23 Jan

Bank of Canada On Hold As Expected


Posted by: Eileen Crosbie

Bank on Hold As Housing Expected to Continue to Slow

Bank on Hold As Housing Expected to Continue to Slow
It is no surprise that the Bank of Canada maintained its target overnight rate at 1/2 percent today, reaffirming its view that the Canadian economy is still operating with considerable slack despite strong employment growth and inflation remains below the 2 percent target. The policy statement highlighted that that “uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States.”  Trump’s ascendancy to the highest office in the US portends major policy changes, some of which could have a direct impact on Canada.

For now, the Bank has chosen to incorporate assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. US growth in 2017 was revised up only slightly, from 2.1 percent to 2.2 percent. The impact of the new administration’s fiscal stimulus is more pronounced in 2018, increasing the Bank’s forecast to 2.3 percent (up 0.3 percentage points from the October forecast). These are initial estimates, which include changes in tax policies only. Clearly, an important factor impacting Canada will be US trade policy. The impact of this and other fiscal measures will be updated in future Bank of Canada reports as more details become available. 

The Bank’s forecast for US growth is above its estimate of the rate of potential US output expansion of about 1.8 percent in 2018. The economy is judged to be already at or near full capacity. Business investment in the US is expected to regain momentum as growth in demand remains above potential output.

Bond yields around the world, including here at home, have risen in anticipation of more stimulative fiscal policies and deregulation in the US, though financial conditions remain accommodative (Chart 1).

Global crude oil prices have recently averaged about 15 percent higher than assumed in the October Monetary Policy Report (MPR). By convention, the Bank is now assuming oil prices will remain at near current levels of $55 for Brent, $50 for West Texas intermediate and $35 for Western Canada Select. The Bank believes that the risks to this forecast remain tilted to the upside over 2017-18, since prices are still below levels likely required to support medium-term market rebalancing. The Bank’s new MPR, released today says that “the scope for sustained higher prices is limited, however, because technological advances have contributed to lower production costs for unconventional oil production, notably shale oil in the United States”. And the Trump administration supports the fracking sector.

Nevertheless, the worst is over for the Alberta economy, which we have already seen reflected in the housing sector, which has improved considerably in the most recent Canadian realtors report. 

The Bank believes that growth in the Canadian resource-related sectors have troughed and investment and employment are being reallocated to the growing service sector. Real GDP in Canada is expected to grow at a rate moderately above potential output as housing slows. The Bank is estimating that housing boosted growth in 2015 and 2016 by 0.3 percent and 0.2 percent respectively. Housing will be a small net drain on activity this year, according to the MPR, reflecting the negative impact of tighter mortgage restrictions and the rise in mortgage rates (see Table). 

Some have suggested that the Bank of Canada might cut interest rates again next year, particularly if housing slows too much. Judging from comments made by the CEO of the CMHC, a slowdown in housing is the intended result of the new rules. Clearly, Governor Poloz sees the enhanced mortgage stress tests and changes in the insurability of mortgages as mitigating his concerns of overextended homebuyers. It would take a material negative shock to growth for the Bank to cut rates. 

On the other hand, others recently have suggested the Canadian economy will benefit sufficiently from the fiscal boom in the US for the Bank to hike rates by the end of this year. I believe this is unlikely as market rates have already risen and the potential negative impact of a stronger Canadian dollar on trade, as well as a potential  US harder line on trade–such as recent US saber rattling on a border tax–will keep the Bank on the sidelines through the rest of this year. 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

23 Jan

Housing Data for December–Activity Up in 60% of Markets


Posted by: Eileen Crosbie

National Home Sales End 2016 On the Upside

National Home Sales End 2016 On the Upside
This morning, the Canadian Real Estate Association (CREA) released its December national real estate statistics showing home sales rose 2.2% month-over-month in the final month of last year. This rebound retraced less than half of the decline in November, when it posted the largest monthly decline in more than four years in response to the federal tightening of mortgage regulations. 

Activity was up in 60% of all markets, led this time by Calgary and Edmonton where sales have been hard hit by the oil slowdown and the knock-on effects of the wildfires. 

For the year as a whole, the number of homes changing hands set a new record. New home sales were up 6.3% last year, reflecting strong sales in the first half of the year, slowing thereafter. Tightened mortgage regulations will however, weigh on activity this year. Housing activity will not provide the boost to overall economic growth in 2017 that it did last year as first-time homebuyers will find it more difficult to qualify for a mortgage.

New Listings Continue To Decline

The number of newly listed homes fell 3.0% in December compared to the prior month. New listings were down in about 60% of all local markets, with sizeable declines in B.C.’s Lower Mainland, Calgary and the Greater Toronto Area (GTA).

With sales up and new listings down, the national sales-to-new-listings ratio rose to 63.5% in December compared to 60.3% in the prior month. A ratio in the range of 40%-to-60% is considered generally consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market. 

The sales-to-new-listings ratio was above 60% in half of all local housing markets again last month–the vast majority of which continued to be in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario. 

Number of Months of Inventory

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents the number of months it would take to completely liquidate current inventories at the current rate of sales activity. 
There were 4.6 months of inventory on a national basis at the end of December–down from 4.8 months in November. 

The tight balance between housing supply and demand in Ontario’s Greater Golden Horseshoe region is without precedent (the region includes the GTA, Hamilton-Burlington, Oakville-Milton, Guelph, Kitchener-Waterloo, Cambridge, Brantford, the Niagara Region, Barrie and nearby cottage country). The number of months of inventory in December ranged between one and two months in many of these housing markets, and stood below one month in the Durham Region, Orangeville, Oakville-Milton, Kitchener-Waterloo, Brantford and Cambridge.

