Canadian Inflation Pressures Mount in August, Even As They Eased in the U.S.

Latest News Kim Stenberg 15 Sep

Annual Inflation in August Rises to 4.1% in Canada — But Area We Close to the Peak?

 

Today’s release of the August Consumer Price Index (CPI) for Canada posted another uptick in the year-over-year (y/y) inflation rate, but hidden in the details was some support for the Bank of Canada’s position that the spike in inflation is transitory. The Bank has long suggested that the rise in prices will prove to be the result of base effects (y/y comparisons that are biased upward by the temporary decline in prices one year ago), supply disruptions, and the surge in pent-up demand accompanying the reopening of the global economy.

This morning’s Stats Canada release showed that consumer price inflation surged to a 4.1% y/y pace last month, above the 3.7% pace recorded in June, and the 3.1% pace in May. This is now the fifth consecutive month in which inflation is above the 1%-to-3% target band of the Bank of Canada.

The good news, however, is that the monthly rise in prices slowed on a (seasonally adjusted basis) in August to 0.4% compared to the 0.6% rise in July. As well, core measures of inflation preferred by the Bank of Canada, which exclude food and energy, are considerably lower than the all-items measures of the CPI. All three of the BoC’s core inflation measures rose on a y/y basis last month to an average level of 2.6% vs. the all-items level of 4.1%

The major contributors to the surge in inflation didn’t change in August. Gasoline prices rose a whopping 32.5% y/y, owing to production cuts and disruptions in the wake of Hurricane Ida. This more than offset the decline in demand due to the rise in the Delta variant, causing a sharp slowdown in China and other hard-hit regions. The homeowners’ replacement cost index, related to the price of new and existing homes, rose to 14.3% in August–the largest annual increase since September 1987. Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, rose 14.3% year over year in August. The easing of travel restrictions boosted demand for airfares and hotel accommodation when labour shortages and rising energy costs pressed these industries. Meat prices have also surged in the past year as restaurant demand spiked. Auto sector prices continued to rise sharply as the inventories of new vehicles, disrupted by the chip shortage, hit new record lows.

Bottom Line

As the first chart below shows, the US has posted the highest level of inflation in the G-7, as the economic rebound there has outpaced that of its counterparts where Covid restrictions were more pervasive. Yet, yesterday’s release of the US August CPI report showed a marked slowdown in inflation pressure, leading some to suggest that the transitory view of inflation has been validated.

One thing to watch, however, is wage rates. Job vacancies and labour shortages have pushed up wages in some sectors, especially in the hardest-hit low-wage hospitality and leisure sectors, including food services and accommodation. If price pressures become validated by enough wage inflation, we run the risk of inflation becoming embedded. Wage-price spiraling has not been a factor since the 1970s when labour unions were much stronger and labour had much more pricing power.

Financial markets appear to be sanguine about the prospect for inflation-induced rate hikes in the near term. Bond yields remain historically low. Next week, we will hear more from the Fed on this subject as the policy-making group releases its report on Wednesday, September 22.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Good News on the Canadian Jobs Front

Latest News Kim Stenberg 10 Sep

August Employment Report Showed Continuing Recovery

This morning, Statistics Canada provided us with some much-needed good news on the economic front following last week’s surprisingly dismal Q2 GDP report. Canada’s labour market continued its recovery in August, especially in the hardest-hit food services and accommodation sectors. The August Labour Force Survey (LFS) data reflect conditions during the week of August 15 to 21. By then, most regions of Canada had lifted many of the Covid-related restrictions. However, there were capacity restrictions in such indoor locations as restaurants, gyms, retail stores and entertainment venues. Also, for the first time since March 2020, border restrictions were lifted for fully vaccinated non-essential travellers from the US.

However, the reopening of the Canadian economy has been creaky, owing to supply constraints and difficulty in filling job vacancies in sectors that require high-contact interfaces, especially with the concern regarding a fourth wave of the delta variant. Nevertheless, today’s LFS indicated that employment grew last month by 90,200, the third consecutive monthly gain, further closing the pandemic gap. Employment is now within 156,000 (-0.8%) of its February level, the closest since the onset of the pandemic. Moreover, most of the net new jobs were in full-time work. Increases were mainly in the service sector, led by accommodation and food services.

