time low reached in March 2017 (0.9 months). Even so, the December reading stood a full month below the regions’ long-term average (3.1 months) and reached a seven-month low.

Price Pressures Eased
The Aggregate Composite MLS® Home Price Index (HPI) rose by 9.1% year-over-year (y-o-y) in December 2017 marking a further deceleration in y-o-y gains that began in the spring of last year and the smallest increase since February 2016. The slowdown in price gains mainly reflects softening price trends in the Greater Golden Horseshoe housing markets tracked by the index, particularly for single-family homes. On an aggregate basis, only single-family price increases slowed on a y-o-y basis. By comparison, y-o-y price gains picked up for townhouse/row and apartment units.

Apartment units again posted the most substantial y-o-y price gains in December (+20.5%), followed by townhouse/row units (+13%), one-storey single family homes (+5.5%), and two-storey single family homes (+4.5%).

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

So here we are in the lead-up to the January 1 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 at federally regulated financial institutions. It is no surprise that home sales rose in advance of the new ruling. Even so, activity remains below peak levels earlier this year and prices continue to fall in the Greater Toronto Area (GTA) for the seventh consecutive month.
In a speech this week, Governor Poloz of the Bank of Canada confirmed his continued concern about household indebtedness. Indeed, data released this week by Statistics Canada showed that households continued to pile on debt in the third quarter. The household-debt-to-disposable-income ratio rose by a percentage point to 171.1% last quarter. Relative to assets and net worth, debt also edged higher, but those ratios are much closer to longer run levels, painting a far less dire picture of household finances. And even with households taking on more debt, the share of income needed to service that debt was little changed in Q3, as it has been over the last decade. That will change as the Bank of Canada continues to raise interest rates gradually. However, the prevalence of fixed rate mortgage debt means households won’t feel the increase all at once. Instead, the debt service ratio is likely to rise only gradually. The rising cost of borrowing and more stable home prices should slow credit growth in the year ahead.
But with so much attention paid to the imprudent borrower, I think it is important to reiterate that the vast majority of Canadians responsibly manage their finances. For example, roughly 40% of homeowners are mortgage-free, and one-third of all households are 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 meagre.
The Canadian Real Estate Association (CREA) reported yesterday that home sales jumped 3.9% from October to November–the second most significant increase in two years. Home sales have now risen for the fourth consecutive month, led by a 16% jump in the Greater Toronto Area (GTA), which accounted for two-thirds of the national rise. Even so, sales activity in the GTA was significantly below year-ago levels. Victoria, Ottawa and Regina also recorded strong gains, while Calgary, Edmonton and Montreal posted modest increases.
Not all markets participated in the rally, though. Vancouver was among the few holdouts. Resales fell for a second-straight month by 3.7% in the Vancouver area where affordability strains represent a major issue for buyers.

New Listings Shot Up
Many sellers decided to list their properties ahead of the mortgage rule changes. New listings rose by 3.5% in Canada between October and November. Most of this increase took place in the Toronto area where new listings jumped by a whopping 22.9%. A report released earlier this month by the Toronto Real Estate Board showed that active listings in Toronto rose modestly above their 10-year average in recent months after plunging to historic lows at the start of this year. Pressure has come off Toronto-area buyers as they are now presented with more options. This could soon be the case in Vancouver too. New listings rose sharply in November and, with resales declining in the past couple of months, the sales-to-new listings ratio is finally moving toward more balanced conditions (see charts below).
The number of months of inventory is another important measure of the balance between housing supply and demand. It represents how long it would take to liquidate current inventories at the current rate of sales activity. There were 4.8 months of inventory on a national basis at the end of November 2017 – down slightly from 4.9 months in October and around 5 months recorded over the summer months, and within close reach of the long-term average of 5.2 months. At 2.4 months, the number of months of inventory in the Greater Golden Horseshoe region is up sharply from the all-time low of 0.8 months reached in February and March.

Price Pressures Eased
The Aggregate Composite MLS® Home Price Index (HPI) rose by 9.3% y-o-y in November 2017 marking a further deceleration in y-o-y gains that began in the spring and the smallest increase since February 2016. The slowdown in price gains mainly reflects softening price trends in the Greater Golden Horseshoe housing markets tracked by the index, particularly for single-family homes.
Toronto single-family house prices were down 11.6% over the past six months ending November 30 (see chart below). GTA condo prices have fared better, up 0.3% since late May, 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.

On a year-over-year basis, benchmark home prices were up in 11 of the 13 markets tracked by the MLS HPI. After having dipped in the second half of last year, benchmark home prices in the Lower Mainland of British Columbia have recovered and now stand at new highs (Greater Vancouver: +14% y-o-y; Fraser Valley: +18.5% y-o-y). Benchmark home prices rose by about 14% on a y-o-y basis in Victoria and by 18.5% elsewhere on Vancouver Island in November, on par with y-o-y gains in October.
Price gains have slowed considerably on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph but remain above year-ago levels (Greater Toronto: +8.4% y-o-y; Oakville-Milton: +3.5% y-o-y; Guelph: +13.4% y-o-y).
Calgary benchmark home prices remained just inside positive territory on a y-o-y basis (+0.3%), while prices in Regina and Saskatoon were down from last November (-3.5% y-o-y and -4.1% y-o-y, respectively).
Benchmark home prices rose 6.7% y-o-y in Ottawa, led by a 7.6% increase in two-storey single-family home prices, by 5.6% in Greater Montreal, driven by an 8.3% increase in prices for townhouse/row units, and by 4.6% in Greater Moncton, led by a 7.8% increase in one-storey single-family home prices. (see table below)
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.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres