The expected slowdown in the Canadian labour market did not materialize in October as full-time jobs surged and wage gains accelerated. Total employment increased by 35,300 last month and the unemployment rate rose a tick to 6.3% as the labour force participation rate edged up a bit to 65.7%–well above the level in the U.S. Full-time jobs rose 88,700 while part-time jobs fell by 53,400–evidence of strong improvement in the quality of net-new job creation. Canada has added 201K full-time jobs in just the past two months, the strongest two-month performance on record. This report might force the Bank of Canada to reconsider its view that there remains a lot of slack in the Canadian jobs market.
Another sign of stellar growth was the 2.7% year-over-year gain in total hours worked and hourly earnings of permanent employees increased by a whopping 2.4% last month, the strongest annual wage growth since April 2016. The jobless rate has trended downward over the past year, falling 0.7 percentage points. While the overall unemployment rate was 6.3% last month, the jobless rate for prime workers–those aged 25- to 54-years old is much lower–posted at 5.1% for women and 5.6% for men. Men have been harder hit in both the U.S. and Canada as much of the restructuring in jobs has been in male-dominated industries such as heavy manufacturing (and construction in the U.S.) and most of the growth has been in female-dominated services such as health care-related services.
Canadian employment rose in several industries, led by “other services” (which include services such as those related to civic and professional organizations, and personal and laundry services) up by 21,000. Construction jobs rose by 18,000 in October but were virtually unchanged on a year-over-year basis. Also strong were information, culture and recreation and agriculture. Employment declined in wholesale and retail trade.

According to StatsCanada, the most significant employment gains were in Quebec, followed by Alberta, Manitoba, Newfoundland and Labrador, and New Brunswick. At the same time, there was a decline in Saskatchewan. Unemployment rates by province are in the table below.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

According to the Canadian Real Estate Association (CREA), national home sales in September rose modestly from the previous month but remained below levels recorded one year ago. Resale activity was 12% below the record set in March, before the April announcement of a 15% foreign buyers’ tax and a sixteen-point program to enhance housing affordability in the Ontario provincial budget.
The number of homes sold edged up 2.1% last month, building on an even smaller gain in August. Activity was up in about half of all local markets, led by Greater Vancouver and Vancouver Island, the Greater Toronto Area (GTA), London and St. Thomas and Barrie. In and around the Greater Golden Horseshoe region, activity was mixed as some markets posted monthly sales gains while others continued to be near recent lows or fell further.
Actual (not seasonally adjusted) existing home sales were down 11% in September compared to one year ago. Actual sales were down from year-ago levels in close to three-quarters of all local markets, led by the GTA and surrounding housing markets.
New Listings
The number of newly listed homes increased by almost 5% last month following three consecutive monthly declines. The rise in listings was mostly reflective of a jump in new supply in the GTA. With new listings rising by more than sales in September, the national sales-to-new listings ratio eased to 55.7% compared to 57.2% in August. 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.
About two-thirds of all local markets were in balanced market territory last month based on a comparison of sales-to-new listings ratio. The number of months of inventory is another measure of housing market tightness. There were five months of inventory on a national basis at the end of last month, unchanged from August and broadly in line with the long-term average for the measure.
At 2.4 months of inventory in the Greater Golden Horseshoe region, this was a sharp increase from the all-time low of 0.8 months reached 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 10.7% y-o-y in September 2017, representing a further deceleration in y-o-y gains since April. 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 ground-level benchmark homes.
Price gains diminished in September among the ground-level benchmark homes tracked by the index and accelerated slightly for apartment units. Condo units again posted the most significant y-o-y gains in September (+19.8%), followed by townhouse/row units (+13.5%), one-storey single family homes (+7.9%), and two-storey single family homes (+7.2%).
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.
Toronto Area
Resales in Toronto in August and September rose 18%, which only partially retraces the 44% plunge in existing home sales between April and July of this year. New listings surged by almost 19% last month, which was good for buyers. Prices remained under downward pressure for the fourth consecutive month.
Vancouver Area
After slowing earlier this past summer, activity recovered further in the Vancouver area in August and September. The 6.1% gain in September resales was the strongest among Canada’s larger markets. This increase exceeded the substantial rise in new listings, which tightened demand-supply conditions, adding more upward pressure to prices. Vancouver’s benchmark price accelerated to 10.9% year-over-year in September from 9.4% in August. Given the current market tightness, we expect further acceleration in the months to come.
Calgary
Calgary’s housing market is back on the recovery path. Home resales rose for a second consecutive month by 2.8% in September. However, high condo inventories remain a dampening issue, keeping condo prices on a downward trend. Calgary’s overall benchmark price continued to rise year-over-year in September, but the 0.6% rate was minimal. There’s little scope for stronger appreciation until those inventories decline sharply.
Montreal
Montreal’s housing market continues strong with home prices rising further.
Outlook for a Continue Soft Landing
While the economy in Canada peaked in the second quarter and housing has slowed appreciably, we are likely in the early stages of an extended cooling process in Canadian residential real estate. Rising interest rates and the possible introduction of tighter mortgage stress testing for uninsured borrowers will continue to drive down resales this year and next. Overall this year, house price gains of around 10.5%-to-11.0% are likely, down sharply from the 20% year-over-year pace posted in April. For 2018, we expect composite house prices nationwide to rise only 3%, declining about 4.0-to-5.0% in the GTA in 2018.