The jobless rate fell from 7.5% in July to 7.1% in August. The unemployment rate peaked at 13.7% in May 2020 and has trended downward since, despite some short-term increases during the fall of 2020 and spring of 2021. In the months leading up to the pandemic, the unemployment rate had hovered around historic lows and was 5.7% in February 2020.

The adjusted unemployment rate—which includes discouraged workers–those who wanted a job but did not look for one—was 9.1% in August, down 0.4 percentage points from one month earlier.

Employment increased in Ontario, Alberta, Saskatchewan and Nova Scotia in August. All other provinces recorded little or no change. For the third consecutive month, British Columbia was the lone province with employment above its pre-pandemic level. Compared with February 2020, the employment gap was largest in Prince Edward Island (-3.4%) and New Brunswick (-2.7%). The table below shows the jobless rates by province.

Bottom Line 

The Bank of Canada this week once again suggested that it would not begin to tighten monetary policy until the economy returned to full capacity utilization, which they estimate will not be until at least the second half of next year. Employment will need to surpass pre-pandemic levels before complete recovery is declared because the population had grown since the start of the crisis 18 months ago.

Although August was another solid month for the jobs market, there is a wide disparity across sectors of the job market in the degree to which they have recovered from the effects of the pandemic. The table below shows the employment change in percentage terms by sector compared with February 2020.

Sectors where remote work has been widespread–such as professional, scientific and technical services, public administration, finance, insurance and real estate–have seen a net gain in employment. However, in high-touch sectors that were deemed nonessential, the jobs recovery has been far more constrained. This is especially true in agriculture, accommodation and food services, and recreation.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

BANK OF CANADA RATE ANNOUNCEMENT: BoC Responds to Weak Q2 Economy – Holding Policy Steady

Latest News Kim Stenberg 8 Sep

As we await the quarterly economic forecast in next month’s Monetary Policy Report, the Bank of Canada acknowledged that the Q2 GDP report, released last week, caught them off-guard. In today’s policy statement, the Governing Council of the Bank said, “In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery” (see chart below).

Bank Says CPI Inflation Boosted By Temporary Factors–Maybe

Financial conditions remain highly accommodative around the globe. And the Bank today continued to assert that the rise in inflation above 3% is expected, “boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen but by less than the CPI.”

The Governing Council again stated the Canadian economy still has considerable excess capacity, and the recovery continues to require extraordinary monetary policy support. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Concerning forward guidance, the Bank said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022.” This seems to be a placeholder statement, allowing the Bank to reassess the outlook next month, possibly delaying the guidance if the economy continues to perform below their July projection.

Similarly, the Bank maintains its Quantitative Easing program at the current pace of purchasing $2 billion per week of Government of Canada (GoC) bonds, keeping interest rates low across the yield curve. “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective”.

Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but bond markets seem willing to accept their view for now. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .80%. In contrast, the Canadian dollar had weakened significantly since late June when it was over US$0.825 to US$0.787 this morning. Clearly, the Bank of Canada is committed to keeping Canadian interest rates low for the foreseeable future. 

The next Bank of Canada policy decision date is October 27th. Stay tuned for the Canadian employment report this Friday.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Home Sales Slow for Fourth Consecutive Month

Latest News Kim Stenberg 16 Aug

Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 3.5% nationally from June to July 2021–the fourth consecutive monthly decline. Over the same period, the number of newly listed properties dropped 8.8%, and the MLS Home Price Index rose 0.6% and was up 22.2% year-over-year.

While sales are now down a cumulative 28% from the March peak, Canadian housing markets are still historically quite active (see Chart below). In July, the decline in sales activity was not as widespread geographically as in prior months, although sales were down in roughly two-thirds of all local markets. Edmonton and Calgary led the slowdown, but these cities didn’t experience falling sales until recently. In Montreal, in contrast, where sales began to moderate at the start of the year, activity edged up in July.

The actual (not seasonally adjusted) number of transactions in July 2021 was down 15.2% on a year-over-year basis from the record for that month set last July. July 2021 sales nonetheless still marked the second-best month of July on record.

“While the moderation of sales activity continues to capture most of the headlines these days, it’s record-low inventories that should be our focus,” said Cliff Stevenson, Chair of CREA. Most markets are in sellers’ market territory.

New Listings

The number of newly listed homes dropped by 8.8% in July compared to June, with declines led by Canada’s largest cities – the GTA, Montreal, Vancouver and Calgary. Across the country, new supply was down in about three-quarters of all markets in July.

This was enough to noticeably tighten the sales-to-new listings ratio despite sales activity also slowing on the month. The national sales-to-new listings ratio was 74% in July 2021, up from 69.9% in June. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, the tightening of market conditions in July tipped a small majority of local markets back into seller’s market territory, reversing the trend of more balanced markets seen in June.

Another piece of evidence that conditions may be starting to stabilize was the number of months of inventory. There were 2.3 months of inventory on a national basis at the end of July 2021, unchanged from June. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is twice where it stands today.

 

 

 

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.6% month-over-month in July 2021, continuing the trend of decelerating month-over-month growth that began in March. That deceleration has yet to show up in any noticeable way on the East Coast, where property is relatively more affordable.

Additionally, a more recent point worth noting (and watching) just in the last month has seen prices for certain property types in certain Ontario markets look like they might be re-accelerating. This could be in line with a re-tightening of market conditions in some areas.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 22.2% on a year-over-year basis in July. While still a substantial gain, it was, as expected, down from the record 24.4% year-over-year increase in June. The reason the year-over-year comparison has started to fall is that we are now more than a year removed from when prices really took off last year, so last year’s price levels are now catching up with this year’s, even though prices are currently still rising from month to month.

Looking across the country, year-over-year price growth averages around 20% in B.C., though it is lower in Vancouver and higher in other parts of the province. Year-over-year price gains in the 10% range were recorded in Alberta and Saskatchewan, while gains are closer to 15% in Manitoba. Ontario sees an average year-over-year rate of price growth in the 30% range. However, as with B.C., gains are notably lower in the GTA and considerably higher in most other parts of the province. The opposite is true in Quebec, where Montreal is in the 25% range, and Quebec City is in the 15% range. Price growth is running a little above 30% in New Brunswick, while Newfoundland and Labrador is in the 10% range.

Bottom Line

Sales activity will continue to gradually cool over the next year, but it will take higher interest rates to soften the housing market in a meaningful way. Local housing markets are cooling off as prospective buyers contend with a dearth of houses for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Job Growth Continued in July as Unemployment Rate Fell to 7.5%

Latest News Kim Stenberg 9 Aug

Canada’s labour market continued its recovery in July as health restrictions were lifted, but the gains were shy of expectations. The report signals the economic rebound is intact and shows companies are finding workers as pandemic restrictions vanish. The smaller-than-expected increase, though, could cast some doubt on the pace of hiring. The gains last month were largely in full-time private-sector employment, particularly among youth and women.

The  Labour Force Survey showed employment rose 94,000 (+0.5%) in July, adding to the 231,000 (+1.2%) increase in June. The two months reversed the 275,000 jobs lost during lockdowns in April and May. Of the three million jobs lost at the start of the crisis, 2.74 million have now been recovered. The employment rate was 60.3% in July, still 1.5 percentage points below the pre-pandemic rate.

The unemployment rate fell 0.3 percentage points to 7.5%, matching the post-February 2020 low hit earlier this year.

Employment growth in July was almost entirely in Ontario. Youth aged 15 to 24 and core-aged women aged 25 to 54 accounted for the bulk of gains in the month. Women were hardest hit by the pandemic’s loss of childcare/schooling, so the make-up of employment gains will likely be skewed towards them.

The number of employed people who worked less than half their usual hours fell by 116,000 (-10.1%) in July. Total hours worked were up 1.3% and were 2.7% below their pre-pandemic level.

Self-employment was little changed in July and was down 7.1% (-205,000) compared with February 2020. The number of self-employed workers has seen virtually no growth since the onset of the pandemic.

The number of employees in the public sector fell by 31,000 (-0.7%) in July, the first decline since April 2020. Nearly half of the monthly decrease was in Quebec (-15,000; -1.5%) and was partly due to a larger-than-usual summer decrease in the number of educational services workers. Despite this decline, public sector employment at the national level was up 150,000 (+3.8%) compared with February 2020.

In terms of provinces, Ontario accounted for the majority of July’s improvement, as employment increased by 72k in the province. Manitoba (+7k), Nova Scotia (+4k), and Prince Edward Island (+1k) also saw employment advance on the month. New Brunswick (-3k), Saskatchewan (-5k), and B.C. (-3k) lost jobs in July.

Lastly, total hours worked improved by a robust 1.3% in July, but it is still 2.7% below its pre-pandemic level.

The Canadian jobs report coincided with the release on Friday of surprisingly strong U.S. payroll numbers, where 943,000 positions were added last month.

 

Bottom Line 

According to the Bank of Canada, employment will need to surpass pre-pandemic levels before complete recovery is declared because the population has grown since the start of the crisis.

July was another solid month for the Canadian labour market as the loosening of public health restrictions across the country spurred hiring activity. That said, capacity limits and travel restrictions held back high-touch businesses from operating at full capacity, limiting job gains in July.

Indeed, employment in high-touch services is still well below pre-pandemic levels. Even with gains in July, accommodation and food services employment was nearly 20% below its February 2020 level. It’s important to note that July’s labour survey was taken during the week of July 11th, and restrictions in some provinces were loosened at the end of that week. So, we could see the recovery continue to strengthen in August.

There are growing headwinds, however. Concerns around the Delta variant are rising, and some countries, harder hit by the virus, are re-imposing restrictions. Canada has not yet been compelled to do so due to low hospitalization levels, but cases are rising. While the impressive vaccination drive should keep hospitalization rates low, health worries could dent consumer and business confidence. Indeed, the economy’s path forward will be closely linked to the evolution of the pandemic.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Jobs Market Rebounds in June as Lockdown Eases

Latest News Kim Stenberg 12 Jul

This morning, Statistics Canada released the June 2021 Labour Force Survey showing employment rose 230,700 (1.2%) in June, rebounding from a cumulative decline over the previous two months of 275,000. Total hours worked were little changed. The national unemployment rate fell 0.4 percentage points to 7.8%.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.

The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.

Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

Gains were driven by private-sector employees, while self-employment declines.

The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

The employment rate remains below pre-pandemic levels.

To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

Number of Canadians who worked from home drops by nearly 400,000 

Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.

Bottom Line 

The jobs report is the last major piece of economic data before next week’s Bank of Canada policy decision, where it’s expected to continue paring back its stimulus efforts. The Bank of Canada is among the first from advanced economies to shift to a less expansionary policy, having already cut its purchases of Canadian government bonds to $3 billion weekly from a peak of $5 billion last year.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Housing Continues to Moderate in May

Latest News Kim Stenberg 15 Jun

The Slowdown in Canadian Housing Continued in May

Today, the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 7.4% nationally from April to May 2021, building on the 11% decline in April. Over the same period, the number of newly listed properties fell 6.4%, and the MLS Home Price Index rose 1.0%, a marked deceleration from previous months.

Activity nonetheless remains historically high, but in contrast to March’s all-time record, it is now running closer to levels seen in the second half of 2020 (see chart below). Month-over-month declines in sales activity were observed in close to 80% of all local markets. It was a mixed bag of results, with a slowdown in sales observed in most large markets across Canada.

“While housing markets across Canada remain very active, we now have two months of moderating activity in the books, and that goes for demand, supply and prices,” stated Cliff Stevenson, Chair of CREA. “More and more, there is anecdotal evidence of offer fatigue and frustration among buyers, and the urgency to lock down a place to ride out COVID would also be expected to fade at this point given where we are with the pandemic”.

 

New Listings

The number of newly listed homes declined by 6.4% in May compared to April. New listings were down in about 70% of all local markets in May.

The national sales-to-new listings ratio was 75.4% in May 2021, down slightly from 76.2% posted in April. The long-term average for the national sales-to-new listings ratio is 54.6%, so it remains historically high; although, it has been moderating since peaking at 90.7% back in January.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about a quarter of all local markets were in balanced market territory in May, measured as being within one standard deviation of their long-term average. The other three-quarters of markets were above long-term norms, in many cases well above.

