Sales were up in about 70% of all local markets, including Canada’s largest markets: the Greater Toronto Area (GTA), Montreal, Greater Vancouver, Calgary, Edmonton, and Ottawa.

The number of newly listed homes was up 6.8% month-over-month in May, although the bigger picture is that new supply is still running at historically low levels.

With sales and new listings up by similar magnitudes in May, the sales-to-new listings ratio was 67.9%, little changed from 69% in April. The long-term average for this measure is 55.1%.

There were 3.1 months of inventory on a national basis at the end of May 2023, down from 3.3 months at the end of April and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

The dearth of sellers could reflect the reluctance of existing homeowners to give up their low-rate mortgages.

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2.1% on a month-over-month basis in May 2023 – a significant increase for a single month and on the heels of a similar gain in April. Once again, it was also very broad-based, with a monthly price increase between April and May observed in most local markets.

The Aggregate Composite MLS® HPI now sits 8.6% below year-ago levels, a smaller decline than in the first four months of this year. The second chart below shows that year-over-year price gains are posted at the national level and in BC, Alberta, and Nova Scotia. With the strength in the GTA, y/y prices are fast approaching positive territory.

The rate hike by the BoC has spooked the housing market. Anecdotal evidence suggests that activity has slowed, and the demand for fixed-rate mortgages has surged. Many households now face higher monthly payments in the next two years. The Bank of Canada knows that and wants to see household spending slow from the rapid Q1 pace. Consumer confidence has risen sharply since March. But with household debt-to-income levels at near-record highs, the sensitivity to interest rates is extreme.

Ironically, just as the BoC raised rates again after months of no action, the Federal Reserve decided to pause rate hikes for the first time this cycle. US inflation peaked at over 9.1% and fell to 4.0% in May. While Canadian inflation topped at 8.1%, its most recent posting was 4.4% in April. May data for Canada will be released on June 27.

Traders are currently expecting one more rate hike in Canada this year. The idea that the Bank would cut rates any time this year has vanished. Most are betting the first rate cut is more likely to be in mid-2024. We have learned that uncertainty prevails, but I’d bet that we will not return to pre-Covid interest rates for a very long time.

First-quarter growth was driven by strong international trade and robust household spending. These factors were partly mitigated by slower inventory accumulation and declines in new housing construction and business investment in machinery and equipment.

After two quarters of minimal growth, household spending rose for goods (+1.5%) and services (+1.3%) in the first quarter of 2023. Expenditures on durable goods (+3.3%) were driven by motor vehicles, including new trucks, vans, and sport utility vehicles (+7.8%). Spending on semi-durables (+4.3%) was led by garments (+4.5%), while spending on non-durable goods (-0.2%) declined slightly.

Service spending picked up in the first quarter of 2023, led by food and non-alcoholic beverage services (+4.4%), and alcoholic beverage services (+6.5%). Meanwhile, travel was on the rise, with expenditures by Canadians abroad up 6.8% in the first quarter, compared with a 3.3% decrease in the previous quarter.

These data do not portend a household sector overly burdened by rising mortgage and credit card payments.

Coinciding with higher borrowing costs and slowing mortgage borrowing, housing investment fell 3.9% in the first quarter of 2023, the fourth consecutive quarterly decrease. The decline in investment was widespread—as new construction (-6.0%), renovations (-2.1%), and ownership transfer costs (-1.5%), which represents resale activity, were all down.

We know housing activity has picked up considerably since the first quarter, undoubtedly adding to Q2 growth. Also expansionary is the persistent rise in employee compensation, led by salary gains in professional and personal services, manufacturing and construction.

One warning sign is the declining household savings rates and slower disposable income. Persistently high interest rates had a predominantly negative effect on net property income, as increases in interest income (+6.4%), mainly from deposits, did not keep pace with higher interest payments on mortgages (+14.7%) and consumer credit (+10.9%).

