Canadian Home Sales Rose in February as New Listings Increased Sharply

Latest News Kim Stenberg 16 Mar

New Listings Finally Show Some Life

Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales were up in February 2022 as buyers jumped on the first spring listings. The number of newly listed properties surged a welcome 23.7% from extremely depressed levels, hopefully portending a much-needed increase in supply that will continue for the spring selling season. National home sales rose 4.6% month-over-month in February as prices rose 3.5%, taking the y/y price gain to a record 29.2%.

In February, sales were up in about 60% of local markets, led by some big jumps in Calgary and Edmonton. The GTA also outperformed the national averages.

The actual (not seasonally adjusted) number of transactions in February 2022 came in 8.2% below the monthly record set in 2021. That said, as was the case in January and throughout the second half of 2021, it was still the second-highest level on record for that month.

New Listings

The pullback in new listings in January was reversed in February, rebounding by 23.7% m/m. The monthly gain was led by the GTA, Calgary and the Fraser Valley.

With sales up by quite a bit less than new listings in February, the sales-to-new listings ratio fell back to 75.3% after having shot up briefly to 89% in January. The February reading puts the measure roughly back in line with where it has been since the summer of 2020. The long-term average for the national sales-to-new listings ratio is 55.1%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in February 2022. The other third of local markets were in balanced market territory.

There were just 1.6 months of inventory on a national basis at the end of February 2022 — tied with January 2022 and December 2021 for the lowest level ever recorded. The long-term average for this measure is a little over five months.

 

Home Prices

There were just 1.6 months of inventory on a national basis at the end of February 2022 — tied with January 2022 and December 2021 for the lowest level ever recorded. The long-term average for this measure is a little over 5 months.

Compared to the national year-over-year increase, gains remain about on par in British Columbia, lower in the Prairies and Newfoundland & Labrador, a little lower in Quebec and Prince Edward Island, and a little higher in Ontario, New Brunswick and Nova Scotia. The regional differences under the surface of those provincial numbers can be seen in the table below.

 

 

Bottom Line

Canada has the most significant housing shortage in the G7. This began in late 2015 when the federal government decided it would target the entry of much larger numbers of economic immigrants. Canada is “underpopulated” and celebrates a growing population, unlike many other countries. There are many job vacancies to be filled, and more people means more economic growth and prosperity for Canada.

In mid-February, the federal government revised up its targets for immigration this year and next (see chart below), raising the spectre of even more significant housing shortages going forward. While CMHC announced an 8% rise in February housing starts this morning, home completions are not keeping up with the increase in household formation. The only solution is a sharp increase in new home construction for sale and rent. This requires local zoning regulations to increase housing density and measures to speed up the approval processes.

This month, the Bank of Canada began their rate-hiking cycle with much more to come. We believe they will raise the overnight rate again on April 13, with the likelihood of five more rate hikes this year. That would take the overnight rate up to 2.0% by yearend. The Ukraine War has added to future uncertainty, but it has also boosted inflation pressures and increased the risk of a marked economic slowdown. All in, home price pressures are likely to dissipate for the remainder of this year and well into next year.

   

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canada Reach Full Employment for February 2022

Latest News Kim Stenberg 11 Mar

Statistics Canada released the February Labour Force Survey this morning, reporting a much more significant than expected 336,600 net new jobs, with the unemployment rate falling a full percentage point to 5.5%. This is the first time the unemployment rate fell below its pre-Covid level and reinforces the expectation for another Bank of Canada rate hike in April and as many as five more increases this year. Last month’s recovery more than offsets the losses that coincided with the Omicron lockdowns in January and points to the continued resilience of the Canadian economy.

The loonie jumped on the news, as did Canadian government bond yields.

Other indicators point to an increasingly tight labour market in February. Total hours worked surged 3.6% to a record high, while the employment rate rose 1.0 percentage points to 61.8%. Gains were most notable in the hard-hit accommodation and food services sector (+114,000; +12.6%), and information, culture and recreation (+73,000; +9.9%) industries. Employment increases were widespread across provinces and demographic groups.

Average wages increased 3.1% from February 2020, significantly faster than the 2.4% rate recorded in January. That could signal that inflationary pressures, already intense, continue to build.

