Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% monthly (m/m). National home sales fell by 8.6% between April and May, building on April’s decline, leaving monthly activity at pre-COVID levels recorded in the second half of 2019. (see chart below).

Sales were down in three-quarters of all local markets, led by many larger census metropolitan areas (CMAs), including those in the Lower Mainland, Calgary, Edmonton, the Greater Toronto Area (GTA) and Ottawa. The actual (not seasonally adjusted) number of transactions in May 2022 came in 21.7% below the record for that month set last year. At a little over 50,000 units sold, the May 2022 sales figure was very close to the 10-year average for that month.

New Listings

The number of newly listed homes climbed 4.5% month-over-month in May. The monthly increase was influenced by a jump in new supply in Montreal, while new listings in the GTA posted a modest decline.

With sales down and new listings up in May, the sales-to-new listings ratio eased back to 57.5% — its lowest level since April 2019. It was also not far off the long-term average for the national sales-to-new listings ratio of 55.1%.

Almost three-quarters of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in May 2022 – the most significant number since the fall of 2019. A little less than one quarter was in seller’s market territory, while a small handful was in buyer’s market territory.

There were 2.7 months of inventory on a national basis at the end of May 2022, still historically low but up by a month from the tightest conditions ever recorded just six months ago. The long-term average for this measure is a little over five months.

Home Prices

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.

The Aggregate Composite MLS® Home Price Index (HPI) edged down 0.8% m/m in May 2022, following a 1.1% decline in April.

Regionally, most of the monthly declines were in markets in Ontario. While most Ontario markets saw prices dip in May, prices rose in cottage country.

Prices rose in Vancouver Island but were flat in Greater Vancouver. Prices fell modestly in the Fraser Valley and posted a larger decline in Chilliwack. Prices were more or less unchanged across the Prairies save for small gains in Saskatoon and Winnipeg.

Meanwhile, Quebec, New Brunswick and PEI continued to outperform, while prices in Nova Scotia and Newfoundland and Labrador edged up slightly.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 19.8% y/y in May. However, this posted a marked slowdown from the near-30% record increases logged in January and February.

Bottom Line

The three-month slide in Canadian home sales has now returned sales to pre-COVID levels after running roughly 3)% above that level for the 18 months through February. The most significant slowdown has occurred in Ontario, especially outside the core Toronto region. New listings have risen, but inventories remain low. The sales-to-new listings ratio has fallen sharply to 57.5%, its lowest level since early 2019. Prices have fallen moderately, taking the year-over-year gain down to 19.8% from 23.6% y/y in April. The average home price is now up just 3.4% y/y, which is down 11% from the February peak.

Toronto is cooling, but the suburbs are cooling even faster, while the exurbs (think London, Woodstock, Barrie) are seeing the sharpest shifts. The sales-to-new listings ratio for all of Ontario sunk below 50%, a level we’ve only seen during the 2009 recession and the dark days of the early 1990s. Elsewhere, Alberta remains relatively tight, albeit with stalling prices, while Vancouver, Ottawa and Montreal are mixed between the extremes.

Interest rates have risen sharply from their COVID-induced lows. Mortgage rates have risen sharply from lows of about 1.5% to nearly 5% for 5-year fixed rates. Variable mortgage rates are on their way to 4%-to-4.5% by yearend. By late summer, any still-favourable rate holds will be gone, and this new interest-rate reality will fully sink in. Stress tests at the contract rate plus 200 bps are now nearing 7%; they’ll also be pushing above 5.25% in the variable space.

Many potential Canadian homebuyers now expect home prices to continue to fall in some regions. This shift in psychology will also contribute to the housing correction. In a separate report, CMHC reported that housing starts increased sharply in May. Homebuilding is at its most robust pace on record, going back to the 1950s. Given the record-low unemployment rate, home construction is constrained by record-high job vacancies in the sector, shortages of materials, and rising wage rates. Construction costs have risen sharply in the past year. With higher mortgage rates in the future, the deceleration in sales could lead to slower housing starts next year.