Thank you Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres, for your market insight.

There will be new government enforced mortgage rule changes starting on Jan 1st. These changes will make borrowing MUCH harder. Give me a call before these changes take effect.

To Read More…http://ow.ly/i9zO30fW0yf

We know – more changes?! How can that be! With this ever-changing landscape, mortgages continue to get more complicated. This next round of changes is predicted to take affect this coming October 2017 (date not yet available). These new rules contain three possible changes, the most prominent being the implementation of a stress test for all uninsured mortgages (those with a down payment of more than 20%). Under current banking rules, only insured mortgages, variable rates and fixed mortgages less than five years must be qualified at a higher rate. That rate, of course, is the Bank of Canada’s posted rate (currently 4.84%, higher than typical contract rates).

For the first time in seven years, the Bank of Canada announced today that it was hiking its key overnight rate by a quarter percentage point (25 basis points) bringing it to 0.75 percent as the economy has staged a broadly based economic expansion this year. In a break from tradition, the Bank has taken this action even though inflation remains well below its target rate of 2 percent. Indeed, inflation has hit its lowest level since 1999. The consumer price index (CPI), released in late June, rose only 1.3 percent in May from a year ago, down from an annual pace of 1.6 percent in April. Both Governor Poloz and Senior Deputy Governor Wilkins have emphasized that the Bank must begin to hike rates pre-emptively due to the lagged effect of monetary tightening.
Measures of annual core inflation, a key indicator tracked by the Bank of Canada, which excludes volatile components such as food and energy, fell to its lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 percent, its lowest level since March 1999. The Bank has recently played down sluggish inflation numbers, suggesting they reflect the lagged effects of past excess capacity. Incoming inflation figures have been well below the Bank’s forecasts and will likely remain low for some time as oil prices are wobbling downward and wage inflation is a mere 1.3 percent–just keeping up with core inflation.
Last Friday’s continued strong employment report for June cinched the rate-hike. Employment rose a hefty 45,300, lifting the 12-month gain to a whopping 350,000 and trimming the jobless rate to match the cycle low of 6.5%. What’s more, total hours worked surged in the second quarter at the fastest rate since 2003. GDP climbed an impressive 3.3% year-over-year in April, while record levels of exports and imports suggest activity stayed on track in May, and further record highs for auto sales suggest consumers kept right on spending in June. Spending strength is yet another sign that after two years of lagging behind, Canada’s overall growth rate has come bouncing back in the past year to surpass the U.S. pace. The Bank now expects the output gap to close around year end.

Markets have been expecting this move for some time, as monetary policymakers have publicly stated that the 2015 interest-rate cuts appear to have done their job. Governor Stephen Poloz has said that the Canadian economy enjoyed “surprisingly” strong growth in the first three months of this year and that he expects the growth pace to remain above potential (estimated at 1-3/4 percent), setting the stage for this rate hike. In response, Canadian bond yields have moved higher, the Canadian dollar has surged anew, and the big Canadian banks raised mortgage rates by roughly 20 basis points last week in anticipation of this move. The 5-year Government of Canada bond yield has surged nearly 50 basis points in the past month. Indeed, 10-year government yields are up to roughly 1.9 percent, their highest yield in more than two years. The Canadian dollar surged to above 77.5 cents, the strongest level in 10 months, up more than 6 percent from the lows in early May. Stalling oil prices may reverse some of the loonie’s recent gain.