As the chart below shows, Edmonton was one market in balance, and the Greater Vancouver Area was moving closer to balance, but others remain a seller’s market.

There were 2.1 months of inventory on a national basis at the end of May 2021, up from a record-low 1.7 months in March but still well below the long-term average for this measure of over 5 months.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 1% month-over-month in May 2021 – a noticeable deceleration. The most recent deceleration in month-over-month price growth has come from the single-family space compared to the more affordable townhome and apartment segments.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 24.4% on a year-over-year basis in May. Based on data back to 2005, this was another record year-over-year increase; although, it is not likely to go much higher.

While the largest year-over-year gains continue to be posted across Ontario, this is also where month-over-month price growth has been slowing the most. Meanwhile, price growth has continued to accelerate in some other parts of the country, thus reducing the year-over-year growth disparity between Ontario and other provinces.

Bottom Line

The near-uniform nature of the housing market activity (in what is usually a highly regionalized market) is still a key feature of this cycle. Indeed, 22 of 26 markets tracked by CREA saw sales fall in May, while all but one market saw the average transaction price up by double-digits from a year ago (sorry, Thunder Bay). Among the tightest markets in the country based on the sales-to-new listings ratio are the Okanagan and Kawartha Lakes; cottage country is still on fire.

The two-month slowdown in Canadian housing is welcome news. The OECD recently released a report showing that New Zealand, Canada and Sweden have the frothiest housing markets in the world. The UK and the US are near the top as well. Clearly, COVID led many around the world to alter their abode, driving prices higher almost everywhere.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Housing is Driving the Canadian Economy

Latest News Kim Stenberg 2 Jun

Housing Drove the Economic Expansion in Q1

 

Yesterday’s Stats Canada release showed that the economy grew at a 5.6% annualized rate in the first quarter, after a revised 9.3% pace in the final quarter of last year.  That was somewhat below economists’ expectations. Housing investment grew at an annualized 43% pace, by far the biggest impetus of the expansion. Residential investment now makes up a record proportion of GDP (see chart below). Compared with the first quarter of 2020, housing investment was up 26.5% and led the recovery. Growth in housing was attributable to an improved job market, higher compensation of employees, and low mortgage rates. After adding $63.6 billion of residential mortgage debt in the last half of 2020, households added $29.6 billion more in the first quarter of 2021.

Residential investment is a component of the Gross Domestic Product accounts and is technically called ‘gross fixed capital formation in residential structures’ by Statistics Canada.  Investment in residential structures is comprised of three components: 1) new construction, 2) renovations and 3) ownership transfer costs. The first two components are obvious.

The home-resale market’s contribution to economic activity is reflected in ‘ownership transfer costs.’ These costs are as follows:

  • real estate commissions–including realtors and mortgage brokerage fees;
  • land transfer taxes;
  • legal costs (fees paid to notaries, surveyors, experts etc.); and
  • file review costs (inspection and surveying).

The second chart below shows the quarterly percent change in the components of housing investment in inflation-adjusted terms. This chart illustrates the surge in existing home sales since the second quarter of last year (reflected in the red bar). Although the resale market has slowed since the third quarter of last year, it remains a driving force of economic expansion.

Growth in housing investment was broad-based. New construction rose 8.7% (quarter-over-quarter), largely driven by detached units in Ontario and Quebec. Ownership transfer costs increased 13.1%, with the rise in resale activities. Working from home and extra savings from reduced travel heightened the demand for, and scope of, home renovations, which grew 7.0% in the first quarter.

The increase in GDP in the first quarter of 2021 reflected the continued strength of the economy, influenced by favourable mortgage rates, continued government transfers to households and businesses, and an improved labour market. These factors boosted the demand for housing investment while rising input costs heightened construction costs.

The GDP implicit price index, which reflects the overall price of domestically produced goods and services, rose 2.9% in the first quarter, driven by higher prices for construction materials and energy used in Canada and exported. The sharp increase in prices boosted nominal GDP (+4.3%). Compensation of employees rose 2.1%, led by construction and information and cultural industries, and surpassed the pre-pandemic level recorded at the end of 2019.

Strength in oil and gas extraction, manufacturing of petroleum products, and construction industries led to a higher gross operating surplus for non-financial corporations (+11.5%). Higher earnings from commissions and fees bolstered the operating surplus of financial corporations (+3.9%), coinciding with the sizeable increases in the value and volume of stocks traded on the Toronto Stock Exchange (TSX).

Most aspects of final sales were solid in Q1, with consumers a bit stronger than expected (2.8% a.r.), government adding (5.8%), and net exports also contributing. In contrast, business investment was one real source of disappointment, with equipment spending surprisingly falling. But the biggest drag came from a drop in inventories, with this factor alone cutting growth 1.4 ppts in Q1, and versus expectations, it could add a touch. The good news is that this should reverse in Q2, supporting activity in the current quarter.

On the monthly figures, there were few big surprises. March’s initial flash estimate of +0.9% was nudged up in the official estimate to +1.1% as the economy began to re-open from the second wave. Tougher COVID public health rules slammed the brakes on Canada’s economy in April. Statistics Canada estimates gross domestic product shrank 0.8% in the month, representing the first contraction in a year and a weak handoff heading into the second quarter. April may well be followed by a soft May. Even so, we still expect a strong June will keep Q2 roughly flat overall and look for robust Q3 growth.

Bottom Line

In many respects, Q1 data is ancient history. We know with the resurgence in lockdowns, growth in Q3 will at best be flat. In the hopes that vaccinations will accelerate and COVID case numbers will continue to fall across the country, Q4 will likely see a strong resurgence in growth.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Housing Market Slowed in April as Renewed Lockdown Took its Toll

Latest News Kim Stenberg 17 May

The Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 12.4% nationally from March to April 2021. Over the same period, the number of newly listed properties fell 5.4%, and the MLS Home Price Index rose 2.4%.

While home sales fell month-over-month in April, largely due to the new lockdowns, April sales were still the strongest ever for that month and well above the 10-year monthly average.

Month-over-month declines in sales activity were observed in close to 85% of all local markets, including virtually all of B.C. and Ontario.

 

New Listings

The number of newly listed homes declined by 5.4% in April compared to March. In a market with historically low inventory, where sales activity depends on a steady supply of new listings each month, the synchronous gains in new supply and sales in March followed by synchronous declines in April suggest the slowdown in sales may be partially about the availability of listings as opposed to only a demand story. New listings were down in 70% of all local markets in April.

The national sales-to-new listings ratio eased back to 75.2% in April compared to a peak level of 90.6% back in January. That said, the long-term average for the national sales-to-new listings ratio is 54.5%, so it is currently still high historically. The good news is that it is moving in the right direction.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about a quarter of all local markets were in balanced market territory in April, measured as being within one standard deviation of their long-term average. The other three-quarters of markets were above long-term norms, in many cases well above.

There were 2 months of inventory on a national basis at the end of April 2021, up from a record-low 1.7 months in March but still well below the long-term average for this measure of a little more than 5 months.

In a separate release, Canadian housing starts fell to 268,600 annualized units in April from the blowout (334.8k) month in March. While down sharply month-over-month, this is still a solid level of new construction activity in Canada by historical standards. In fact, average annualized starts over the past six months run at the strongest level on record, topping building booms in the 1970s and 1980s. All regions but the Prairies and Atlantic Canada saw lower starts in April.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) climbed by 2.4% month-over-month in April 2021 – a historically strong gain but less than in February and March. Most of the recent deceleration in month-over-month price growth has come from the single-family space compared to the more affordable townhome and apartment segments.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 23.1% on a year-over-year basis in April. Based on data back to 2005, this was a record year-over-year increase.

The largest year-over-year gains continue to be posted across Ontario (around 20-50%), followed by markets in B.C., Quebec and New Brunswick (around 10-30%), and lastly by gains in the Prairie provinces and Newfoundland and Labrador (around 5-15%).

