Canadian Housing Market Stuck In A Holding Pattern

General Leslie Blais 16 Sep

National home sales increased in June following the Bank of Canada’s first interest rate cut since 2020, and activity posted another slight gain in August on the heels of the second rate cut in late July. Still, the bigger picture appears to be a market mostly stuck in a holding pattern.

Home sales recorded over Canadian MLS® Systems increased by 1.3% month-over-month in August 2024, reaching their highest level since January and their second highest in over a year.

“Despite some fledgling signs of life to kick off the long-awaited monetary policy easing cycle, Canadian housing market activity still looks to be stuck in the same holding pattern it’s been in all year,” said Shaun Cathcart, CREA’s Senior Economist. “That said, with ever more friendly interest rates now all but guaranteed later this year and into 2025, it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well-behaved in most of the country.”

At the end of August 2024, about 177,450 properties were listed for sale on all Canadian MLS® Systems, up 18.8% from a year earlier but still more than 10% below historical averages of around 200,000 listings for this time of the year.
New ListingsAs of the end of July 2024, about 183,450 properties were listed for sale on all Canadian MLS® Systems, up 22.7% from a year earlier but still about 10% below historical averages of more than 200,000 for this time of the year.

New listings posted a slight 0.9% month-over-month increase in July. A much-needed boost in new supply in Calgary led to the national increase in new supply in Calgary.

With new listings up slightly and sales down slightly in July, the national sales-to-new listings ratio fell to 52.7% compared to 53.5% in June. The long-term average for the national sales-to-new listings ratio is 55%, with a ratio between 45% and 65% generally consistent with balanced housing market conditions.

At the end of July, there were 4.2 months of inventory nationwide, unchanged from the end of June. The long-term average is about five months of inventory.

“While it wasn’t apparent in the July housing data from across Canada, the stage is increasingly being set for the return of a more active housing market,” said James Mabey, Chair of CREA. “At this point, many markets have a healthier amount of choice for buyers than has been the case in recent years, but the days of the slower and more relaxed house hunting experience may be somewhat numbered.

At the end of August 2024, there were 4.1 months of inventory on a national basis, down from 4.2 months at the end of July. Continuing the theme of the market being in a holding pattern, this measure of market balance has been range-bound between 3.8 months and 4.2 months since last October. The long-term average is about five months of inventory.
Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.2% from June to July. While a slight increase, it was slightly larger than the June increase, making it just the second and the most significant gain in the last year.  While prices were up slightly at the national level, they were held back by reduced activity in the most extensive and expensive British Columbia and Ontario markets. Regionally, prices are rising in most markets.

The non-seasonally adjusted National Composite MLS® HPI stood 3.9% below July 2023. This primarily reflects how prices took off last April, May, June, and July—something that was not repeated over that same period in 2024. Year-over-year comparisons will likely improve from this point on.

The actual (not seasonally adjusted) national average home price was $667,317 in July 2024, almost unchanged (-0.2%) from July 2023.

The National Composite MLS® Home Price Index (HPI) was unchanged from July to August, following two small increases in June and July. That said, the bigger picture is that prices at the national level have been flat since the beginning of the year, posing no reason for potential buyers to rush to market.

The non-seasonally adjusted National Composite MLS® HPI stood 3.9% below August 2023. This mostly reflects price gains last spring and summer, followed by declines in the second half of last year. As such, it’s mostly likely that year-over-year comparisons will improve from this point on.
Bottom Line

Potential homebuyers remain on the sidelines awaiting further rate cuts by the Bank of Canada. As long as home prices are flat, purchasers have no compelling reason to take immediate action. This should change gradually. With new supply on the market, sales should continue to rise this month.

With weak labour markets and falling economic growth, the Bank of Canada will continue to cut interest rates by at least 25 bps on each decision date. Governor Macklem has commented that more significant rate cuts would be forthcoming if the economy weakens too aggressively and inflation falls below the 2% target. This would be welcome news for housing. We expect the overnight policy rate to fall to 2.5% before the end of next year. It is now at 4.25%–well above the current inflation rate.

In separate news, the Trudeau government has taken action to implement some of the budget measures to improve housing affordability. The federal government will make 30-year mortgages available to all first-time buyers and to buyers of newly built homes.Canada cracked down on lengthy mortgage amortizations during the 2008 global financial crisis. Until this year, buyers who required government-backed default insurance on their mortgages were limited to 25-year amortizations.

Trudeau and  Finance Minister Freeland stepped toward loosening that rule in April, allowing 30-year amortizations on insured mortgages only for first-time buyers purchasing newly built homes.