The big banks will also raise their prime rates, driving up the cost of variable rate mortgages, other loans and lines of credit tied to the benchmark rate. While the banks shaved their response to the interest rate cuts to less than the 25 basis points decline when monetary policy was easing, it is likely now that banks will adjust lending rates to close to the full 25 basis point increase. This asymmetric response is consistent with the desire of regulators to slow the growth in household debt.

Housing is one crucial component of the Canadian economy, and it has slowed meaningfully at the national level, in line with the central bank’s expectations. Prices and sales have declined in the Greater Toronto Area and surrounding municipalities since the Ontario Fair Housing Plan announcement in late April. However, housing activity has gained momentum in Montreal and Ottawa, while Alberta stabilizes and Vancouver posted a modest bounceback from the swoon following its August 2016 imposition of a foreign buyers’ tax. The underlying strength in many housing markets is the reason why policymakers are proposing new rules to tighten mortgage lending. This time OSFI–the regulator of financial institutions–is proposing that banks stress test non-insured borrowers at two percentage points above the contract rate. This despite the fact that non-insured borrowers are putting at least 20 percent down on their home purchase. A small BoC rate hike would reinforce the multi-faceted steps to calm the broader housing market.
The Bank has repeatedly stated that “macroprudential and other policy measures have contributed to more sustainable debt profiles,” even though household debt-to-income levels have hit a record high (see chart).

Uncertainties, of course, persist–particularly on the trade side as NAFTA is renegotiated in fewer than 90 days. The U.S. has already imposed duties on softwood lumber, and President Trump’s rhetoric remains hostile, threatening U.S. import duties on steel and other products. These uncertainties notwithstanding, I expect another Bank of Canada rate hike in the fourth quarter. The Federal Reserve will also likely increase rates in Q4. Look for a slow crawl upward in interest rates from both central banks in 2018.

Dr. Sherry Cooper Chief Economist, Dominion Lending Centres

This morning, the Canadian Real Estate Association (CREA) released its April national real estate statistics showing home sales fell by 1.7% from March to April from the record sales pace set in March. Sales declined in two-thirds of all markets, led by the Greater Toronto Area (GTA) and offset by increased sales in Greater Vancouver and the Fraser Valley. Sales in B.C. had slowed even before the August introduction of the 15% tax on foreign purchases. That slowdown has now dissipated as the Vancouver housing market apparently has bottomed.

Since last month’s release of CREA housing data, the Ontario government has introduced a similar 15% tax on foreign purchases in the Greater Golden Horseshoe (GGH), which is Canada’s largest urbanized area centred on the City of Toronto, where house prices have risen very sharply over the past decade and spiked in 2016 (see map below). This has caused great concern at all levels of government. The Bank of Canada has repeatedly warned that the housing boom is unsustainable and household debt levels relative to income at record highs is a threat to financial stability.

Not seasonally adjusted sales were down 7.5% year-over-year, with widespread declines led by the Lower Mainland of British Columbia, where activity continues to run well below last year’s record levels. Sales in Calgary and Edmonton are up from last year’s lows and are trending higher in Ottawa and Montreal.

According to Gregory Klump, CREA’s Chief Economist, “Homebuyers and sellers both reacted to the recent Ontario government policy announcement aimed at cooling housing markets in and around Toronto. The number of new listings in April spiked to record levels in the GTA, Oakville-Milton, Hamilton-Burlington and Kitchener-Waterloo, where there had been a severe supply shortage. And with only ten days to go between the announcement and the end of the month, sales in each of these markets were down from the previous month. It suggests these housing markets have started to cool. Policy makers will no doubt continue to keep a close eye on the combined effect of federal and provincial measures aimed at cooling housing markets…, while avoiding further regulatory changes that risk producing collateral damage in communities where the housing market is well balanced or already favours buyers.”

New Listings Shot Up in April

The number of newly listed homes jumped 10% in April, led by a 36% surge in the GTA. Housing markets in the GGH also saw similar percentage increases. Supply shortages have been a major issue depressing sales activity and raising prices, especially in and around Toronto and parts of B.C.

The jump in new listings and the decline in sales eased the national sales-to-new listings ratio to 60.1% in April compared to 67.3% in March. The ratio in the range of 40%-to-60% is considered generally consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market.

The sales-to-new-listings ratio was above the sellers’ market threshold in about half of all local housing markets, the majority of which continued to be in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario.

Number of Months of Inventory

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

There were 4.2 months of inventory on a national basis at the end of April–up slightly from 4.1 months in March when it fell to its lowest level in almost a decade.

Although new listings surged in the Greater Golden Horseshoe, inventories remain very tight across the region. Ontario’s recent changes to housing policy were announced late in the month, so their full effect on the balance between supply and demand is yet to be seen.

Prices Continue to Rise

The Aggregate Composite MLS House Price Index (HPI) rose 19.8% y-o-y last month. Once again, price gains accelerated for all benchmark housing categories tracked by the index.

This price index, unlike those provided by local real estate boards and other data sources, provides the best gauge of price trends because it corrects for changes in the mix of sales activity (between types and sizes of housing) from one month to the next.

Prices for two-storey single family homes posted the strongest ever year-over-year gains (+21.8%), followed by townhouse/row units (+17.2%), apartment units (18.8%) and one-storey single family homes (17.2%). In many of these regions, the supply of new single-family homes is so limited, you practically need to knock one down to build a new one.

After having dipped in the second half of last year, home prices in the Lower Mainland of British Columbia have been recovering and are up from levels one year ago. They are now achieving new heights or trending toward them (Greater Vancouver: +11.4% y-o-y; Fraser Valley: +18% y-o-y).

Meanwhile, benchmark home price gains remained in the 20% range in Victoria and elsewhere on Vancouver Island. Price gains were in the 30% range in Greater Toronto and Oakville-Milton, and ranged in the mid-20% in Guelph.

By comparison, home prices eased in Calgary (-0.9% y-o-y) and Saskatoon (-2.6% y-o-y) and are now about 5.5% below their peaks reached in 2015.

Home prices were up modestly from year-ago levels in Regina (+0.4% overall, led by a 2% increase in apartment prices), Ottawa (+4% overall, led by a 4.9% increase in two-storey single family home prices), Greater Montreal (+3.7% overall, led by a 5.5% increase in prices for townhouse/row units) and Greater Moncton (+4.8% overall, led by a 12.7% increase in prices for townhouse/row units). (Table 1).

The actual (not seasonally adjusted) national average price for homes sold in April 2017 was $559,317, up 10.4% from where it stood one year earlier.

The national average price continues to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which are two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations trims more than $150,000 from the average price.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canada’s economy generated virtually no net new job growth in April, on the heels of a multi-month employment rally that was the strongest in years. Employment has now increased in 15 of the last 17 months with growth over the last year averaging a solid 23,000 per month. The details of the monthly report for April were mixed (with a sharp pull-back in full-time jobs offset by stronger part-time employment) but, on average, more than two-thirds of job gains over the last year have been full-time.

Employment grew by just 3,200 jobs last month, well below the 10,000 forecasted by economists. On a year-over-year basis, however, there were 276,000 more people employed–up 1.5%–and the jobless rate was down 0.6 percentage points. Other positive signs include hours worked numbers that show gains of 1.1% over the past 12 months.

Despite the slowdown in job growth in April, the unemployment rate fell 0.2 percentage points to 6.5%, its lowest level since October 2008. According to Statistics Canada, the decrease reflected the departure of 45,500 people from the labor force. About half of those were youth, meaning many young people looking for work have stopped looking.
Employment among the population aged 55 and older rose by 24,000 in April, mostly in full-time work, and their unemployment rate declined 0.6 percentage points to 5.6%. On a year-over-year basis, people 55 and older had the fastest rate of employment growth (+3.6% or +133,000) compared with the other demographic groups. This is primarily the result of the continued transition of the baby-boom cohort into this older age group.

For men aged 25 to 54, employment declined by 20,000 in April, mostly in full-time work, and their unemployment rate increased 0.3 percentage points to 6.1%. Since August 2016, their employment gains have totalled 81,000. On a year-over-year basis, their unemployment rate was down 0.4 percentage points.

Among women aged 25 to 54, employment held steady in April and their unemployment rate was little changed at 5.1%. Compared with 12 months earlier, employment for this group was up 71,000 (+1.2%), virtually all in full-time work.

Employment for youth aged 15 to 24 was little changed in April, while their unemployment rate fell 1.1 percentage points to 11.7% as fewer of them searched for work. This is the lowest unemployment rate for youth since September 2008. On a year-over-year basis, youth employment was virtually unchanged.

Employment rose in British Columbia and Prince Edward Island, while it was virtually unchanged in the other provinces. In B.C., employment rose by 11,000 last month and the jobless rate was little changed at 5.5%. Job creation has been on a upward trend in the province with sizable increases in four out the past five months. On a year-over-year basis, employment was up 3.4% in B.C.