In contrast with lower disposable income, consumption expenditures (in nominal terms) rose 2.1% in the first quarter of 2023. This was faster than the 1.4% pace recorded in the fourth quarter of 2022, partly due to inflationary pressures. As a result, the household saving rate was 2.9% in the first quarter of 2023, down from 5.8% at the end of 2022. The household saving rate approached the pre-pandemic level, which averaged 2.1% in 2019.

Business incomes fell significantly in Q1, and judging from the stock market, corporate earnings news has also been disappointing across a wide array of sectors in the second quarter.

The strength in today’s data and the higher-than-expected inflation number for April will cause the Bank of Canada to seriously consider raising the overnight rate by 25 bps to 4.75% when they meet again next week. I think they will hold off to see the May employment and inflation data before they pull the trigger.

Markets have already responded to the numbers. Short-term interest rates remain well above levels posted earlier this year, although that is mainly about the debt-ceiling issue in the U.S. The Bank’s statement will undoubtedly be rather hawkish.

Sales were up in about 70% of all local markets, including Canada’s largest markets: the Greater Toronto Area (GTA), Montreal, Greater Vancouver, Calgary, Edmonton, and Ottawa.

The number of newly listed homes was up 6.8% month-over-month in May, although the bigger picture is that new supply is still running at historically low levels.

With sales and new listings up by similar magnitudes in May, the sales-to-new listings ratio was 67.9%, little changed from 69% in April. The long-term average for this measure is 55.1%.

There were 3.1 months of inventory on a national basis at the end of May 2023, down from 3.3 months at the end of April and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

The dearth of sellers could reflect the reluctance of existing homeowners to give up their low-rate mortgages.

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2.1% on a month-over-month basis in May 2023 – a significant increase for a single month and on the heels of a similar gain in April. Once again, it was also very broad-based, with a monthly price increase between April and May observed in most local markets.

The Aggregate Composite MLS® HPI now sits 8.6% below year-ago levels, a smaller decline than in the first four months of this year. The second chart below shows that year-over-year price gains are posted at the national level and in BC, Alberta, and Nova Scotia. With the strength in the GTA, y/y prices are fast approaching positive territory.

The rate hike by the BoC has spooked the housing market. Anecdotal evidence suggests that activity has slowed, and the demand for fixed-rate mortgages has surged. Many households now face higher monthly payments in the next two years. The Bank of Canada knows that and wants to see household spending slow from the rapid Q1 pace. Consumer confidence has risen sharply since March. But with household debt-to-income levels at near-record highs, the sensitivity to interest rates is extreme.

Ironically, just as the BoC raised rates again after months of no action, the Federal Reserve decided to pause rate hikes for the first time this cycle. US inflation peaked at over 9.1% and fell to 4.0% in May. While Canadian inflation topped at 8.1%, its most recent posting was 4.4% in April. May data for Canada will be released on June 27.

Traders are currently expecting one more rate hike in Canada this year. The idea that the Bank would cut rates any time this year has vanished. Most are betting the first rate cut is more likely to be in mid-2024. We have learned that uncertainty prevails, but I’d bet that we will not return to pre-Covid interest rates for a very long time.

Wages rose by 5.1% last month, a moderate decline from the prior three months.

The employment rate—the percentage of people aged 15 and older—declined by 0.3 percentage points to 62.1% in May. This reflected strong population growth in the month (+83,000) and little change in employment.

Following five consecutive months of a low 5% unemployment rate, the jobless rate rose 0.2 percentage points to 5.2% last month. This was the first monthly increase since August 2022. According to the median estimate in a Bloomberg survey, the figures missed expectations for a gain of 21,300 positions and a jobless rate of 5.1%.

Following an unanticipated robust beginning of the year, Canada’s employment market demonstrated dynamism well into the second quarter. A confluence of factors, including a tight labour market, solid economic growth, persistent inflation, and a resurgence in housing market activities, propelled Governor Tiff Macklem and his team to increase the overnight lending rate to 4.75% on Wednesday. This hike came after a previously announced halt in January. Policymakers perceived the enduring excess demand in the economy as “more persistent than anticipated.”

It seems improbable that the Bank of Canada would disrupt the interest rate pause that commenced in January merely for the 25 basis point interest rate increase. A single employment report exhibiting softer figures doesn’t constitute a new trend, especially considering that historically, the labour markets remain extraordinarily tight. Before the following decision on interest rates is due on July 12, we anticipate another jobs report, the May Consumer Price Index (CPI) report, and the Bank’s intensely scrutinized Business Outlook Survey. While we project a continued trend of softer data releases over time, it would likely require further unexpected downturns to derail plans for another rate hike in July.

“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” the bank said, citing an “accumulation of evidence” that includes stronger-than-expected first-quarter output growth, an uptick in inflation and a rebound in housing-market activity.

I had thought that the Bank would want to see the May employment data and the next read on inflation before they resumed tightening, but with the substantial May numbers in the housing market, the Governing Council jumped the gun.

The next Bank of Canada decision date is a mere five weeks away. While we will see two labour force surveys and one inflation report, the odds favour another rate hike before yearend. The BoC concluded in their press release that, “Overall, excess demand in the economy looks to be more persistent than anticipated.”

No doubt, if the data remain strong over the next several weeks, another 25 bps rate hike is likely in July. Deputy Governor Beaudry will flesh out today’s decision in his Economic Progress Report tomorrow.

According to the report, the severe downturn in real estate prices and demand following their significant rise during the pandemic was the most pressing issue. OSFI acknowledges that the housing market changed significantly over the past year, and house prices fell substantially in 2022. The regulator is preparing for the possibility that the housing market will experience continued weakness throughout 2023.

The report also highlights how the Bank of Canada’s rate hiking cycle has impacted borrowers’ ability to pay down mortgage debt, with the central bank increasing its benchmark cost of borrowing eight times between March 2022 and January 2023, bringing its Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today.

Mortgage holders may be unable to afford continued increases in monthly payments or may experience a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities. Given the considerable impact of real estate-secured lending (RESL) activities in the Canadian financial system, a housing market downturn remains a critical risk.

OSFI also highlights the dangers posed by more borrowers hitting their trigger rates; according to a National Bank study, eight in ten variable fixed-payment borrowers who took their mortgages out between 2020-2022 are impacted. Lenders have addressed this by extending the amortization period for affected borrowers, but OSFI says this is just a temporary solution.

Borrowers and lenders alike will need to pay the price in due course, as OSFI points out. The growth in highly leveraged borrowers increases the risk of weaker credit performance, potentially leading to more borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility.

These recent comments strengthen expectations that stricter mortgage rules could be in the cards before the year ends. Back in January, OSFI announced it was considering making tweaks to its Guideline B-20, which outlines borrowing and risk requirements for banks underwriting residential mortgages and qualification rules for borrowers, including the mortgage stress test.

OSFI may increase borrowers’ debt servicing ratio requirements, making it more challenging for those with larger debt loads to qualify for a mortgage. It is also considering limiting how many of these higher-leveraged borrowers banks can have in their portfolios, potentially leading to fewer borrowers making the cut at A-lenders and turning to the B-side and alternative mortgage market.

Finally, OSFI may change the threshold criteria for the mortgage stress test. Currently, borrowers must prove they can carry their mortgage at a rate of 5.25%, or 2% above the one they’ll receive from their lender, whichever is higher. However, following last year’s rapid rate increases, the 5.25% threshold has become obsolete, with all current market rates above 3.25%.

OSFI wrapped up consultations on these potential changes late last week and will release a report on its recommendations. Borrowers should keep an eye out for changes in the months to come.

Gasoline prices have fallen sharply since March 2022–down year-over-year by a whopping -13.8%. This was the second consecutive month in which gas prices caused inflation to fall. The fall in gasoline prices was mainly driven by steep price increases in March 2022, when gasoline rose 11.8% month-over-month due to supply uncertainty following Russia’s invasion of Ukraine. This increased crude oil prices, which pushed prices at the pump higher for Canadians. Gasoline price inflation was transitory.

There is no question that lower inflation portends a continued rate pause by the Bank of Canada.

Inflation at 4.3% was the smallest rise since August 2021. On a year-over-year basis, Canadians paid more in mortgage interest costs, offset by a decline in energy prices.Excluding food and energy, prices were up 4.5% year over year in March, following a 4.8% gain in February, while the all-items CPI excluding mortgage interest cost rose 3.6% after increasing 4.7% in February.

Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — also dropped, averaging 4.5%, in line with forecasts.

On a monthly basis, the CPI was up 0.5% in March, following a 0.4% gain in February. Travel tours (+36.7%) contributed the most to the headline month-over-month movement, largely driven by increased seasonal demand during the March break. On a seasonally adjusted monthly basis, the CPI rose 0.1%.

While headline inflation has slowed in recent months, having increased 1.7% in March compared with six months ago, prices remain elevated. Compared with 18 months ago, for example, inflation has increased by 8.7%.

Prices for passenger vehicles also contributed to the deceleration in prices for durable goods, increasing at a slower pace year over year in March 2023 (+4.7%) compared with February (+5.3%). Higher prices for passenger vehicles in March 2022, due to the global shortage of semiconductor chips, put downward pressure on the index in March 2023.

Month over month, new passenger vehicle prices were up 1.3% in March, attributable to the higher availability of new 2023-model-year vehicles. For comparison, prices for used cars rose 0.6% month over month in March, after a 1.9% decline in February.

Homeowners’ replacement costs continued to slow in March, rising 1.7% year over year compared with a 3.3% increase in February, reflecting a general cooling of the housing market.

In contrast, mortgage interest costs rose faster in March (+26.4%) compared with February (+23.9%). This was the most significant yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates.

There has finally been some relief in grocery price inflation. Year over year, prices for food purchased from stores rose to a lesser extent in March (+9.7%) than in February (+10.6%), with the slowdown stemming from lower prices for fresh fruit and vegetables.

Service inflation slowed to 5.1% in March. But in a sign wage pressures could be picking up, more than 155,000 federal workers are set to go on strike starting Wednesday if no deal is reached on their talks with Prime Minister Justin Trudeau’s government by Tuesday night.

The Bank of Canada is no doubt delighted that inflation continues to cool. The Bank expects price gains to reach 3% by midyear and return to near their 2% target by the end of 2024. But they said getting the prices back to 2% could prove more difficult because inflation expectations are coming down slowly, and service prices and wage growth remain elevated.

Governor Tiff Macklem, speaking at the IMF and World Bank meetings in Washington recently, said the Bank of Canada is prepared to end quantitative tightening earlier than planned if the economy needs stimulation. Quantitative tightening is the selling of government bonds on the Bank’s balance sheet, which takes money out of the economy.

Macklem said his officials discussed hiking rates further during deliberations for the April 12th decision to continue to pause and reiterated that “it is far too early to be thinking about cutting interest rates.”

His comments provide a glimpse into the Bank of Canada’s strategy for shrinking its balance sheet, which ballooned to more than $570 billion during the pandemic as it bought large quantities of government bonds — to restore market functioning during the initial Covid shock and then to provide a stimulus for the economy.

According to Bloomberg News, swaps traders are now betting the Bank of Canada’s next move will be a cut later this year. The governor pushed back on those expectations in a press conference this week. He and his officials discussed the possibility that rates need “to remain restrictive for longer to get inflation all the way back to target.”

In a speech last month, Deputy Governor Toni Gravelle said quantitative tightening will likely end in late 2024 or early 2025. That marked the first time the Bank of Canada put a date on abandoning the program.