Following the trend in recent months, the sales increase was broad-based but once again dominated by the B.C. Lower Mainland and the Greater Toronto Area (GTA). Toronto home sales, for example, rose by 27% m/m. That’s the most significant monthly increase over the past two decades, besides the rebound from the 2020 Covid lockdowns.

The benchmark price of a Toronto home rose 2.4% to C$1.11 million in April on a seasonally adjusted basis. The rise erased declines from earlier this year; prices are now up 0.5% year-to-date in the first four months of 2023.

Housing inventory is not just low; it is extremely low, although more recent data suggest that new listings rose in the first week of May. The persistent lack of new listings is hurting home affordability.

The number of newly listed homes edged up 1.6% month-over-month in April; however, the bigger picture is that the new supply remains at a 20-year low. The number of new listings hitting the Toronto market trailed far behind the 27% increase in sales at just 2.8%. That helped shrink the supply of houses on the market, which had built up over the past year by 12.3% and left the city’s active-listings-to-sales ratio, a measure of how competitive the market is for buyers, tighter than the historical average.

And Toronto’s housing market isn’t the only one seeing tighter supply and rising prices. Vancouver, long one of the country’s most expensive markets, also saw its benchmark price rise 2.4% last month.

With national sales gains vastly outpacing new listings in April, the sales-to-new listings ratio jumped to 70.2%, up from 64.1% in March. The long-term average for this measure is 55.1%.

There were 3.3 months of inventory on a national basis at the end of April 2023, down half a month from 3.8 months at the end of March. The long-term average for this measure is about five months.

The Aggregate Composite MLS® Home Price Index (HPI) climbed 1.6% month-over-month in April 2023 – a significant increase for a single month. It was also broad-based. A monthly price rise from March to April was observed in most local markets.

The actual (not seasonally adjusted) national average home price was $716,000 in April 2023, down 3.9% from April 2022 but up $103,500 from January 2023, a gain owed to outsized sales rebounds in the GTA and B.C. Lower Mainland.

A turnaround in the Canadian housing market is in train. While inventory remains extremely low, homes are not only selling but also selling fast. Short-term fixed-rate mortgages are popular with buyers. A significant change from before the Bank of Canada started raising rates.

While the Bank will likely hold rates steady for the remainder of this year, I do not expect Macklem to cut rates before then. All of this depends on inflation. We will get another read on inflation tomorrow.

The fact that labour markets are still strong and housing activity is picking up has got to make the Bank of Canada a wee bit nervous about inflation reaching the 2% target next year.

Another noticeable thing is the continued surge in the Canadian population, thanks to immigration, has worsened the housing shortage. The supply of new housing, especially affordable housing, is inadequate for the rapidly growing population. Moreover, a recent report by the C.D. Howe Institute’s Benjamin Dachis suggests there are major governmental impediments to providing adequate housing.

The Institute recommends:

• Enable the non-political enforcement of municipal housing policies
• Reform the fees on new development
• ease restrictions on building up and out.

The employment rate—the share of the population aged 15 and older—held steady at 62.4% for the third consecutive month in April. This is particularly noteworthy given the population grew by more than a million people in 2022 and is slated to snowball this year, thanks to immigration.

However, there is a catch. All the job growth in April was in part-time positions, while full-time jobs decreased by 6,200. But even with this slight hiccup, the labour market is still going strong, which means the Bank of Canada will likely continue its wait-and-see approach, even as we all wonder when the first rate cut will happen.

The jobless rate held steady at a near-record low of 5.0%, unchanged since December 2022. This remained near the record low of 4.9% observed in June and July 2022. Compared with April 2022, the unemployment rate was down 0.3 percentage points in April 2023.

Of great concern to the Bank of Canada, average hourly wages rose by 5.2% on a yearly basis in a further sign of the labour market’s resilience, with wage growth now above the annual rate of inflation, which was 4.3% in March. It is not that wage inflation caused the surge in the Consumer Price Index last year, but continued vigorous wage hikes become impended in wage-price spiralling as higher costs give businesses cover to rate prices.

The BoC, despite this report, isn’t likely to budge from its current policy stance. As more and more immigrants enter the workforce, the traditional markers of a strong jobs report are evolving. Even though the unemployment rate remains steady at 5%, it may indicate that we’ve hit a new equilibrium point. That’s why this seemingly “surprising” report doesn’t hold the same weight as it would have in the past.

In addition, the BoC can quickly point out the narrowness of sector hiring and the trend of full-time employment declining while part-time jobs rise. After today’s release, the BoC’s decision to stay on the sidelines is a wise move. But it also means that the Bank will not be in a hurry to cut rates this year.

As we move into the all-important spring-selling season, green shoots of growth are evident. A standout in March was a significant sales increase in BC’s Fraser Valley.

The actual (not seasonally adjusted) number of transactions in March 2023 was 34.4% below a historically strong March 2022. The March 2023 sales figure was comparable to what was seen for that month in 2018 and 2019. It was also the smallest year-over-year decline since last September.

As we enter the spring season, some buyers are coming off the sidelines, but these are very tight markets. The inventory of unsold homes is exceptionally low in most regions of the country as sellers have been waiting for prices to rise. Home prices are now stabilizing across the country.

The number of newly listed homes dropped a further 5.8% on a month-over-month basis in March. New supply is currently at a 20-year low. The monthly decline from February to March was led by a majority of major Canadian Census Metropolitan Areas (CMAs).

With new listings falling considerably and sales increasing again in March, the sales-to-new listings ratio jumped to 63.5%, the tightest market in a year. The long-term average for this measure is 55.1%. There were 3.9 months of inventory on a national basis at the end of March 2023, down from 4.1 months at the end of February and the lowest level since last October. It’s also now more than a full month below its long-term average.

The Aggregate Composite MLS® Home Price Index (HPI) was up 0.2% on a month-over-month basis in March 2023 – the first increase, albeit a small one–since February 2022. The trend of stabilizing prices from February 2023 to March 2023 was broad-based.

With few exceptions, prices are no longer falling across most of the country, although they’re not rising meaningfully anywhere. The Aggregate Composite MLS® HPI now sits 15.5% below year-ago levels, a smaller decline than in February.

A gradual turnaround in the Canadian housing market is in train. While inventory remains extremely low, homes are not only selling but also selling fast. Short-term fixed-rate mortgages are popular with buyers. A significant change from before the Bank of Canada started raising rates.

While the Bank will likely hold rates steady for the remainder of this year, I do not expect Macklem to cut rates before then. All of this depends on inflation. We will get another read on that next week. It should be a good number (less than February’s 5.2% y/y posting) because of base effects. Stay tuned.

Since then, three bank failures in the US as well as the UBS absorption of troubled Credit Suisse, have caused interest rates to plummet, bank stocks to plunge, and credit conditions to tighten. Many worry that rate increases will exacerbate a volatile situation, but others believe the Fed should continue the inflation fight and use Fed lending to provide liquidity to financial institutions.

Relative calm has been restored thanks to the provision of huge sums of emergency cash by lenders of last resort–the central banks–and some of the US industry’s strongest players.

While Canadian bank stocks have also been hit, the banks themselves are in far better shape than the weaker institutions in the US. Our banks are more tightly regulated, have much more plentiful Tier 1 capital, and their outstanding loans and depositors are far more diversified.

This morning, Statistics Canada released the February Consumer Price Index (CPI). Headline inflation fell more than expected to 5.2% from 5.9% in January. This was the largest deceleration in the headline CPI since the beginning of the pandemic in April 2020.The year-over-year deceleration in February 2023 was due to a base-year effect for the second consecutive month, which is attributable to a steep monthly increase in prices in February 2022 (+1.0%).

Excluding food and energy, prices were up 4.8% year over year in February 2023, following a 4.9% gain in January, while the all-items excluding mortgage interest cost rose 4.7% after increasing 5.4% in January.

On a monthly basis, the CPI was up 0.4% in February, following a 0.5% gain in January. Compared with January, Canadians paid more in mortgage interest costs in February, partially offset by a decline in energy prices. On a seasonally adjusted monthly basis, the CPI rose 0.1%.

While inflation has slowed in recent months, having increased by 1.2% compared with 6 months ago, prices remain elevated. Compared with 18 months ago, for example, inflation has increased by 8.3%.

Food prices continued to rise sharply–up 10.6% y/y, marking the seventh consecutive month of double-digit increases. Supply constraints amid unfavourable weather in growing regions and higher input costs such as animal feed, energy and packaging materials continue to put upward pressure on grocery prices.
Price growth for some food items such as cereal products (+14.8%), sugar and confectionary (+6.0%) and fish, seafood and other marine products (+7.4%) accelerated on a year-over-year basis in February.

Prices for fruit juices were up 15.7% year over year in February, following a 5.2% gain in January. The increase was led by higher prices for orange juice, as the supply of oranges has been impacted by citrus greening disease and climate-related events, such as Hurricane Ian.

In February, energy prices fell 0.6% year over year, following a 5.4% increase in January. Gasoline prices (-4.7%) led the drop, the first yearly decline since January 2021. The year-over-year decrease in gasoline prices is partly the result of a base-year effect, as prices began to rise rapidly in the early months of 2022 during the Russian invasion of Ukraine.

Conversely, the mortgage interest cost index increased at a faster rate year over year in February (+23.9%) compared with January (+21.2%), the fastest pace since July 1982. The increase occurred amid a higher interest rate environment.

Bottom Line

The Bank of Canada is no doubt delighted that inflation continues to cool. Canada’s inflation rate is low compared to the US at 6.0% last month, the UK at 10.1%, the Euro Area at 8.5%, and Australia at 7.2%.

The Bank was already in pause mode and will likely stay there when they meet again in April

The Canadian aggregate benchmark home price dropped 1.1% in February, the smallest month-to-month decline of rapid interest rate increases in the past year. The unprecedented surge in the overnight policy rate,  from a mere 25 bps to 450 bps, has not only slowed housing–the most interest-sensitive of all spending–but has now destabilized global financial markets.

In the past week, three significant US regional financial institutions have failed, causing the Fed, the Federal Deposit Insurance Corporation and the Treasury to take dramatic action to assure customers that all money in both insured and uninsured deposits would be refunded and the Fed would provide a financial backstop to all financial institutions.

Stocks plunged on Monday as the flight to the safe haven of Treasuries and other government bonds drove shorter-term interest rates down by unprecedented amounts. With the US government’s reassurance that the failures would be ring-fenced, markets moderately reversed some of Monday’s movements.

But today, another bogeyman, Credit Suisse, rocked markets again, taking bank stocks and interest rates down even further. All it took was a few stern words from Credit Suisse Group AG’s biggest shareholder on Wednesday to spark a selloff that spread like wildfire across global markets.

Credit Suisse’s shares plummeted 24% in the biggest one-day selloff on record. Its bonds fell to levels that signal deep financial distress, with securities due in 2026 dropping 20 cents to 67.5 cents on the dollar in New York. That puts their yield over 20 percentage points above US Treasuries.

For global investors still, on edge after the rapid-fire collapse of three regional US banks, the growing Credit Suisse crisis provided a new reason to sell risky assets and pile into the safety of government bonds. This kind of volatility unearths all the investors’ and institutions’ missteps. Panic selling is never a good thing, and traders are scrambling to safety, which means government bond yields plunge, gold prices surge, and households typically freeze all discretionary spending and significant investments. This, alone, can trigger a recession, even when labour markets are exceptionally tight and job vacancies are unusually high.

Canadian bank stocks have been sideswiped despite their much tighter regulatory supervision. Fears of contagion and recession persist. Job #1 for the central banks is to calm markets, putting inflation fighting on the back burner until fears have ceased.

Larry Fink, CEO of Blackrock, reminded us yesterday that previous cycles of rapid interest rate tightening “led to spectacular financial flameouts” like the bankruptcy of Orange County, Calif., in 1994, he wrote, and the savings and loan crisis of the 1980s and ’90s. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S.&L. crisis) with more seizures and shutdowns coming,” he said.

So it is against that backdrop that we discuss Canadian housing. The past year’s surge in borrowing costs triggered one of the record’s fastest declines in Canadian home prices. Sales were up in February, the markets tightened, and the month-over-month price decline slowed.

With new listings falling considerably and sales increasing in February, the sales-to-new listings ratio jumped to 58.4%, the tightest since last April. The long-term average for this measure is 55.1%.

There were 4.1 months of inventory on a national basis at the end of February 2023, down from 4.2 months at the end of January. It was the first time the measure had shown any sign of tightening since the fall of 2021. It’s also a whole month below its long-term average.

The Aggregate Composite MLS® HPI sits 15.8% below its peak in February 2022.

Looking across the country, prices are down from peak levels by more than they are nationally in most parts of Ontario and a few parts of British Columbia and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks. Prices began to stabilize last fall in the Maritimes. Some markets in Ontario seem to be doing the same now.

Despite these significant declines, prices remain roughly 28% above pre-pandemic levels.

Last month I wrote, “The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.”

Given the past week’s events, all bets are off regarding central bank policy until and unless market volatility abates and fears of a global financial crisis diminish dramatically. Although the overnight policy rates have not changed, market-driven interest rates have fallen precipitously, which implies the markets fear recession and uncontrolled mayhem. As I said earlier, job #1 for the Fed and other central banks now is to calm these fears. Until that happens, inflation-fighting is not even a close second. I hope it happens soon because what is happening now is not good for anyone.

Judging from experience, this could ultimately be a monumental buying opportunity for the stocks of all the well-managed financial institutions out there. But beware, markets are impossible to time, and being too early can be as painful as missing out.