Although employment held steady in Ontario, the unemployment rate fell 0.6 percentage points to 5.8%, largely due to a decline in the number of youth searching for work. This is the lowest jobless rate for Ontario since January 2001.

In Alberta, April saw little job gain after a period of growth that began in autumn 2016. The jobless rate in the province was 7.9% in April, down 0.5 percentage points from the previous month as fewer people searched for work.

More people were employed in educational services, health care and social assistance, and transportation and warehousing in April. At the same time, employment declined in business, building and other support services, as well as in accommodation and food services.

Public sector employment increased in April, while the number of private sector employees fell. Self-employment was little changed.

Yet, the pace of annual wage rate increases fell to another record low. The pace of annual wage rate increases for permanent employees fell to 0.5% in April, the lowest in records dating back to the late 1990s. The wages puzzle, which has been cited by the Bank of Canada as evidence of slack in the economy, persists. The weak wage growth is in sharp contrast to what would otherwise appear to be a labour market with little or no slack remaining. To be sure, other measures of wages have been stronger (wage growth in the alternative (lagged) Survey of Employment, Payrolls and Hours (SEPH) was 2.4% year-over-year in February) but weaker numbers today from a wage perspective will likely continue to worry the Bank of Canada.

For historical perspective, wage gains have averaged 2.7% over the past decade. Adding to the mystery is that Ontario is the major source of wage sluggishness, with pay increases of 0.2% year-over-year. Full-time jobs also are showing slower wage gains than the national average. Clearly, businesses are very cost conscious, keeping labour costs muted, and economic uncertainty continues to depress the willingness of workers to demand higher wages. This concern can only be enlarged by growing trade tensions between the U.S. and Canada as President Trump continues to threaten to renegotiate NAFTA, already imposing punitive duties on soft wood lumber imports from Canada.

Trade tensions as well as a decline in oil prices to $45 a barrel (WTI) and the continuing troubles with Home Capital have added to downward pressure on the Canadian dollar as it has suffered the weakest performance of any of the Group of Ten currencies, now trading at 72.7 cents U.S.

Provincial Unemployment Rates in April In Descending Order (percent)
(Previous months in brackets)
— Newfoundland and Labrador 14.0 (14.9)
— Prince Edward Island 10.3 (10.1)
— New Brunswick 8.7 (8.4)
— Nova Scotia 8.3 (8.6)
— Alberta 7.9 (8.4)
— Quebec 6.6 (6.4)
— Saskatchewan 6.2 (6.0)
— Ontario 5.8 (6.4)
— British Columbia 5.5 (5.4)
— Manitoba 5.4 (5.5)

U.S. Job Growth Rebounds and Jobless Rate Falls to Lowest Level Since May 2007

U.S. payroll gains rebounded in April by more than forecast and the jobless rate unexpectedly fell to 4.4%, signaling that the labor market remains healthy and should support continued increases in consumer spending.

The 211,000 increase in nonfarm payrolls–beating economist forecasts–followed a 79,000 advance in weather-depressed March that was lower than previously estimated. The recovery in employment was most evident in private sector, service-producing jobs.

While the jobless rate is now the lowest since May 2007 (see chart below), wage increases did moderate slightly in April but is still indicative of real wage gains. This continued support to household incomes should contribute to Q2 consumer spending growth, and overall Q2 GDP growth, which is likely to rebound to over 2.5% following a disappointing first quarter increase of only 0.7%. Average hourly earnings, the main wage measure in the report, rose an expected 0.3% though this did not prevent the year-over-year rate from moderating slightly to 2.5% from 2.6% in March and a Q1 average of 2.7%.

Strengthening U.S. business confidence might be translating into hiring, and the data should keep Federal Reserve policy makers on track to raise interest rates in the coming months after officials declared this week that the first-quarter slowdown is likely to be transitory. The Fed refrained from raising rates this week.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Most Realtors I speak with on a day-to-day basis have buyers starting to stack up like cordwood, and a very limited supply of properties to show said buyers.

Turns out the Pacific Ocean, US border, North shore mountains, and the ALR all remain intact. No expanded land supply in the Lower Mainland. Thus, no expanded supply of properties to market. Yet migration and immigration numbers remain strong, largely due to strong employment numbers and – despite the recent sub-zero temperatures – a pretty awesome climate in general.

Click HERE To Read More

Blog written by Dustan Woodhouse

Premier Kathleen Wynne surprised the market yesterday by announcing sweeping measures aimed at cooling the red-hot housing market a full week before Ontario Budget Day. The sixteen-measure package is largely intended to do three things: Cool demand; boost supply; and limit the increases in rents.

No one doubts that something needed to be done to dampen speculative fervour and increase the supply of both rental properties and non-rental housing in the GTA and surrounding areas. While home prices have been rising in the GTA for more than a decade, the price gains hit an inflection point 2016 with hyperbolic price gains, exaggerated well beyond reasonable levels took hold, spiraling to a sellers’ strike, rampant speculation and frenzied demand.

In most of the region, the inventory-to-sales ratio fell to less than one-month’s supply as speculators compete with first-time and other buyers, driving prices to the stratosphere. Potential sellers held back, expecting prices to continue to rise at a 30% annual rate. Many of these potential sellers feared they wouldn’t find a suitable place to live as speculators increasingly are willing to buy properties with negative carry as capitalization rates fell, expecting to make a fast buck in a year or two. This has been compounded by non-resident foreign purchases, much of which could well lie vacant, further reducing supply and often damaging existing neighborhoods. Moreover, the market is further inflated by nefarious activities on the part of unethical market participant–activities that include “paper flipping”, rigged bidding, double-dealing and falsified income and asset statements–not to mention reselling properties pre-construction, which is technically legal but sometimes reportedly involves kick-backs to developers.

Clearly, this frenzy is unsustainable and something needed to be done to avert a crash landing–a result that is in no one’s interest as it would dramatically slow economic activity and job growth in the province and beyond. The question is: Will the Ontario Fair Housing Plan–comprised of 16 initiatives–generate a soft landing and do the job of balancing housing and rental supply and demand.

Risks and Uncertainties

The most troubling measure is the expansion of rent controls to all rental properties built after 1991–condo or purpose built. While it is good for existing tenants, the potential unintended consequences are concerning. Rent controls diminish the supply of rental stock and have adverse implications for existing home markets as investors (and speculators) dump their properties in response to heightened uncertainty and already compressed capitalization rates. This is especially negative for the condo market as investors have often provided the seed money for new developments. Toronto suffers from a dearth of purpose-built rental properties owing to the rent controls introduced many years ago. There has been a burgeoning rise in the development of such properties over the past year or so, but expanded rent controls might cause many lenders, investors and developers to reassess their plans.

Setting the rent-control cap at the rate of consumer inflation to a maximum of 2.5% while occupied by the same tenant would in no way provide a sufficient reward to offset the risk and capital necessary to build new supply. Any developer and investor would find the risk-reward trade-off insufficient. The cost of maintaining rental property is far greater than the 2% rate of inflation as utility costs, maintenance fees and property taxes have gone up by multiples of that rate, which is roughly equivalent to the return of risk-free government bonds.

Boost Rental Supply

The measures introduced to increase rental housing supply are welcome, but limited. Rebating a portion of development charges, lowering new property taxes on purpose-built rentals, unlocking available provincial land and streamlining the approval process will help to offset some of the negative effects of rent control, but they will no way offset them fully.

Already about 70% of Canadian households own their own home, which is probably close to long-run peak levels. Younger people and incoming residents are likely to need rental housing just as builders will need to set rents at sufficiently high levels to mitigate the effect of rent control on longer-term returns on investment, making housing less affordable for the very people the measures are intended to help. But, again, it is applauded by current tenants, particularly those living in relatively new housing.

Cooling Demand

The measures intended to cool demand by dampening speculation and discouraging vacant housing are welcome. The 15% non-resident speculation tax (NRST) in the Greater Golden Horseshoe levied on non-citizen, non-permanent residents and foreign corporations (with some exclusions) makes sense, but we have inadequate data to judge the magnitude of its effect. If Vancouver’s experience is any guide, the NRST should reduce home price inflation by some measure.

A tax on vacant housing and land will likely increase the rental supply as most of these properties are owned by non-resident foreigners.

The prevention of paper flipping or reselling properties pre-construction is welcome.

Biggest Uncertainty: In my view, the biggest quandary is the impact of this sweeping package on market psychology as it ripples through the economy. The speculators will be the first to run for the hills, reducing demand and increasing supply–which, of course, is the intended consequence. But taking that a step further, boomers who have been holding off listing their homes will call their realtors to do so promptly if they perceive markets are softening, further increasing supply. And buyers could prudently suspend their home search, at least for a while, in the hopes that prices will fall, further diminishing demand. The real question then becomes, will there be a soft- or a hard-landing. Stay tuned, we will be watching these developments very closely.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres