12 Apr

Recent Signs Show Housing Activity Will Strengthen Meaningfully In April

General

Posted by: Jen Lowe

Recent Signs Show Housing Activity Will Strengthen Meaningfully In April
The Canadian Real Estate Association (CREA) announced today that national home sales for March were roughly flat, while new listings fell and prices stagnated. CREA analysts are confident that recent activity will harken stronger housing markets for the rest of this year.

There is significant pent-up demand for housing owing to rapid population growth and first-time homebuyers’ fears that prices will rise sharply once the Bank of Canada cuts interest rates. Moreover, Ottawa has been handing out goodies for first-time buyers–leaking what’s to come in the April 16 federal budget. The Finance Minister has already announced the resumption of 30-year amortization on insured mortgages for first-time buyers of new construction. While this is less than meets the eye, in that pre-sales typically require a 20% deposit, the homebuilders’ association is pretty excited.

In addition, Ottawa has eased restrictions on the RRSP Home Buyers’ Plan, allowing F-T buyers to withdraw $60,000–up from $ 35,000 (never mind that the $35K ceiling is hardly ever broached)–with 5 years until repayments must begin, up from two years.

Ottawa is also providing assistance to at-risk homeowners, telling lenders to work with these households to lower payments “to a number they can afford, for as long as they need to” by allowing longer remaining amortizations. The Department of Finance is encouraging lenders to begin working with these at-risk households two years before scheduled renewals. The unintended consequences of this could be significant. For example, what happens to the mortgage-backed securities market and other investors in mortgages? Also, this reduces competition by discouraging refinancings and could raise the cost of borrowing for all participants.

Ottawa has never been very good at considering the second-order effects of their actions. A case in point is the decision to markedly increase immigration (for lots of good reasons) without considering where all of these new people would live. This has led to a massive housing shortage and the least affordable housing in Canadian history. Now that Trudeau’s approval ratings have suffered, they are scrambling to remediate, but increasing demand for housing is obviously not the answer.

There will be more news on Tuesday when I dissect the federal budget’s housing initiatives. The more government money spent, the more money borrowed, which will only raise interest rates from what they will otherwise be.

Back to the March data, national home sales edged up a mere 0.5% month-over-month, although activity rose 1.7%. That was a much smaller gain than those recorded in the previous two months, although a part of that does reflect a mostly inactive market during the Easter long weekend.

New Listings

The number of newly listed homes declined by 1.6% month-over-month in March. “While the official March monthly numbers were quite flat, anecdotal evidence from late last month and early April suggests activity is ramping up,” said Larry Cerqua, Chair of CREA.

With sales edging up and new listings falling in March, the national sales-to-new listings ratio tightened to 57.4%. The long-term average is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

At the end of March, there were 3.8 months of inventory nationwide, unchanged from the end of February. The long-term average is about five months of inventory.

New listings rose sharply in late March and early April–good news on all fronts.

The actual national average home price in March was up 2% year-over-year from a markedly depressed level. The MLS Home Price Index was roughly unchanged, down markedly from its early 2022 peak when the central bank’s overnight policy rate was a mere 25 basis points before they started hiking rates in March, two years ago.

Bottom Line

With pent-up demand for housing rising with every rent increase, the spring housing season is likely to be robust, even before the central bank cuts interest rates. We believe the BoC will begin reducing the policy rate in June or July, depending on the next two CPI reports. March inflation data will be released on Tuesday (a big day for economic news), and April data will come out on May 21st. The next Bank of Canada decision date is June 5th.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
10 Apr

The Bank of Canada Remains Cautious but a rate cut in June is possible

General

Posted by: Jen Lowe

The Bank of Canada Cautious, But A Rate Cut In June Is Possible

Today, the Bank of Canada held the overnight rate at 5% for the sixth consecutive meeting and pledged to continue normalizing its balance sheet. Governor Macklem confirmed that inflation is moving in the right direction, labour markets are easing, and wage pressures appear to be dissipating. In today’s release of the April Monetary Policy Report (MPR), the central bank forecasters lowered their 2024 inflation forecast to 2.6% from 2.8%. However, the Governing Council needs more evidence to be confident that the downtrend in inflation is sustainable.

In contrast, the US CPI data released today for March showed that underlying inflation topped forecasts for the third consecutive month, and the US jobs data also beat estimates. This is in direct contrast to the news of better-than-expected inflation in Canada and the easing of labour markets. The Canadian economy is far more interest-rate sensitive than the US because mortgage terms are far shorter. Over 60% of all outstanding mortgages are up for renewal in the next two to three years, adding to monthly mortgage payments. That process has already begun.

While the Canadian economy slowed at the end of last year, more recent data suggest a bounceback in the first quarter. The Bank revised up its forecast for GDP growth in the first half of 2024 but reduced its economic outlook for next year. The Bank expects inflation to hit its 2% inflation target in 2025.

Bottom Line

Governor Macklem’s prepared opening statement at today’s press conference was more dovish on inflation than in prior months. “We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained,” Macklem said in the prepared text.  If things go according to today’s MPR forecasts, policymakers are likely to begin cutting the overnight rate in June.

Still, Macklem called further declines in core inflation “very recent,” adding that the bank wants to “be assured this is not just a temporary dip.”

“While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months,” officials said in the policy statement.

The next decision date is June 5, when overnight swaps traders pared their bets to about a 50-50 chance of a 25 basis point cut at that meeting, down from over two-thirds before today’s data release. A July rate cut is fully priced in.

We will know more this coming Tuesday when the March CPI data (along with the federal budget) are released. April CPI will be posted on May 21.  As the chart below shows, inflation data in Canada is rapidly approaching the 2% target, well ahead of the US, although set backs can’t be ruled out. For example, gasoline prices have risen since early February. However, the proportion of CPI sectors showing less than 1% gains is rising as those showing more than 3% increases are falling fast.

Please reach out if you have questions.

Jen Lowe
Mortgage Professional
Modern Mortgage Group, Dominion Lending Centres
250-217-4925
j.lowe@dominionlending.ca

Courtesy of Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
8 Apr

March’s Weak Jobs Report Sets The Stage For A June Rate Cut

General

Posted by: Jen Lowe

March’s Weak Jobs Report Sets The Stage For A June Rate Cut
Today’s StatsCanada Labour Force Survey for March is much weaker than expected. Employment fell by 2,200, and the employment rate declined for the sixth consecutive month to 61.4%.

Total hours worked in March were virtually unchanged but up 0.7% compared with 12 months earlier.

The details were similar to the headline: as full-time jobs dipped, total hours worked fell 0.3%, and only two provinces managed job growth. Among the type of worker, a 29k drop in self-employment was the primary source of weakness, while private sector jobs managed a decent 15k gain. The issue for the Bank of Canada is that wage gains are not softening even with a rising jobless rate. Average hourly wages actually nudged up to a 5.1% y/y pace, now more than two percentage points above headline inflation. With productivity barely moving, these 5% gains will feed into costs and threaten to keep inflation sticky.

 

The unemployment rate in Canada jumped to 6.1% in March of 2024 from 5.8% in the earlier month, the highest since October of 2021, and sharply above market expectations of 5.9%. The result aligned with the Bank of Canada’s rhetoric that higher interest rates have a more significant impact on the Canadian labour market, strengthening the argument for doves in the BoC’s Governing Council that a rate cut may be due by the second quarter. The unemployed population jumped by 60,000 to 1.260 million, with 65% searching for jobs for over one month. Unemployment rose to an over-seven-year high for the youth (12.6% vs 11.6% in February) and grew at a softer pace for the core-aged population (5.2% vs 5%).In March, fewer people were employed in accommodation and food services (-27,000; -2.4%), wholesale and retail trade (-23,000; -0.8%), and professional, scientific, and technical services (-20,000; -1.0%). Employment increased in four industries, led by health care and social assistance (+40,000; +1.5%).

The unemployment rate in Canada jumped to 6.1% in March of 2024 from 5.8% in the earlier month, the highest since October of 2021, and sharply above market expectations of 5.9%. The result aligned with the Bank of Canada’s rhetoric that higher interest rates have a more significant impact on the Canadian labour market, strengthening the argument for doves in the BoC’s Governing Council that a rate cut may be due by the second quarter. The unemployed population jumped by 60,000 to 1.260 million, with 65% searching for jobs for over one month. Unemployment rose to an over-seven-year high for the youth (12.6% vs 11.6% in February) and grew at a softer pace for the core-aged population (5.2% vs 5%).In March, fewer people were employed in accommodation and food services (-27,000; -2.4%), wholesale and retail trade (-23,000; -0.8%), and professional, scientific, and technical services (-20,000; -1.0%). Employment increased in four industries, led by health care and social assistance (+40,000; +1.5%).