The government will also begin allowing mortgage default insurance on homes worth up to $1.5 million, an increase from the current cap of $1 million, effective December 15. That means buyers can bid on more expensive homes even if they have less than a 20% down payment — as long as they purchase insurance.

Today’s announcement will significantly expand the pool of buyers who can access 30-year loans, which lowers monthly payments. According to Freeland, insured first-time buyers represent roughly 20% of the market in Canada, while new builds make up about 4%.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weaker-Than-Expected August Jobs Report Raises Prospect Of Larger Rate Cuts

General Leslie Blais 9 Sep

Statistics Canada released August employment data today, showing continued growth in excess supply in labour markets nationwide. Employment changed little last month, up 22,100. The employment rate—the proportion of the population aged 15 and older who are employed—decreased a tick to 60.8%, marking the fourth consecutive monthly decline and the 10th decline in the past 11 months. On a year-over-year basis, the employment rate was down 1.2 percentage points in August, as employment growth (+1.6%) was outpaced by growth in the working-age population (+3.5%).

Full-time jobs declined by 44,000 while part-time work increased by 66,000. This was the fourth straight month of very modest employment gains.

The Bank of Canada expressed mounting concern about the rising output gap–the difference between economic growth at full employment and the current underemployment growth of less than 2%.

The number of private sector employees rose by 38,000 (+0.3%) in August, mainly offsetting a similar-sized decrease in the previous month (-42,000; -0.3%). The increase in private-sector employment in August was the first since April. Public sector employment and self-employment both changed little in August.

Year-over-year employment growth was concentrated among core-aged (aged 25 to 54) men and women as youth unemployment surged. Young immigrants have been hardest hit.
The unemployment rate rose 0.2 percentage points to 6.6% in August after holding steady in July. It was the highest since May 2017, outside of 2020 and 2021, during the COVID-19 pandemic. The unemployment rate has generally increased since April 2023, rising 1.5 percentage points.

In August 2024, 1.5 million people were unemployed, an increase of 60,000 (+4.3%) from July and 272,000 (+22.9%) from August 2023.

Among those unemployed in July, 16.7% had transitioned to employment in August (not seasonally adjusted). This was lower than the corresponding proportion in August 2023 (23.2%), indicating that unemployed people may face more difficulties finding work.

In August, the unemployment rate rose for men aged 25 to 54 years old (+0.4 percentage points to 5.7%) and for men aged 55 and older (+0.4 percentage points to 5.5%), while it was little changed for other major demographic groups.

Although the unemployment rate was up across all age groups year-over-year in August, the increase was most significant for youth (+3.2 percentage points to 14.5% in August). The rate was up for young men (+3.8 percentage points to 16.3%) and young women (+2.6 percentage points to 12.6%).

For core-aged people, the jobless rate was up 0.9 percentage points to 5.4% on a year-over-year basis in August. Increases for this age group were observed across all levels of educational attainment. On a year-over-year basis, the unemployment rate was up in August for core-aged people with a high school diploma or less (+1.5 percentage points to 8.2%), for those with some post-secondary education below a bachelor’s degree (+0.7 percentage points to 5.5%) as well as for those with a bachelor’s degree or a higher level of education (+0.9 percentage points to 6.2%) (not seasonally adjusted).

In August, employment rose by 27,000 (+1.7%) in educational services, the first increase since January. There were 75,000 (+5.1%) more people employed in this sector than 12 months earlier.

In August, health care and social assistance employment increased by 25,000 (+0.9%). In the 12 months to August, employment gains in health care and social assistance (+157,000; +5.8%) were the largest of any sector and accounted for nearly half (49.6%) of total net employment growth.

Year-over-year employment growth in health care and social assistance was recorded in the private sector (+94,000; +8.6%) and the public sector (+77,000; +6.1%). Self-employment in health care and social assistance changed little over the period (not seasonally adjusted).
Canada’s unemployment rate has risen from 5% at the start of last year.

The youth unemployment rate continued to surge in August, rising to 14.5%, the highest since 2012 outside the pandemic.
Bottom Line

The data point to deteriorating labour demand in an economy that consistently fails to add jobs at the pace of population growth. And while there’s little evidence of widespread layoffs, the continued weakness is likely to add to disinflationary pressures, allowing the Bank of Canada to keep lowering borrowing costs at a gradual pace.

Still, the unexpected jump in the jobless rate will further fuel debate about deeper interest rate cuts. Traders in overnight index swaps boosted bets that the Bank of Canada would cut by 50 basis points at its Oct. 23 meeting. They now put those odds at around 40%, compared with about 30% the day before.