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average home price was slightly under $696,000 in April 2021, up 41.9% from the same month last year. That said, it is important to remember that the national average price dropped by 10% month-over-month last April as the higher-end of every market effectively shut down for a couple of months. That will serve to stretch these year-over-year comparisons over and above what is actually happening to prices until around June.

By segment: Single-detached remains extremely strong, but earlier signs that condo markets in the large cities were tightening up continue to play out. Condo prices were up 8.5% y/y in April, the strongest pace since mid-2018, and price gains are now running even stronger month-to-month in the biggest cities. We continue to expect these markets to come back stronger than most might think.

By region: It’s as close to wall-to-wall strength that we’ve probably ever seen in this country. Long-dormant markets like Calgary and Edmonton are awake again with prices up roughly 9% y/y; Toronto, Montreal and Vancouver remain strong as usual; some smaller markets (think Halifax, Moncton, Southwestern Ontario) are even stronger than the big cities; and cottage country is booming.

 

Bottom Line

Headlines will probably flag housing market declines in April, but don’t that fool you…this market is still robust across geography and segment, even if we’ve likely seen peak momentum. Activity will likely remain strong this summer, especially if the COVID restrictions are eased, and people begin to get their second vaccine.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canada’s Jobs Recovery Impaired by Third-Wave Virus Restrictions

Latest News Kim Stenberg 7 May

This morning, Statistics Canada released the April 2021 Labour Force Survey showing a major deterioration in the jobs market following the third-wave Covid containment measures. Employment fell by 207,100 (-1.1%) in April, and the unemployment rate rose 0.6 percentage points to 8.1%.

Employment declined in both full-time (-129,000; -0.8%) and part-time (-78,000; -2.3%) work. The number of employed people working less than half their usual hours increased by 288,000 (+27.2%).

The number of Canadians working from home grew by 100,000 to 5.1 million.

Total hours worked fell 2.7% in April, driven by declines in educational services, accommodation and food services, and retail trade.

The labour underutilization rate, which captures the full range of available people who want to work, rose 2.3 percentage points to 17.0% in April.

The number of Canadians unemployed for 27 weeks or more–the long-term unemployed–increased to 486,000. This group might well be the most scarred by the pandemic in terms of their job prospects and skill deterioration.

Hardest Hit By Industry Sector

In April, employment fell in several industries directly impacted by public health restrictions, namely retail trade (-84,000); accommodation and food services (-59,000); and information, culture and recreation (-26,000).

Accommodation and food services accounted for more than two-thirds (70.9%) of the overall employment gap (-503,000) compared with February 2020.

Employment increased in public administration (+15,000); professional, scientific and technical services (+15,000); and finance, insurance and real estate (+15,000), three industries where many activities can be performed remotely.

Employment in goods-producing industries was little changed in April.

Fewer people working in Ontario and British Columbia

Following gains over the previous two months, employment in Ontario fell 153,000 (-2.1%) in April.

Employment in British Columbia declined by 43,000 (-1.6%)—the first decrease since substantial employment losses in March and April 2020.

Employment increased in Saskatchewan and New Brunswick, while there was little change in all other provinces.

Bottom Line 

The third wave restrictions cut heavily into Canadian employment in April, mostly in line with expectations. However, in contrast to the mild impact on growth from second-wave restrictions, the latest drop may leave more of a mark on the broader economy, with full-time positions also hit this time. On a less downbeat note, the employment-to-population rate remains a full point above January’s level (at 59.6%). The participation rate is also higher than in the second wave at 64.9% (albeit down a bit from the pre-pandemic trend of 65.5%).

Looking ahead, as in prior waves of virus spread, employment will rebound once the government can ease containment measures. And that light at the end of the tunnel is getting closer, with vaccination rates ramping up. In the meantime, government support programs for those losing work remain in place and help put a floor under household purchasing power.

Canada’s economy remains about half a million jobs shy of pre-pandemic levels. The Canadian dollar rose to 82.36 cents US after the report. The yield on Canada’s 5-year bond yield dipped to 0.894%, down a few ticks from Thursday’s close.

The U.S. Labor Department also released soft jobs data Friday that were even more disappointing. U.S. payrolls increased by just 266,000, versus estimates for a 1 million gain.

 

 

 

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