Finally, the Federal Reserve hiked interest rates by 75 bps today, intensifying the inflation fight. This opens the door for a 75 bps hike by the Bank of Canada when it meets again on July 13. It is now widely expected that the US policy rate, the overnight fed funds rate will exceed 4% by yearend. Canada’s central bank had already announced its intention to hike the overnight rate here more forcefully and has suggested that it will take an overnight rate above 3% to break the back of inflation. The overnight rate now is only 1.5%. A further correction in housing is likely in the coming months. As the economy’s most interest-sensitive sector, housing is the key transmission mechanism for tighter monetary policy to slow the economy and bring inflation under control.

written by
Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Today’s Labour Market Survey for May 2022 showed that hiring continued at a rapid pace last month in an increasingly tight labour market, driving the jobless rate to another record low and fueling a sharp acceleration in wage gains. The economy added 39,000 jobs in May, surpassing expectations. The unemployment rate fell to 5.1%, far below the noninflationary rate of joblessness. Job vacancies are at a record high, and wage inflation accelerated to 3.9%, from the 3.2% pace posted in April.

Another sign of a red-hot jobs market was a shift from part-time employment to full-time. Full-time employment jumped by 135,400, with part-time jobs down by 95,800.

The excess supply of jobs continues to push wages higher and will undoubtedly cause the Bank of Canada to continue to hike rates aggressively. The Governing Council of the Bank will release their next decision on July 13, as money market traders now see an even chance that the central bank will increase the overnight policy rate by 75 bps next month.

The employment rate, which measures the percentage of the population aged 15 years and older that has a job, increased to almost 62% in May, from 59.4% cent a year earlier.

Bottom Line

In other relevant news today, the US released its CPI inflation report for May showing inflation accelerated to a whopping 8.6%, up from 8.3% in April. Investors increased bets on a 75 bp hike after the release showing inflation is at a fresh 40-year high. Both headline and core inflation rose more than expected.

Market rates shot up on today’s news, with the Canadian 5-year government bond yield now at 3.3%.

written by
Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. The chart below shows that inflation remains well above the Bank’s forecasts. Today’s press release suggests they now estimate that inflation rose again in May and could well accelerate further.

Today’s policy statement emphasized that “As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022.”

The Bank said that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.”

Bottom Line

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

The Bank of Canada has told us we should expect at least another 50 bps rate hike when they meet again on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (noninflationary) level is 2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%.

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

Written by
Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Inflation at 6.8% is unmitigated bad news. The Bank of Canada looks flat-footed again, having forecast that Inflation would be at least a full percentage point lower by now. What’s worse, inflation looks likely to rise again this month given the surge in gasoline prices from April to May.

Today’s report raises the urgency for policymakers to withdraw stimulus from the economy quickly. Look for another 50 bp rate hike on June 1 and again in July. Markets are pricing in an overnight rate as high as 3% by the end of the year. It is currently at 1%.

In April, Canadian consumer prices rose 6.8% y/y, up slightly from March’s 6.7% pace despite a slowdown in the pace of gasoline inflation. The April inflation rise was driven mainly by food and shelter prices. Excluding gasoline, the CPI rose 5.8% in April, after a 5.5% gain in March. This was the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.

Since late February, Russia’s invasion of Ukraine has boosted energy, commodity, and, most notably, food prices.

The Canadian economy’s strength has added to inflation pressure. The unemployment rate is at a record low. Average hourly wages rose 3.3% y/y last month. With prices rising faster than wages, Canadian families are experiencing reduced purchasing power.

In April, Canadians paid 9.7% more for food purchased from stores compared with April 2021. This rise, which exceeded 5% for the fifth month in a row, was the most significant increase since September 1981.

In April, shelter costs rose 7.4% y/y, the fastest pace since June 1983, following a 6.8% increase in March. Higher prices for energy sources used to heat homes, such as natural gas (+22.2%) and fuel oil and other fuels (+64.4%), contributed to the rise.

Reflecting the dynamic Canadian housing market, homeowners’ replacement cost (+13.0%) is related to the price of new homes and other owned accommodation expenses (+17.2%), which include commissions on the sale of real estate; both rose sharply in April.

