Before today’s report, traders were pricing in a pause at the next policy decision, with a possibility of a 25 basis-point hike. Barring an excellent inflation report for December, another rate hike is likely on January 25, likely a 25 bp hike. Given what’s happened in the first three weeks of this month, there is a good chance that the almost 14% drop in gasoline prices (compared to a 4% decline in December a year ago) could pull this month’s headline inflation down to 6.5%. However, many components of core inflation continue to rise.

While the BoC will slow the rate hikes in 2023, at least two or three more hikes are still possible, with no rate cuts likely next year. Remember, wage inflation is running at 5.6% y/y, and wage negotiations are getting more aggressive.

Sellers remain on the sidelines as the number of newly listed homes edged down last month by 1.3%, declining 6.1% from a year ago. Most sellers are waiting for interest rates to fall, either because they expect a rebound in sellers or are unwilling to buy new properties themselves with mortgage rates so high.

While sales have swung wildly, new listing flows have remained relatively steady through the recent turbulence and are very much in line with pre-COVID norms. There’s still not a lot of forced selling, which can exacerbate a price correction.

New listings fell in slightly more than half of the local markets. Among the larger markets in Canada, month-over-month movements in new supply were generally small, the only exception being some more significant declines in the B.C. Lower Mainland and Okanagan regions.

In terms of monthly new supply, the bigger picture is listings are not flooding the market. With the one exception of 2019, November 2022 saw the fewest new listings for that month in 17 years.

With sales down month-over-month by a little more than new listings in November, the sales-to-new listings ratio fell to 49.9% compared to 50.9% in October. The ratio has remained close to around 50% since May. The long-term average for this measure is 55.1%.

Based on a comparison of the current sales-to-new listings ratio with long-term averages, about 70% of local markets are currently in balanced market territory.

There were 4.2 months of inventory on a national basis at the end of November 2022. This is close to where this measure was in the months leading up to the initial COVID-19 lockdowns and still nearly a full month below its long-term average.

The Aggregate Composite MLS® HPI now sits about 11.5% below its peak level. Breaking that down regionally, the general trend is prices are down somewhat more than they are nationally in Ontario and parts of B.C. and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina and Saskatoon stand out as markets where home prices are barely off their peaks at all.

OSFI announced this morning that the minimum qualifying rate for uninsured mortgages at federally regulated financial institutions would remain unchanged. They will review Guideline B-20 next month, but don’t hold your breath for an easing of the stress test.

In other news, housing starts were little changed last month at 264,600 annualized units. This is a strong level of new construction; the year-to-date average is roughly 265,000 units. Combined with the record 275,000 new units started last year, we are in line for the most significant two-year wave of housing starts on record. On a per-capita basis, we’re starting 2023 with an unprecedented construction boom despite higher costs, labour shortages and much higher interest rates.

Outlook   

The Bank of Canada is likely to raise the policy rate a couple of times by 25 bps in the first half of next year, pausing between rate hikes. They will not cut rates in 2023 even though the economy will post at least a mild contraction.

2024 will be a recovery year but don’t expect the overnight rate to return to the pre-Covid level of 1.75%. Indeed, the new cycle low will likely be more like 2.5% assuming inflation continues to trend downward. Price growth will be much more subdued than during the rocking ten-year period before the pandemic. Still, the underlying fundamentals of rapid population growth, mainly from immigration, bode well for sustained growth going forward.

Indicative of hiring strength, full-time employment was up a robust 50,700, and the private sector added 24,700 jobs. The jobless rate ticked down for the second consecutive month to 5.1%–well below the 5.7% rate posted immediately before the pandemic, which was considered full employment at that time. Total hours worked edged up, consistent with growth in the fourth quarter. And most notably, wage inflation came in at a year-over-year pace of 5.6% in November, the sixth consecutive month of greater than 5% wage inflation. Moreover, private and public sector unions demand even more significant wage gains as inflation remains close to 7%.

Businesses report difficulty filling jobs as job vacancies rose in the latest reading. The employment rate among core-aged women reached a new record high of 81.6% in November.
Employment rose in finance, insurance, real estate, rental and leasing, manufacturing, information, culture, and recreation. At the same time, it fell in several industries, including construction and wholesale and retail trade.

While employment increased in Quebec, it declined in five provinces, including Alberta and British Columbia.

Today’s data are the last key input into the Bank of Canada’s December 7 interest rate decision. Overnight swap markets are fully pricing in a 25 basis-point hike next week, with traders putting about a one-third chance on a 50 basis-point move. Rising wages show no sign of cooling, and the economy posted much more robust growth in the third quarter than the Bank expected.

The overnight policy rate target is currently at 3.75%. If I were on the Bank’s Governing Council, I would vote for a 50-bps rise to 4.25%. Returning to a more typical 25 bps rise is premature, given inflation is a long way above the Bank’s 2% target. Inflation will not slow, with consumers and businesses expecting continued high inflation. Wage-price spiralling is a real risk until inflationary psychology can be broken.

In either case, additional rate hikes early next year are likely. Even when the central bank pauses, it will not pivot to rate cuts for an extended period. Market-driven longer-term interest rates have fallen significantly as market participants expect a recession in 2023. Fixed mortgage rates have fallen as well. The inverted yield curve will remain through much of 2023, with a housing recovery in 2024.