Policymakers led by Governor Tiff Macklem reduced the policy rate by 25 basis points for a third straight time on Wednesday. Officials say they’re increasingly focused on downside worries and guard against the risk that growth slows too much. Speaking to reporters, Macklem said the Governing council had discussed a scenario wherein the economy and inflation were weak enough to require a more significant than a quarter-point reduction in borrowing costs. Policymakers also reiterated they’re concerned about undershooting their 2% inflation target. “We need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” the governor said.

This is the first of two job reports before the October rate decision. A Bloomberg survey found that most economists expect the bank to cut by 25 basis points at the next four meetings, bringing the policy rate to 3% by mid-2025.

The Canadian data were released simultaneously with the highly anticipated nonfarm payrolls in the US, which rose by 142,000 following downward revisions to the prior two months. Economists surveyed by Bloomberg were expecting an increase of 165,000. Treasury yields fell as markets weighed whether the weaker job gains would prompt a larger than quarter percentage point cut from the Federal Reserve when they meet again on September 18.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Cuts Rates Another Quarter Point

General Leslie Blais 4 Sep

Today, the Bank of Canada cut the overnight policy rate by another 25 basis points to 4.25%. This is the third consecutive decrease since June. The Bank’s decision reflects two main developments. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to the target, the central bank wants to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.Overall, the economy’s weakness continues to pull inflation down. However, price pressures in shelter and some other services are holding inflation up. Since the July Monetary Policy Report, the upward forces from prices for shelter and some other services have eased slightly. At the same time, the downward pressure from excess supply in the economy remains.

Tiff Macklem said today, “If inflation continues to ease broadly in line with the central bank’s July forecast, it is reasonable to expect further cuts in the policy rate. We will continue to assess the opposing forces on inflation and take our monetary policy decisions one at a time.”

The economy grew by 2.1% in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July. Together with the first quarter’s growth of 1.8%, the economy grew by about 2% over the first half of 2024. That’s a healthy rebound from our near-zero growth in the second half of 2023. The Bank’s July projection has growth strengthening further in the second half of this year. Recent indicators suggest there is some downside risk to this pickup. In particular, preliminary indicators suggest that economic activity was soft through June and July, and employment growth has stalled in recent months.

That makes this Friday’s Labour Force Survey data for August particularly important. We expect economic activity to slow in the third quarter to rough 1.3%, keeping the Bank in an easing posture through next year.

The unemployment rate has risen over the last year to 6.4% in June and July. The rise is concentrated in youth and newcomers to Canada, who find it more challenging to get a job. Business layoffs remain moderate, but hiring has been weak. The slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity.

Turning to price pressures, CPI inflation eased further to 2.5% in July, and the central bank’s preferred measures of core inflation also moved lower. With the share of CPI components growing above 3% around its historical norm, there is little evidence of broad-based price pressures. But shelter price inflation is still too high. Despite some early signs of easing, it remains the most significant contributor to overall inflation. Inflation remains elevated in some other services but has declined sharply in manufacturing and goods prices.

As outlined in the Bank of Canada’s Monetary Policy Report, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be more potent than expected. At the same time, with inflation getting closer to the target, the central bank must increasingly guard against the risk that the economy is too weak and inflation falls too much. Judging from comments made at today’s press conference, the BoC is at least as concerned about too much disinflation–taking the economy into a deflationary spiral.

Macklem said, “We are determined to bring inflation down to the 2% target and keep it there. We care as much about inflation being below the target as we do about it being above it. The economy functions well when inflation is around 2%.”

With continued easing in broad inflationary pressures, the Governing Council reduced the policy interest rate by 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation. “Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians”.
Bottom Line

Monetary policy remains restrictive, as the chart above shows. While the target overnight rate is now 4.25%, core inflation is only roughly 2.4%. Real interest rates remain too high for the economy to reach its potential growth pace of about 2.5%. Weaker growth implies a continued rise in unemployment and excess supply in other sectors.

In separate news, the US released data showing that US job openings fell to their lowest level since January 2021, consistent with other signs of slowing demand for workers.

US job growth has been slowing, unemployment is rising, and job seekers are having greater difficulty finding work, fueling fears about a potential recession.

Federal Reserve policymakers have made it clear they don’t want to see further cooling in the labour market and are widely expected to start lowering interest rates at their next meeting in two weeks.

In other news, consistent with a global economic slowdown, oil prices have plunged to new 2024 lows. Weak oil prices are a harbinger of lower inflation, growth and mortgage rates.

Bonds rallied in the wake of the disappointing US data, taking the 5-year government of Canada bond yield down to a mere 2.89%, well below the 3.4% level posted when the Bank of Canada began cutting interest rates in June. This decline in market-driven interest rates reduces fixed-rate mortgage yields. Moreover, today’s cut in the overnight rate will be followed soon by a 25 basis point reduction in the prime rate to 6.45%, reducing floating rate mortgage yields as well.

The Bank of Canada has two more decision dates this year: October 23 and December 11. At those meetings, the Bank is widely expected to continue its quarter-point rate cuts, taking the overnight rate down to 4.0% at year-end and 2.75% next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Q2 Real GDP Growth A Bit Stronger Than Expected, But Per Capita Real GDP Falls for The Fifth Consecutive Quarter.

General Leslie Blais 1 Sep

Q2 Canadian Growth, Boosted By Record Population Gains, Slows In June And July

Canada’s economy grew a bit more than expected in the second quarter, but falling per-capita gross domestic product and softening household consumption assure the Bank of Canada that it will cut rates for a third consecutive meeting next week.

Canadian GDP rose 2.1% annually in the second quarter, beating the median estimate of 1.8% in a Bloomberg survey of economists and the Bank of Canada’s forecast of 1.5%. Q1 growth was revised up a tick to 1.8%. Q2 growth was the strongest since the first quarter of 2023 and was boosted by the sharp rise in population. Canada’s population grew by 1.3 million people last year to 40.8 million, according to Statistics Canada–its fastest annual pace in Canada since 1957. This is one of the world’s most extensive immigration programs as pressures mount on Trudeau’s government to slow future inflows.

At a 3.2% annual rate, Canada now ranks among the world’s fastest-growing countries, only behind a few African nations with high fertility rates. In 2022, the population grew 2.7%, or by 1.1 million people, a previous record.

According to Bloomberg News, “Only 2.4% of the increase last year came from net births, and the rest was driven by international migration, primarily non-permanent residents such as foreign workers and students. Without temporary immigration, Canada’s population growth would have been 1.2%.”

Political pressure is mounting for the government to cut the influx of temporary residents entering the country in the next few years, but the Bank of Canada recently revised up the federal government’s forecasts of population gains this year and next.

Canada’s economy benefited from strong population growth, but this surge put pressure on infrastructure and services, worsened housing shortages, and led to soaring rents. Concerns about the declining standard of living prompted the government to reduce its immigration targets, serving as a cautionary tale for advanced economies that rely on newcomers to prevent economic decline.

 

The 2.1% real GDP growth in Q2—up from 1.8% in the first quarter of the year—reflected higher government spending, business investment in non-residential structures (primarily in the oil and gas sector), machinery and equipment, and household spending on services. Growth was reduced by declines in exports, residential construction, and household spending on goods. Population growth outpaced the increase in household spending in the second quarter, and, as a result, per capita household expenditures fell 0.4% after rising 0.3% in the first quarter. On a per capita basis, GDP fell for the fifth consecutive quarter.

Despite federal and provincial programs to boost housing, residential construction declined, falling in eight of the last nine quarters. Housing investment was down 1.9% in Q2, the most significant decline since the first quarter of 2023. The decrease in the second quarter of 2024 was driven by lower investment in new construction (-1.6%), as work put in place for single-family dwellings and apartments fell, primarily in Ontario. Renovations fell 2.6%, and ownership transfer costs, representing the resale market, declined 1.1%, led by less activity in Ontario.

Monthly GDP updates, also released today, suggest that the relatively strong spring performance was followed by a slower summer, as a flat reading for June looks to be followed by a similar result in July. The early reading in July is an evident disappointment, given some hints that activity picked up last month, and it casts some serious doubt on the BoC’s above consensus call of 2.8% growth in the current quarter.

Bottom Line
This is the last major economic release before the Bank of Canada meets again on September 4. Traders in overnight markets put the odds of a rate cut at next week’s meeting at about 98%. Moreover, the US core personal consumption expenditures (PCE) inflation data, the Federal Reserve’s preferred measure of consumer inflation, was tame. The Fed will no doubt follow through with its first rate cut when they meet later this month. Some speculation is that they could reduce rates by more than a quarter-point.

The Bank of Canada has every reason to continue easing monetary policy on every decision date this year–September 4, October 23 and December 11. They won’t stop until the overnight rate, currently at 4.25%, reaches 2.75%, likely in the second half of next year. This will boost housing activity.

Please Note: The source of this article is from SherryCooper.com/category/articles/