The mortgage interest cost Index (+0.2%) increased on a m/m basis for the first time since April 2020.

Rent prices increased in April (+4.5%) compared with the same month in 2021. The rent hike was mostly driven by price increases in Canada’s most populous provinces: Ontario (+5.3%), Quebec (+4.3%) and British Columbia (+6.4%).
While monthly, Inflation slowed in April (0.6%) compared to March (1.4%), the surge in gasoline price in May portends continued high Inflation in next month’s CPI report.

Bottom Line

Bloomberg News reported this morning that “The inflation surge has made the Bank of Canada a target of criticism, with some politicians accusing Macklem of moving too slowly. Immediately after the inflation data was published, Conservative leadership candidate Pierre Poilievre released a statement reiterating he plans to fire Macklem should he ever win power.”

The pressure is on for more rate hikes. Central banks all over the world are under similar pressure. Central bank tightening will slow demand, as we have seen already in the Canadian housing data for March and April. It does not address the supply disruptions that are the root cause of much of the inflation pressure.

Written by
Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Housing Market Feels The Pinch of Higher Rates 

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% on a month-over-month (m/m) basis. The decline placed the monthly activity at its lowest level since the summer of 2020.

While the national decline was led by the Greater Toronto Area (GTA) simply because of its size, sales were down in 80% of local markets, with most other large markets posting double-digit month-over-month declines in April. The exceptions were Victoria, Montreal and Halifax-Dartmouth, where sales edged up slightly.

The actual (not seasonally adjusted) number of transactions in April 2022 came in 25.7% below the record for that month set last year. As has been the case since last summer, it was still the third-highest April sales figure ever behind 2021 and 2016.

Jill Oudil, Chair of CREA, said, “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue. For buyers, this slowdown could mean more time to consider options in the market. For sellers, it could necessitate a return to more traditional marketing strategies.”

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” said Shaun Cathcart, CREA’s Senior Economist. “But it’s less about what the Bank of Canada has done so far. It’s about a pretty steep pace of continued tightening that markets expect to play out over the balance of the year because that is already being factored into fixed mortgage rates. Of course, those have, for that very reason, been on the rise since the beginning of 2021, so why the big market reaction only now? It’s likely because typical discounted 5-year fixed rates have, in the space of a month, gone from the low 3% range to the low 4% range. The stress test is the higher of 5.25% or the contract rate plus 2%. For fixed borrowers, the stress test has just moved from 5.25% to the low 6% range – close to a 1% increase in a month! It won’t take much more movement by the Bank of Canada for this to start to affect the variable space as well”.

New Listings

The number of newly listed homes edged back by 2.2% on a month-over-month basis in April. The slight monthly decline resulted from a relatively even split between markets where listings rose and those where they fell. Notable declines were seen in the Lower Mainland and Calgary, while listings increased in Victoria and Edmonton.

With sales falling by more than new listings in April, the sales-to-new listings ratio eased back to 66.5% – its lowest level since June 2020. This reading is right on the border between what would constitute a seller’s and a balanced market. The long-term average for the national sales-to-new listings ratio is 55.2%.

More than half of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in April 2022. A little less than half were in seller’s market territory.

There were 2.2 months of inventory on a national basis at the end of April 2022, still historically very low but up from slightly lower readings in the previous eight months. The long-term average for this measure is a little over five months.

Home Prices

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.

Bottom Line

The fever broke in the Canadian housing market last month. Nevertheless, despite the sizeable two-month slide in sales, activity is still almost 10% above pre-COVID levels and the raw April sales tally was still one of the highest on record.

Markets in Ontario are weakening most, significantly further outside the core of Toronto. Sales in the province slid 21% in April and are now in line with pre-pandemic activity levels. The market balance has gone from drum tight with “not enough supply” to one that resembles the 2017-19 correction period. Elsewhere, Vancouver and Montreal look better with relatively balanced markets, while others like Alberta and parts of Atlantic Canada remain pretty strong.

The Bank of Canada will likely hike interest rates by another 50 bps on June 1.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca