The Spring Housing Market Continues To Be Weak

National home sales via the Canadian MLS Systems remained little changed from April to May. Having slipped 0.1% lower, it marked the lowest level for national sales activity in more than five years. Slightly more than half of all local housing markets reported fewer sales in May compared to April, led by the Okanagan region, Chilliwack and the Fraser Valley, together with the Durham region of the Greater Toronto Area (GTA) and Quebec City. Declines in activity were offset by gains in Calgary, Thunder Bay, Brantford, London and St. Thomas, Oakville-Milton and the Quinte Region west of Kingston. A small increase in GTA sales also supported the national tally.

On a positive note, sales have stabilized suggesting that buyers could be adjusting to the impact of tighter mortgage rules and higher interest rates. After all, sales did climb 1.6% in Toronto, after falling to recession-era lows in April.

Still, CREA cut its 2018 sales forecast to 459,500 nationwide, which would represent an 11% decline from the 2017 pace. In March, the group had predicted a 7.1% slide.

Existing home sales in Canada remain stuck at a six-year low of 436,500 units on a seasonally adjusted annualized basis in May, representing the fifth consecutive monthly decline. The stress test, along with higher mortgage rates and new market-cooling measures in British Columbia continue to keep homebuyers on the sidelines. Not even a material rise in new listings (up 5.1%) enticed them back into play. Activity was at a virtual standstill last month in all three of Canada’s largest markets— Vancouver, Toronto and Montreal.

“This year’s new stress-test became even more restrictive in May since the interest rate used to qualify mortgage applications rose early in the month,” said, Gregory Klump, CREA’s Chief Economist. “Movements in the stress test interest rate are beyond the control of policymakers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”

New Listings
The number of newly listed homes rose 5.1% in May but remained below year-ago levels. New listings rose in about three-quarters of all local markets, led by Edmonton, Calgary, Montreal, Quebec City, Ottawa and the GTA.
With new listings up and sales virtually unchanged, the national sales-to-new listings ratio eased to 50.6% in May compared to 53.2% in April and stayed within short reach of the long-term average of 53.4%. Based on a comparison of the sales-to-new listings ratio with its long-term average, about two-thirds of all local markets were in balanced market territory in May 2018. There were 5.7 months of inventory on a national basis at the end of May 2018. While this marks a three-year high for the measure, it remains near the long-term average of 5.2 months.

Benchmark home prices in May were up from year-ago levels in 8 of the 15 markets tracked by the index (see Table below).
Composite benchmark home prices in the Lower Mainland of British Columbia continue to trend upward after having dipped briefly in the second half of 2016 (Greater Vancouver (GVA): +11.5% y/y; Fraser Valley: +20.6% y/y). Apartment and townhouse/row units have been mainly driving this regional trend while single-family home prices in the GVA have stabilized. In the Fraser Valley, single-family home prices have also started rising.
Benchmark home prices were up by 11.5% on a y/y basis in Victoria and by 18.1% elsewhere on Vancouver Island.

Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.8%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -5.4% y/y; Oakville-Milton: -5.9% y/y; Barrie and District: -6.3% y/y). This reflects rapid price growth recorded one year ago and masks recent month-over-month price gains in these markets.

Calgary and Edmonton benchmark home prices were down slightly on a y/y basis in May (Calgary: -0.5% y/y; Edmonton: -0.9% y/y), while prices in Regina and Saskatoon were down more noticeably from year-ago levels (-6.2% y/y and -2.7% y/y, respectively).
Benchmark home prices rose by 8.2% y/y in Ottawa (led by a 9.5% increase in two-storey single-family home prices), by 6.7% in Greater Montreal (driven by a 7.3% increase in two-storey single-family home prices) and by 4.3% in Greater Moncton (led by a 4.8% increase in townhouse/row unit prices).

Bottom Line
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada has taken a very cautious stance. However, at their last meeting, monetary policymakers have signalled that a rate hike is coming, likely when they next meet on July 11.
Five-year fixed mortgage rates have already risen roughly 110 basis points, while rates for new variable mortgages rose by close to 40 basis points. Since the implementation of new mortgage standards, nonprice lending conditions for mortgages and home equity lines of credit have also tightened.

In the Bank of Canada’s recently released Financial System Review, the central bank analysts observed that the updated Guideline B-20, which took effect at the beginning of this year, “is dampening credit growth and improving the quality of new mortgage lending, especially in regions with the highest house prices. For example, because of the new mortgage interest rate stress test, the size of a 5-year, fixed-rate mortgage with a 25-year amortization that a median-income borrower in Canada can qualify for dropped by about $82,000 to $373,000. The stress test will have more significant effects in markets such as the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), where house prices are higher relative to incomes and low-ratio mortgages are more common.

Canada’s May Job Loss in Manufacturing and Construction

In the private sector, the job losses were focused in manufacturing and construction. Manufacturing has been weak all year no doubt dampened by the continuing uncertainty surrounding NAFTA. The latest trade battles have postponed any NAFTA decisions until 2019. Not only has the U.S. imposed tariffs on shipments of Canadian steel and aluminum, but Trump is now pushing for separate one-on-one trade negotiations with Canada and Mexico.

This divide-and-conquer strategy will only prolong the uncertainty, and it is not clear that the 24-year old NAFTA deal will endure. Reciprocal tariffs by Canada, Mexico and many other U.S. trade partners will continue to disrupt economic activity worldwide.

Construction employment fell for the second consecutive month, decreasing 13,000 in May. Construction jobs are little changed from a year earlier, with recent declines offsetting gains observed in late 2017. Housing activity has slowed markedly in the past 12 months in response to government and regulatory measures to slow residential activity.

Much of the decline in jobs can be chalked up to B.C., where employment fell by 12,400 in May. Mixed performances were observed elsewhere. But B.C. has exceptionally tight labour markets where the unemployment rate has fallen to 4.8%, the lowest in the country. Job losses there might well reflect an inability to find appropriate workers (see chart below).

The jobs market remains very tight in Canada as an increasing number of employers report job vacancies and difficulty in finding experienced workers in some sectors. Labour shortages and provincial hikes in minimum wages have boosted income. Average hourly wages for permanent workers rose 3.9% from a year earlier, matching a pace last seen in April 2009, and the number of hours worked climbed by 2%. Wage gains hitting a nine-year high was undoubtedly helped by Quebec’s minimum wage increase, but the broader story of price pressures remains–12 of 16 major industries saw wage growth above the 3% mark in May, which also marked the twelfth straight month of real wage gains.

Industrial company capacity utilization rose to 86.1% in the first quarter, the highest since 2006, Statistics Canada said in a separate report. It was the seventh consecutive gain.

The Bank of Canada has said it is closely monitoring income growth as it considers whether to raise interest rates again next month. The job market is expected to remain strong this year with unemployment holding close to record lows despite trade uncertainty and weaker housing. Governor Poloz on Thursday said there are signs of “solid” expansion.

The Bank of Canada is expected to hike interest rates when the Governing Council meets again in July, adding to the three rate hikes over the past year.

Housing Slowdown and Wilting Consumers Dampened Q1 Canadian GDP Growth

Yesterday, the BoC told us in its press release that the first quarter’s growth exceeded their expectations. Most economists were expecting first-quarter growth to come in at 1.8%, and so was the BoC. Only goes to show that not even the central bank has a crystal ball.

Growth was dampened by a deceleration in household spending, lower exports of non-energy products and a decline in housing investment. Consumer spending decelerated for the third consecutive quarter–rising by 1.1% in Q1 compared to 2.2% last quarter. The growth in consumption peaked in the first quarter of last year at a robust 4.0% annual rate. Household spending growth has decelerated to its slowest pace in three years. Consumer spending on goods such as automobiles stalled after almost three years of gains.

Growth in business spending on capital projects slowed to 3.5% from 9.7% in the final period of last year, and foreign trade was a drag on growth as exports climbed less than imports.

The most significant decline was in housing. Investment in housing fell 7.2%, the most since 2009, on a whopping 13.5% plunge in ownership transfer costs such as real estate and mortgage broker commissions (see chart). That reflected new mortgage stress test measures that began in January, Statistics Canada said.

The pace of economic expansion in Canada has now been below 2% for three consecutive quarters, the worst performance since the oil crash in mid-2015. The economy had recovered with gains exceeding 4% in the first half of last year when Canada boasted the most robust economy in the G-7. In the first quarter of this year, while Canada’s economy grew at a 1.3% pace, the GDP growth in the United States was 2.2%.

BoC Deputy Governor Leduc’s speech later today may give some hints about how today’s releases impact the Bank’s thinking, but in general, a July rate hike is still in play after yesterday’s no-change decision.