 

Bottom Line 

This Labour Force Survey was conducted in mid-February, before the start of the Ukrainian War. since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This will accelerate CPI inflation worldwide, which dampens consumer and business confidence and reduces family purchasing power. The war has also contributed to continuing supply disruptions, all of which point to increased uncertainty and potentially slower growth.

The Bank of Canada is likely to hike interest rates when it meets again on April 13 by 25 basis points. Any more than that is imprudent given the risk of an economic slowdown. The outlook for the remainder of this year is more uncertain and likely to be volatile, depending on how long the war lasts. Right now, the likelihood for another five or six rate hikes this year and a few more next year. This, however, is subject to change.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Bank of Canada Starts Hiking Rates, Signalling More to Come

Latest News Kim Stenberg 8 Mar

The Governing Council of the Bank of Canada raised the overnight policy rate target by a quarter percentage point in a widely expected move and signalled that more hikes would be coming. This is the first rate hike since 2018. In a cautious stance, the Bank announced it was continuing the reinvestment phase, keeping its overall Government of Canada bonds holdings on its balance sheet roughly stable.

The Bank’s press release highlighted the major new source of uncertainty provided by the unprovoked invasion of Ukraine by Russia and suggested that it is a new source of substantial inflation pressure. Prices for oil, metals, wheat and other grains have skyrocketed recently. Moreover, this geopolitical distention negatively impacts confidence worldwide and adds new supply disruptions that dampen growth. “Financial market volatility has increased. The situation remains fluid, and we are following events closely.”

The Bank commented that economies have emerged from the impact of the Omicron variant more quickly than expected. Demand is robust, particularly in the US.

“Economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand. In January, Canada’s labour market recovery suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.”

Canadian CPI inflation has risen to 5.1%, as expected in January, well below the 7.5% level posted in the US.” Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.”

The final paragraph of the Bank’s press release speaks with great clarity: “The policy rate is the Bank’s primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement the policy interest rate increases. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”

 

Bottom Line

The Bank of Canada has made a clear statement regarding the outlook for a normalization of interest rates. We expect a series of rate hikes over the next year. Expect another 25 basis point increase following the next meeting on April 13. The increased uncertainty and volatility arising from the war in Ukraine is front of mind worldwide. Still, it will not deter central banks from tightening monetary policy to forestall an embedded rise in inflation expectations.

The Bank of Canada has postponed Quantitative Tightening, for now, a prudent move in the face of geopolitical uncertainty.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

No Wonder the Bank of Canada Didn’t Hike Interest Rates Last Month

Latest News Kim Stenberg 4 Feb

Major Setback in Canada’s January Employment Report

Statistics Canada released the January Labour Force Survey this morning, reporting a much more extensive than expected decline in jobs last month. The Omicron shutdowns and restrictions took a much larger toll in Canada than expected, as employment fell 200,100 in January and the unemployment rate rose 0.5 percentage points to 6.5%.

Ontario and Quebec drove January employment declines, and accommodation and food services was the hardest-hit industry. In January, youth and core-aged women, who are more likely than other demographic groups to work in industries affected by the public health measures, saw the most significant impacts. Goods-producing sectors recorded a gain, led by construction.

We did not expect the Bank of Canada to hike rates in January because of the risk that Omicron restrictions would batter the economy at least temporarily. If we see a reversal in these declines in February, rate hikes could well commence. The Bank of Canada’s next policy-decision date is March 2. But we won’t see the Labour Force Survey for February until March 11. This could postpone lift-off by the BoC until the next meeting on April 13, when we will have both the February and March employment reports. This would put the first rate hike in April, exactly when the Bank’s forward guidance initially told us the hikes would begin. 

The timing of lift-off is subject to the incoming data. It is troubling that the US employment report, also released today for January, was surprisingly strong, in contrast. To be sure, the US did not impose Canadian-style Omicron restrictions last month, but the Omicron wave did depress US economic activity. It was expected to translate into weak hiring. It didn’t. 467,000 jobs were created in the US, and massive upward revisions suggest a fundamentally very strong US economy. With US companies desperate to hire and the most significant issue being the lack of qualified staff, wages are rising more sharply south of the border.

Canadian employment remains just over 30,000 above pre-pandemic levels, and the country has a strong track record of bouncing back after prior waves of the virus. Yet, today’s jobs numbers suggest a tough start for the Canadian economy in the first quarter. Hours worked — which is closely correlated to output — fell 2.2% in January, and the number of employees who worked less than half their usual hours jumped by 620,000. January also saw the first drop in full-time employment — down 82,700 — since June.

Average hourly wages grew 2.4% (+$0.72) on a year-over-year basis in January, down from 2.7% in November and December 2021 (not seasonally adjusted). The January 2022 year-over-year change was similar to the average annual wage growth of 2.5% observed in the five years from 2015 to 2019.

The concentration of January 2022 employment losses in lower-wage industries did not significantly impact year-over-year wage change, partly because employment in these industries experienced similar losses in January 2021 as a result of the third wave of COVID-19.

 

Bottom Line 

There remains uncertainty regarding when (not if) the Bank of Canada will begin to renormalize interest rates. Canadian swaps trading suggests markets are still expecting a hike on March 2, with five more hikes over the next year. Potential homebuyers are certainly anxious to get in under the wire.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

BANK OF CANADA RATE ANNOUNCEMENT

Latest News Kim Stenberg 26 Jan

NO RATE HIKE UNTIL MARCH – BANK ASSURES INFLATION WILL RETURN TO 2% OVER 2023-2024

 

While markets were 70% certain the Bank would hike their overnight target rate today, we remained of the view that the Governing Council would hold off until March or April because of the slowdown in first-quarter growth arising from the Omicron restrictions. The Bank announced today that economic slack in the economy had been absorbed more rapidly than expected in late October when they last met. “Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, the Governing Council judges the economy is now operating close to its full capacity.”

Consequently, the Bank now believes that emergency measures arising from the pandemic are no longer necessary. They clearly state that a rising path for interest rates will be required to moderate domestic spending growth and bring inflation back to target. Being mindful that the increasing spread of Omicron will dampen spending in the first quarter, they decided to keep the policy rate unchanged today and to signal that rates will rise going forward. “The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.”

Notably, the Bank also suggested that another vital policy measure to reduce demand and thereby control inflation is “quantitative tightening” (Q.T.), reducing the central bank’s holdings of Canadian government bonds on its balance sheet. This selling of bonds also raises interest rates. “The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.”

The Bank of Canada is very concerned about maintaining its hard-won inflation-fighting credibility. Remember that while Canadian inflation is at a 30-year high–as it is in the rest of the world–at 4.8%, Canadian inflation pales compared to the 7.0% rate in the U.S. and 6.8% rate in the U.K. (see chart below). It is also below the pace of the Euro area. The Bank stated that “CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”

Bottom Line

It surprises me that economists in Canada would expect the Bank to hike interest rates during a Covid lockdown without properly measured signalling beforehand. Bay St’s hysteria about inflation seems to have muddied thinking. The Bank will be taking out the big guns to get inflation under control. Overnight rate hikes begin at the next policy meeting on March 2 and then Quantitative Tightening shortly after that. The downsizing of the Bank’s balance could have even more dramatic effects on the shape of the yield curve, hiking longer-term interest rates.

In today’s policy statement and Monetary Policy Report, the Bank emphasized the strength of the housing market and the impact on inflation of the more than 20% rise in Canadian house prices last year. The MPR suggests that housing market activity strengthened again in recent months, led by a rebound in existing home sales. “Low borrowing rates and high disposable incomes continue to contribute to elevated levels of housing activity in the first quarter. At the same time, other factors that support demand, such as population growth, are also now picking up.”

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five or six times this year. This would take the overnight rate from 0.25% to 1.5% to 1.75%. It was 1.75% in February of 2020 before the pandemic easing began. Markets also expect two more rate hikes in 2023, taking the overnight rate to 2.25%.

Volatility in financial markets has surged this year. The FOMC, the US policy-making body, announces its decision at 2 PM ET today. No rate hike is expected yet, but the Fed will undoubtedly commit to serious rate hikes and balance sheet contraction in the coming months.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

December Home Sales Top Off Record Year

Latest News Kim Stenberg 17 Jan

Housing Affordability Erodes Further With Record-Low Supply

Housing affordability remains a huge political issue and with the Department of Finance working on the upcoming budget, no doubt measures to reduce home prices will be front and center. What we desperately need is dramatic increases in new housing construction, which has been woefully constrained by local zoning and city planning issues. These are not under the auspices of the federal government. So instead, bandaid measures that do not directly address the fundamental issue of a housing shortage will likely be forthcoming. More on that below.

Today the Canadian Real Estate Association (CREA) released statistics for December 2021 showing national existing-home sales rose edged higher on a month-over-month basis, constrained by limited supply. Excess demand pushed home prices up on the month by 2.5%, taking the 2021 home price index up a record 26.6% year-over-year.

Small gains in home sales in November and December followed a 9% surge in activity in October, placing sales in the final quarter of 2021between the highs and lows seen earlier and the year (see chart below). With the exception of month-over-month sales gains in Calgary and the Fraser Valley, most other large markets mirrored the national trend of little change between November and December. The actual (not seasonally adjusted) number of transactions in December 2021 came in 9.9% below the record for that month set in 2020. That said, as has been the case throughout the second half of 2021, it was still the second-highest level on record for the month.

On an annual basis, a total of 666,995 residential properties traded hands via Canadian MLS® Systems in 2021. This was a new record by a large margin, surpassing the previous annual record set in 2020 by a little more than 20%, and standing 30% above the average of the last 10 years.

 

New Listings

The number of newly listed homes fell 3.2% in December compared to November, with declines in Greater Vancouver, Montreal and a number of other areas in Quebec more than offsetting an increase in new supply in the GTA.

With sales little changed and new listings down in December, the sales-to-new listings ratio tightened to 79.7% compared to 77% in November. The long-term average for the national sales-to-new listings ratio is 54.9%.

Almost two-thirds of local markets were sellers’ markets based on the sales-to-new listings ratio being more than one standard deviation above its long-term mean in December 2021. The remaining one-third of local markets were in balanced market territory.

There were just 1.6 months of inventory on a national basis at the end of December 2021 — the lowest level ever recorded. The long-term average for this measure is a little more than 5 months.

Home Prices

In line with the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.5% on a month-over-month basis in December 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 26.6% on a year-over-year basis in December.

Looking across the country, year-over-year price growth has crept back above 25% in B.C., though it remains lower in Vancouver, close to on par with the provincial number in Victoria, and higher in other parts of the province.

Year-over-year price gains are still in the mid-to-high single digits in Alberta and Saskatchewan, while gains are running at about 12% in Manitoba.

Ontario saw year-over-year price growth remain above 30% in December, with the GTA continuing to surge ahead after trailing other parts of the province for most of the pandemic.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City was only about half that.

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 11% year-over-year.

Bottom Line–We Are In The Political Season

The Bank of Canada conducted a recent study of residential mortgage originations at federally regulated financial institutions since 2014 to determine the share and financial characteristics of mortgage-financed homebuying by type of purchaser: first-time homebuyers; repeat buyers (the so-called move-up market); and investors.

First-time homebuyers are the largest group, generally accounting for roughly half of all mortgage purchases since 2014. Repeat homebuyers (those that discharged their previous mortgage when they took a new mortgage) comprised 31% of all mortgaged buyers over the same period. Investors having multiple mortgages represent 19% of purchases since 2014. Investors without mortgages are not included in the data, so foreign investors who might have borrowed money outside of Canada are not included.

The chart below shows that since 2015, the share of first-time homebuyers has fallen from over 52% to less than 48% of all mortgaged homebuying, while the share of repeat buyers is up slightly, and the share of investors has risen from under 18% to over 20%. Most of the rise in investor activity was in 2017 and 2021.

The Bank of Canada concludes that the increased presence of investors in the housing market has augmented demand and “may reflect a belief that house prices will continue to rise in value…By exacerbating so-called boom-bust cycles in housing markets, investors could thus be a source of instability for the financial system and the economy more broadly. At the same time, investors are an important source of housing rental supply. We need to do further research to examine the delicate balance between adding to rental supply while removing new builds and resale supply in a housing market that already has supply constraints.”

The Ministry of Housing and Diversity and Inclusion, in partnership with the Canada Mortgage and Housing Corporation (CMHC), according to a Financial Post article dated January 12, is concerned about “speculative investing” in housing, “prompting Canadians to overbid on properties, borrow beyond what they can afford, and push home prices even higher.”

“By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.” Currently, investors must make a 20% down payment.

It looks like the Feds may well raise the minimum down payments on investment property loans. They are also considering a limitation on the sources of funding for these properties.

What the Canadian housing market needs is substantial new affordable housing construction. Impeding this is the long and tortuous planning process and local government zoning rules. Actions taken to reduce housing demand in the face of nearly a million new immigrants coming to Canada in 2021 and 2022, if severe enough, could throw the whole economy into recession, particularly given that the Bank of Canada is on the precipice of hiking interest rates. The wealth and liquidity of millions of Canadian households are tied up in housing, so the government must take care not to push demand restrictions too far, especially since condo investments augment the very tight rental markets.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Strong December Jobs Report in Canada

Latest News Kim Stenberg 7 Jan

Statistics Canada released the December Labour Force Survey this morning, reporting employment gains of 54,700 last month–double market expectations. The unemployment rate fell to 5.9% from the 6.0% rate posted in November and is only 0.2 percentage points above the 5.7% rate posted in February 2020 before the pandemic began.

More people were working full-time in December, particularly core-aged men aged 25 to 54. Most of the employment growth was in Ontario. Nationally, gains were driven by the construction and educational services industries.

After having regained its pre-COVID level for the first time in November, total hours worked were little changed in December.

Full-time employment rose by 123,000 (+0.8%) in December, with most of the increase occurring among men of core working age (+95,000; +1.6%). In comparison, the number of people working part-time declined (-68,000; -1.9%). Since June, full-time employment has trended up and was 248,000 (+1.6%) higher than its pre-pandemic February 2020 level in December. In contrast, part-time employment has been mostly flat since June and remained at virtually the same level as in February 2020.

Average hourly wages increased 2.7% (+$0.80) on a year-over-year basis in December, similar to the average pace of wage growth observed from 2017 to 2019 (+2.6%). However, inflation accelerated considerably in 2021.

The number of Canadians unemployed for 27 weeks or more fell for the second consecutive month (-25,000; -8.0%) and stood at 293,000 in December. While long-term unemployment fell in each of the previous two months, it accounted for a substantially higher share of total unemployment in December (24.1%) than in February 2020 (15.6%), before the onset of the pandemic.

The labour underutilization rate—the proportion of people in the potential labour force who are unemployed; want a job but have not looked for one; or are employed but working less than half of their usual hours—fell 0.4 percentage points to 12.0% in December, the lowest rate observed since the onset of the pandemic. While this remained 0.6 percentage points above the record low of 11.4% immediately before the pandemic in February 2020, it is within the range of monthly rates observed through 2018 and 2019, ranging from 11.5% to 12.2%.

In December, the decline in the labour underutilization rate was driven by a decrease in the number of people working less than half of their usual hours. The share of the population aged 15 years and older participating in the labour market held steady at 65.3% in December, virtually the same as before the pandemic.

Hence, there is little doubt that Canada is very close to full employment. This is what the Bank of Canada has been looking towards in making its first post-pandemic rate-hike decision.

Bottom Line 

The December Labour Force Survey was conducted before the recent Omicron restrictions. I believe it is unlikely that the Bank of Canada’s Governing Council will hike rates at its next meeting on January 26. Though some market participants are betting on a January lift-off, The Bank’s forward guidance remains no sooner than Q2 action, and there is little reason, at this uncertain time, for them to accelerate that decision. Moreover, if they want to prove their inflation-fighting credibility, they could hike at the following meeting on March 2. Odds are the likelihood of an April 13 lift-off.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Economic and Fiscal Update

Latest News Kim Stenberg 17 Dec

Federal Fiscal Update: Canada has Weathered the Pandemic Storm Relatively Well

Finance Minister Chrystia Freeland extolled the performance of the Canadian economy in response to the extraordinary support provided by the federal fiscal authorities and the Bank of Canada in the past 21 months. The economic recovery has been the second strongest in the g-7, and the death rate from Covid-19 was the second-lowest. Emergency spending by the federal government was enormous, but the federal government maintained its triple-A credit rating. The Canadian government on Tuesday cut its deficit forecast for the current fiscal year, citing higher tax revenues and less emergency aid spending while earmarking new funds to fight the Omicron coronavirus variant.

“As we look ahead, we are mindful of elevated inflation,” Freeland said in the forward of the update. “We know inflation is a global phenomenon driven by the unprecedented challenge of re-opening the world’s economy. Turning on the global economy is a good deal more complicated than turning it off. We, like other countries, are experiencing the consequences of a time unlike any other.”

Here are some of the key forecasts presented in the fiscal update:

  • The budget deficit came in at $327.7 billion in the last fiscal year (FY) 2020-21–almost $27 billion less than forecast in the spring budget. As it turns out, revenue came in $20 billion stronger than expected, while expenses were $6 billion lower than expected.
  • This year’s red ink is expected to be $144.5 billion versus the $154.7 billion forecast in April.
  • Canada’s debt-to-GDP ratio at 47.5% last FY will peak at 48% this FY versus 51.2% expected in April and fall subsequently to 44% in FY 2026-27. This compares to the pre-pandemic levels of roughly 31%.

“It has been a hard 21 months,” said Freeland. “As we brace ourselves for the rising wave of Omicron, we know that no one wants to endure new lockdowns,” Finance Minister Chrystia Freeland said in prepared remarks.

The Trudeau Liberals are pointing to improvements in the labour market, personal incomes and corporate profits as it forecasts tens of billions of dollars in additional revenue annually through 2026.

There is $13 billion in additional spending since the budget aimed at “finishing the fight against COVID-19” and another $4.5 billion in provisions for any Omicron response this fiscal year. There is $1.7 billion for rapid COVID tests in the fiscal update and $2 billion for COVID therapeutics and treatments. In a nod to the persistence of COVID, the previously announced extensions of the wage, rent and recovery benefits in the fall will put another $6.7 billion on the COVID tab this fiscal year.

When it comes to feeding Canada’s economic growth in the years to come, Ottawa is touting the importance of immigration to address labour shortages. The fiscal update earmarks $85 million in the 2022-23 fiscal year to speed up the application process to bring in workers for key industries hit by labour shortage coming out of the pandemic.

The “Underused Housing Tax Budget 2021” announced the government’s intention to implement a national, annual 1.0% tax on the value of non-resident, non-Canadian-owned residential real estate in Canada that is considered vacant or underused. It is proposed that the tax be effective for the 2022 calendar year.

 

Bottom Line

Today’s fiscal update document may well be most notable in what it omitted. There was no mention of the many new spending promises marked in the summer’s Liberal election platform. Those promises added up to $78 billion over five years.

The Opposition parties in the House of Commons harped on rising inflation and its negative impact on Canadian households and businesses. To be sure, the Trudeau government is not responsible for the surge in global inflation arising from the supply disruptions, labour shortages and enormous pent-up demand. Still, with the Bank of Canada poised for rate hikes next year, the Liberals could well be accused of stoking inflation with additional fiscal stimulus. We will undoubtedly hear more on the election promises when the government’s 2022 budget is announced, likely sometime this spring.

 

Dr. Sherry Cooper
Chief Economist – Dominion Lending Centres

Canadian Homebuyers Trying to Beat Rate Hikes

Latest News Kim Stenberg 16 Dec

Housing Demand Outpaces Supply

Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose 0.6% in November following the whopping 8.6% surge the month before. Sales could have been higher had it not been for the limited supply of homes for sale. Homebuyers are anxious to finalize purchases before the Bank of Canada hikes interest rates next year.  Across the country, sales gains in Calgary, Edmonton, the B.C. interior, Regina and Saskatoon offset declines in activity in the GTA and Montreal.

The actual (not seasonally adjusted) number of transactions in November 2021 was firm historically, edging down a scant 0.7% on a year-over-year basis, missing the 2020 record for that month by just a few hundred transactions.

On a year-to-date basis, some 630,634 residential properties have traded hands via Canadian MLS® Systems between January and November 2021, far surpassing the annual record 552,423 sales for all of 2020.

“The fact is that the supply issues we faced going into 2020, which became much worse heading into 2021, are even tighter as we move into 2022. Interest rate hikes will make it even harder for new entrants to break into the market next year, even though activity may remain robust as existing owners continue to move around in response to all of the changes to our lives since COVID showed up on the scene. As such, the issue of inequality in the housing space will remain top of mind. One wildcard will be what policymakers decide to do with the national mortgage stress test, which could act as a kind of cushion against rising rates for young and/or first-time buyers. It could also make things that much harder for them,” said Shaun Cathcart, CREA’s Senior Economist.

New Listings

The number of newly listed homes rose by 3.3% in November compared to October, driven by gains in a little over half of local markets, including the GTA, Lower Mainland, Montreal, and many markets in Ontario’s Greater Golden Horseshoe.

With new listings up by more than sales in November, the sales-to-new listings ratio eased a bit to 77% compared to 79.1% in October. The long-term average for the national sales-to-new listings ratio is 54.9%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio being more than one standard deviation above its long-term mean. The other one-third of local markets were in balanced market territory.

There were just 1.8 months of inventory on a national basis at the end of November 2021, tied with March 2021 for the lowest level ever recorded. The long-term average for this measure is more than 5 months.

Home Prices

In line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.7% on a month-over-month basis in November 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 25.3% year-over-year in November.

Year-over-year price growth has crept back up to nearly 25% in B.C., though it remains lower in Vancouver, on par with the provincial number in Victoria, and higher in other parts of the province.

Year-over-year price gains are still in the mid-to-high single digits in Alberta and Saskatchewan, while gains have risen to about 13% in Manitoba.

Ontario saw year-over-year price growth hit 30% in November, with the GTA continuing to surge ahead after trailing most other parts of the province for most of the pandemic.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City was only about half that.

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (lower in St. John’s).

Bottom Line–Lots of News Today

Canada continues to contend with one of the developed world’s most severe housing shortages; as our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal and provincial levels. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US posted a year-over-year inflation rate for November at 6.8%, up from 6.2% posted the month before. This undoubtedly led the US Federal Reserve to issue a hawkish statement today, intensifying their battle against inflation. They announced that they will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.

According to Bloomberg News, “The faster pullback puts Powell in a position to raise rates earlier than previously anticipated to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new omicron strain, saying that risks to the economic outlook remain, including from new variants of the virus.”

On more positive news, Canada’s inflation rate held steady at 4.7% y/y in November, well below the pace in the US. Excluding food and energy products, CPI ticked slightly lower to 3.1% from a year ago in November, or 2.7% on an annualized seasonally adjusted basis relative to the pre-shock February 2020 level. Roughly half of that 2.7% can still be attributed to rising expenses related to home-owning and car purchase or leasing. But the breadth of inflation pressure has also widened, with 58% of the consumer basket seeing faster-than-2% annualized growth in November from pre-pandemic (2019) levels on average over the last three months. That compares to 47% in February 2020. The broadening is expected to carry on in 2022 as rising input, transport and labour expenses continue to flow through supply chains for a wider swath of goods and services. Further disruptions to supply chains and energy markets from Omicron and the BC flood later in November are expected to add to price uncertainties in the near term.

In a speech today, Governor Tiff Macklem of the Bank of Canada assured the public that the Bank of Canada would remain the country’s number-one inflation fighter. Macklem clarified that flexibility in their new mandate won’t apply in situations — like now — when inflation is considerably above target.

At a press conference after the speech, Macklem noted he wasn’t comfortable with current elevated levels of inflation and the “time is getting closer” for policymakers to move away from the forward guidance. Markets are pricing in five interest rate hikes next year by the Bank of Canada.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

BANK OF CANADA RATE ANNOUNCEMENT: Holds Rate Target Steady until April to September 2022

Latest News Kim Stenberg 8 Dec

The Bank of Canada decided to keep its target for the overnight rate at 0.25%, in line with forecasts and to maintain its forward guidance, which sees a rise in the overnight rate sometime in the middle quarters of 2022. Until then, policymakers vowed to provide an adequate degree of monetary stimulus to support Canada’s economy and achieve the inflation target of 2%. On the price front, the ongoing supply disruptions continue to support high inflation rates, but gasoline prices, which have been a significant upside risk factor, have recently declined. Still, the BoC expects inflation to remain elevated in the first half of 2022 and ease towards 2% in the second half of the year. Finally, recent economic indicators suggested the economy had considerable momentum in Q4, namely in the labour and housing markets. Still, the omicron variant of the coronavirus and the devastation left by the floods in British Columbia has added to downside risks.

The Bank’s press release went on to say, “The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable 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% inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”

In October, the Bank ended its bond-buying program and is now in its reinvestment stage. It maintains its Government of Canada bonds holdings by replacing securities as they mature.

Bottom Line

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five times next year. This would take the overnight rate from 0.25% to 1.5%. I think this might be overly hawkish, expecting a more cautious stance of three rate hikes next year to a year-end level of 1.0%. This expectation has already had an impact on economic activity. According to local real estate boards reporting in the past week, November home sales were boosted by buyers hoping to lock in mortgage rates before they rise further next year.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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