Prices Continue to Rise

The Aggregate Composite MLS House Price Index (HPI) rose 14.2% y-o-y last month. The rise in prices has diminished in recent months (14.4% y-o-y in November; 14.6% in October) owing to a softening in single-family home prices in B.C.’s Lower Mainland following the introduction of a new 15% land transfer tax on foreign purchasers, which markedly reduced activity. 

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

Price trends continued to vary widely by location. In the Fraser Valley and Greater Vancouver, prices continued to recede from their peaks reached in August 2016 but remained above year-ago levels (+27.0% y-o-y and +17.8% y-o-y respectively). Meanwhile, benchmark prices climbed to new heights in Victoria and elsewhere on Vancouver Island, and in the GTA. By comparison, home prices were down 3.7% y-o-y in Calgary and edged lower by 1.6% y-o-y in Saskatoon, continuing their retreat from peaks reached in 2015.

Home prices were up modestly from year-ago levels in Regina (+5.2%), Ottawa (+4.0%), Greater Montreal (+3.3%) and Greater Moncton (+1.9%). Monthly trends suggest that prices have begun to stabilize in all of these markets except Greater Montreal, where values continue to rise modestly. 

The actual (not seasonally adjusted) national average price for homes sold in December 2016 was $470,661, up 3.5% from where it stood one year earlier. This marks the smallest y-o-y increase in nearly two years.

The national average price continues to be pulled upward by sales activity in Greater Vancouver and the GTA, which remain two of Canada’s tightest, most active and expensive housing markets. That said, Greater Vancouver’s share of national sales activity has diminished considerably over the last year, giving it less upward influence on the national average price. The average price is reduced by almost $120,000 to $352,513 if Greater Vancouver and GTA sales are excluded from calculations.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

23 Jan

Unexpected Strength in Trade and Jobs in Canada


Posted by: Eileen Crosbie

Canada Shows Unexpected Strength with Job Surge and Trade Surplus

December’s jobs report was unambiguously strong showing employment gains of 53,700 (0.3%), the result of gains in full-time work. Finally, for the first time this year, full-time jobs outpaced part-time. The unemployment rate increased 0.1 percentage points to 6.9% as more people entered the labour force. This is evidence that the economy may be absorbing the slack that’s kept interest rates near record lows. 

Full-time positions rose 81,300 in December from the previous month, the biggest gain since March 2012, and even after taking away 27,600 part-time jobs, the total employment gain of 53,700 shattered the economist forecasts for a small decline.

For 2016 as a whole, employment grew by 1.2%, compared to a growth rate of 0.9% in 2015. Payrolls rose by 214,000 last year, the fastest December-to-December growth since 2012.

Quebec and British Columbia posted job gains in December, while there was little change in the other provinces. In 2016, BC recorded the fastest employment growth rate among the provinces for the second consecutive year, up 3.1%. The gains were evenly split be tweet full- and part-time work and spread across many industries.

In another report, Canada’s trade balance returned to surplus in November for the first time since September 2014, moving from a $1.0 billion deficit in October to a $526 million surplus in November. Exports rose 4.3% on the strength of increased exports of metal and non-metallic mineral products as well as record exports to countries other than the US. Imports were up 0.7%, mainly on higher imports of energy products. 

The data may signal Bank of Canada Governor Stephen Poloz’s long-awaited economic revival is finally on solid ground. Poloz has stressed ahead of his Jan. 18 rate decision that there is still plenty of slack in the job market which may be adding to divergence with a recovering US economy.

The job gain made the fourth quarter the best since 2010 and turned 2016 into a breakout year from some of the slowest hiring since World War II. The trade surplus means struggling energy and manufacturing companies may contribute to growth aided by debt-fueled consumer spending on houses and cars.This would be just in time to help offset what is likely to be a slowdown in housing in Canada this year in the wake of federal government mortgage initiatives to tighten mortgage credit conditions. 

Provincial Unemployment Rates in December In Descending Order (percent)
(Previous months in brackets)

   — Newfoundland and Labrador        14.9 (14.3)
   — Prince Edward Island                     10.7 (10.8)
   — New Brunswick                                9.4   (8.7)   
   — Alberta                                              8.5   (9.0)
   — Nova Scotia                                      8.3   (8.0)
   — Quebec                                             6.6   (6.2)
   — Saskatchewan                                 6.5   (6.8)   
   — Ontario                                             6.4   (6.3)
   — Manitoba                                          6.3   (6.2)  
   — British Columbia                             5.8   (6.1)

US Payrolls Rise As Wages Increase The Most Since 2009

US non-farm payrolls rose 156,000 in December. While below economists forecast, this was a solid gain pointing to an economy at close to full employment. The jobless rate ticked up to 4.7% as the labour force grew. Worker shortages have become more prevalent in the US, putting upward pressure on wages. The job market will continue to boost consumer spending in 2017.

According to Bloomberg News, the latest payrolls report brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015. The streak of gains above 2 million is the longest since 1999, when Bill Clinton was president.

Among the details of the December report, the participation rate, which shows the share of working-age people in the labor force, increased to 62.7%, from 62.6%. It has been hovering close to its lowest level in more than three decades largely as a result of demographic changes.
Some measures of labor-market slack showed improvement. Americans who are working part time who would rather have a full-time position fell to 5.6 million.The underemployment rate — which includes part-time workers who’d prefer a full-time job and people who want to work but have given up looking — dropped to 9.2% from 9.3%.

Bottom Line: There is little doubt that the Fed will continue to hike interest rates this year. The Trump administration takes office on January 20 and has promised to cut taxes, increase spending on infrastructure and cut regulations. This fiscal stimulus will likely boost economic activity in 2018 and lead to higher budget deficits. The bond markets have already sold off in anticipation of such moves, pushing mortgage rates higher in Canada. 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres