Canadian Jobs Market Tanks in December

General Michelle Foster 12 Jan

Canadian employment fell 62,600 last month, a bit weaker than expected, following seven months of recovery (see chart below). The rapid rise in COVID cases and the ensuing lockdown measures in many key regions caused the net loss in jobs in the mid-December survey. Especially hard hit were workers at restaurants and hotels who suffered a hefty 56,700 employment loss.

The jobless rate rose a tick to 8.6%–well below the peak of 13.7% in April–but still three percentage points above its pre-pandemic level.

However, there were some bright spots as several sectors churned out small gains (see second chart below). Among them were finance, insurance and real estate, as well as scientific and tech services. Manufacturing rose 15,400, and public administration reported solid gains.

On a positive note, full-time jobs actually rose 36,500, and average wages pushed back up and are now 5.6% higher than one year ago. This outsized gain, in part, reflects the loss in so many low-wage jobs.

Part-time jobs were down sharply in December, led by losses among workers aged 24 and under and those aged 55 and older. Also, the number of self-employed workers fell by 62,000, its lowest point since the pandemic began.

The December loss of jobs left employment down 571,600 (or -3.0%) from year-ago levels, the deepest annual decline since 1982–but far better than the April reading of -15% y/y. The 2020 job loss in Canada of -3.0% is also a relatively mild downturn compared to today’s US job market release for December, which reported a -6.2% y/y drop in employment. In Canada, the 332,300 y/y loss in accommodation and food services employment alone accounted for 58% of our annual job loss.

Employment was down in nine out of ten provinces last month. The lucky exception was British Columbia. None of the provinces stood out on the low side. The table below shows the unemployment rate by province. Jobless rates rise and fall with labour force participation rates. You are not considered unemployed if you are not seeking work. The number of people counted as either employed or unemployed dropped by 42,000 (-0.2%) in December, the first significant decline since April. Core-aged women and young males were largely responsible for the fall.

Bottom Line

It certainly doesn’t appear that the lockdowns will be lifted anytime soon. We keep hitting new records in the number of Covid cases, and the more contagious Covid variant is upon us. What’s more, the rollout of the vaccine has been disturbingly slow. So until winter is behind us, there is unlikely to be a meaningful opening of the economy. All things considered, Canada’s economy has been relatively resilient. That’s not surprising given the government income support–the most generous in the G7 countries. Moreover, financial conditions are extremely accommodative.

Although no one is coming through the pandemic unscathed, most of the employment losses have been lower-paying jobs. Many higher-income earners continue to work from home. And even though the pandemic is worsening, many of Canada’s housing markets recorded their strongest December ever. Rock-bottom interest rates, high household savings and changing housing needs turned 2020 into a spectacular year for housing activity.

According to local real estate boards, December resales were surprisingly strong for what is typically a quiet month. Existing home sales surged between 32% y/y in Montreal, Ottawa and Edmonton and 65% y/y in Toronto based on early results. More distant suburbs attracted many families looking for more space with less concern about long commutes when jobs can be conducted at home. Property values continued to appreciate at accelerating rates in most markets. Downtown condo prices still bucked the trend due to ample inventories in Canada’s largest cities—the downturn in the rental market has prompted many condo investors to sell. That said, softer condo prices are now drawing more buyers in. Existing condo sales soared virtually everywhere in December.

Housing is likely to continue to cushion the blow of the pandemic on the overall economy. And while not everyone is sharing in this windfall, it will ultimately help pave the way to better employment gains in the spring.

However, no question that the bright light at the end of the very dark pandemic tunnel is a widely dispersed vaccine. PM Trudeau reasserted this week that the vaccine will be available to all who want it by September 2021. At the pace, it is now getting into people’s arms, that will not happen. Just over 0.6% of Canada’s population was vaccinated as of Thursday, January 7. By comparison, the US had vaccinated 1.8% of its population by that date, and Israel had inoculated nearly 20%, according to Our World in Data, a nonprofit research project at the University of Oxford. The U.K. had vaccinated about 1.9% of its population by Jan. 3, the latest date for which vaccination numbers were available (see the chart below).

Please Note: The source of this article is from SherryCooper.com/category/articles/

Canadian Home Sales and Prices Set Records Again in September

General Michelle Foster 16 Oct

Canadian Home Sales and Prices Set Another Record High in September

Today’s release of September housing data by the Canadian Real Estate Association (CREA) shows national home sales rose 0.9% on a month-over-month (m-o-m) (see chart below). This continues the rebound in housing that began five months ago amid record-tight market conditions.

“Along with historic supply shortages in a number of regions, fierce competition among buyers has been putting upward pressure on home prices. Much of that was pent-up demand from the spring that came forward as our economies opened back up over the summer,” said Costa Poulopoulos, Chair of CREA.

According to Shaun Cathcart, CREA’s Senior Economist, “Reasons have been cited for this – pent-up demand from the lockdowns, Government support to date, ultra-low interest rates, and the composition of job losses to name a few. I would also remind everyone that sales were almost setting records and markets were almost this tight back in February so we were already close to where things are now, as far away from Goldilocks territory as we had ever been before. But I think another wildcard factor to consider, which has no historical precedent, is the value of one’s home during this time. Home has been our workplace, our kids’ schools, the gym, the park and more. Personal space is more important than ever.”

The modest uptick in home sales nationally reflected diverse results regionally with about 60% of local markets seeing gains. Increases in Ottawa, Greater Vancouver, Vancouver Island, Calgary and Hamilton-Burlington sales were mostly offset by declines in the Greater Toronto Area (GTA) and Montreal; although, activity in the two largest Canadian markets is still historically very strong.

Actual (not seasonally adjusted) sales activity posted a 45.6% y-o-y gain in September. It was a new record for the month of September by a margin of  20,000 transactions, the equivalent of a normal month of September with an entire month of December tacked on. Sales activity was up in almost all Canadian housing markets on a year-over-year basis.

New Listings

The number of newly listed homes declined by 10.2% in September, reversing the surge to record levels seen August. New supply was down in two-thirds of local markets, led by declines in and around Vancouver and the GTA.

With sales edging up in September and new supply dropping back, the national sales-to-new listings ratio tightened to 77.2% – the highest in almost 20 years and the third-highest monthly level on record for the measure.

Based on a comparison of sales-to-new listings ratio with long-term averages, about a third of all local markets were in balanced market territory, measured as being within one standard deviation of their long-term average. The other two-thirds of markets were above long-term norms, in many cases well above.
There were just 2.6 months of inventory on a national basis at the end of September 2020 – the lowest reading on record for this measure. At the local market level, a number of Ontario markets are now into weeks of inventory rather than months. Much of the province of Ontario is close to or under one month of inventory.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.3% m-o-m in September 2020. Of the 39 markets now tracked by the index, all but two were up between August and September.

As buyers are moving further away from city centres, CREA added a large number of Ontario markets to the MLS® HPI this month. The list includes Bancroft and Area, Brantford Region, Cambridge, Grey Bruce Owen Sound, Huron Perth, Kawartha Lakes, Kitchener-Waterloo, the Lakelands (Muskoka-Haliburton-Orillia-Parry Sound), London & St. Thomas, Mississauga, North Bay, Northumberland Hills, Peterborough and the Kawarthas, Quinte & District, Simcoe & District, Southern Georgian Bay, Tillsonburg District and Woodstock-Ingersoll.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 10.3% on a y-o-y basis in September – the biggest gain since August 2017. The largest y-o-y gains in the 22-23% range were recorded in Bancroft and Area, Quinte & District, Ottawa and Woodstock-Ingersoll.

This was followed by y-o-y price gains in the range of 15-20% in Barrie, Hamilton, Niagara, Guelph, Brantford, Cambridge, Grey Bruce-Owen Sound, Huron Perth, the Lakelands, London & St. Thomas, North Bay, Simcoe & District, Southern Georgian Bay, Tillsonburg District and Montreal.

Prices were up in the 10-15% range compared to last September in the GTA, Oakville-Milton, Kawartha Lakes, Kitchener-Waterloo, Mississauga, Northumberland Hills, Peterborough and the Kawarthas, and Greater Moncton.

Meanwhile, y-o-y price gains were around 5% in Greater Vancouver, the Fraser Valley, the Okanagan Valley, Regina, Saskatoon and Quebec City. Gains were about half that in Victoria and elsewhere on Vancouver Island, as well and in St. John’s, and prices were more or less flat y-o-y in Calgary and Edmonton.

The actual (not seasonally adjusted) national average home price set another record in September 2020, topping the $600,000 mark for the first time ever at more than $604,000. This was up 17.5% from the same month last year.

 

Bottom Line

Housing strength is largely attributable to record-low mortgage rates and pent-up demand by households that have maintained their level of income during the pandemic. The hardest-hit households are low-wage earners in the accommodation, food services, and travel sectors. These are the folks that can least afford it and typically are not homeowners.

The good news is that the housing market is contributing to the recovery in economic activity.  

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Throne Speech: Canada’s Response to COVID-19

Latest News Michelle Foster 28 Sep

Throne Speech: Canada’s Response to COVID-19

Prorogation on August 18, following the resignation of Finance Minister Morneau, a new session of Parliament, and a new speech from the throne was meant to allow the government to hit the reset button. And for Prime Minister Justin Trudeau, to try and move past the summer of controversy involving WE Charity and the Canada Student Service Grant.

THE FISCAL PICTURE

There was little opposition earlier this year when the federal government backstopped nearly every economic sector through emergency benefits, wage subsidies, and other programs. But with the federal deficit approaching $400 billion, there are growing calls to temper new spending.

The new Finance Minister, Christia Freeland, has consulted with former prime minister Paul Martin, who erased deficits as finance minister more than 20 years ago. And she claimed this week to be “well aware” of concerns about federal spending and the fiscal balance but said getting more people back to work was a top priority, along with managing a second wave of COVID-19 infections.

“The single most important economic policy of our government and the best thing we can do for our economy is to keep coronavirus under control,” Freeland said. “I can’t emphasize that too much. Some people sometimes like to talk about a trade-off between good health policy and good economic policy. I could not disagree more strongly.”

Today’s throne speech is one of the most highly-anticipated throne speeches in recent memory–amid a slowing economic recovery and rising COVID case counts. Though not an economic blueprint, it lays out Ottawa’s vision for what policy supports it believes are needed to carry the country through the next phase of recovery.

Measures already floated include improved permanent support for the unemployed–building on exceptional levels of policy support delivered over the spring and summer. Estimates for how much all of that will cost will await a fall fiscal update and subsequent budget.

COVID-19 CASE COUNTS TICK HIGHER AS THE ECONOMIC RECOVERY SLOWS

A barrage of reports issued in the past week reinforced what will probably be a historically large, and yet still only partial, bounce-back in economic activity over the summer in Canada. Home resales surged again in August. Reports on retail, wholesale, and manufacturing trade for July left GDP still on track to rebound 40% (at an annualized rate) in the third quarter. But that would only retrace only about 57% of the decline over the first half of the year. And early data – including Royal Bank’s tracking of credit card purchases–continue to flag a slowing pace of recovery.

Meantime, virus case counts are being watched more closely again in Canada, given a faster uptick in recent weeks, particularly in Ontario, Quebec, British Columbia, and Alberta. This latest wave of infections has been more concentrated among less vulnerable age cohorts, meaning fewer hospitalizations. Still, easing in containment measures has already been paused, and in some spots, reversed. At a minimum, the increased spread is another reminder that there are limits to how much the economy will recover while the virus threat remains.

In today’s speech from the throne, the Governor General was expected to lay out the government’s vision for the pandemic recovery. It won’t be easy, with COVID-19 cases on the rise and investor confidence wobbling. While the economy has improved since April lows, the recovery continues to be fragile–especially in the face of a possible second wave. Where should the government focus its investments? And if it survives the confidence vote, what could we expect in its next budget?

Trudeau insisted that he does not want a campaign soon — but would be ready if necessary. “I think it’s irresponsible to say that an election would be irresponsible,” Trudeau told reporters. “Our country and our institutions are stronger than that, and if there has to be an election, we’ll figure it out.”

“I don’t think that’s what Canadians want. I don’t think that’s what opposition parties want, and it’s certainly not what the government wants.”

A MATTER OF CONFIDENCE

Regardless of how many specifics or dollar figures are in the speech from the throne, it will be a confidence test for the Trudeau government, 15 seats shy of a majority in the House of Commons.

Without support from one major opposition party, an election is likely. But it’s not clear if that’s the kind of reset button opposition leaders are ready to press.

NDP Leader Jagmeet Singh wants a pledge to extend the Canada Emergency Response Benefit while the Employment Insurance system is reformed. And he wants a clear pledge to extend access to paid sick leave.

Singh told CPAC he heard no specific commitments from Prime Minister Justin Trudeau when the two spoke last week. But he will be watching for signals from the government, not just in the speech itself, but in the debate and legislation that follows.

From new Conservative leader Erin O’Toole, recently given a positive COVID-19 diagnosis: “Let’s see the plan, and if it’s for the betterment of the country, we’ll support parts of that plan. If we don’t see it, we’ll put forward our own vision”.

The Bloc Quebecois, meanwhile, has threatened to try and force an election over the WE affair unless Trudeau steps down. And the party wants increased health care transfers to the provinces, more support for seniors, respect for Quebec jurisdictions, and support for supply-managed farmers.

But their leader will not be on Parliament Hill as the House of Commons resumes; Yves-François Blanchet has tested positive for COVID-19 and tweeted Tuesday that he and O’Toole would wait to give their formal replies to the speech until after their isolation periods had ended.

ACTUAL MEASURES IN THE THRONE SPEECH

Overcoming pandemic is the key theme of the speech. COVID-19 has been incredibly hard for parents, especially women, young people, older adults, and Black and racialized Canadians. Low wage earners have been hardest hit.

Fight the pandemic and save lives

  • Faster testing, short-term closure orders in high-case areas
  • Help businesses in those areas
  • Additional PPE funding
  • More funding to keep schools safe
  • Vaccine strategy
  • Immunity task force led by scientists

Supporting Canadians Through this Crisis

  • Emergency Wage Subsidy extended
  • Job loss supports
  • Government creates jobs, assists training, youth employment strategy,
  • CERB recipients now supported by EI system–broadened to include self-employed and gig workers
  • Action Plan for women–child care services, create a Canada-wide early childhood education system, after school programs, support for women entrepreneurs.
  • Aid to small businesses
  • Improve business credit, assistance to sectors hardest hit

Build back better to create a more resilient Canada

  • Stimulus for recovery that is done prudently
  • Reduce income inequality by raising taxes stock options and wealth
  • Increase taxes on the digital giants that do business in Canada
  • Defend the strength of the middle class
  • Fighting climate change and commitment to sustainable growth
  • Long-term care homes assistance, new standards for care
  • Increase Old Age Security at age 75
  • Primary care physicians for every region
  • Mental Health resources increased
  • National Universal Pharmacare
  • Telemedicine
  • Limiting firearms
  • National Action Plan on gender-based violence
  • Affordable housing growth
  • All Canadians have access to highspeed internet
  • Affordable regional air services
  • Eliminate chronic homelessness
  • Enhance First-time homebuyer incentive
  • Address food insecurity and enhance local food supply chains, protect food workers
  • Support farmers
  • Introduce the most extensive training and education and accreditation programs in Canadian history
  • Create good jobs in climate action sectors
  • Exceed Canada’s 2030 climate goals
  • More transit options, zero-emissions vehicles and batteries, electric charging stations
  • Cut corporate tax rate in half for clean technology companies
  • Support natural resource and oil companies as they move towards zero-emission and clean-energy goals
  • Ban single-use plastics next year
  • Clean water and irrigation plans

Stand up for who we are as Canadians–welcoming and fights discrimination

  • We take care of each other, welcome newcomers, embrace two official languages
  • Address systemic racism
  • Help Indigenous, First Nations, and Mate peoples
  • Take action on online hate, support employment of Blacks and racialized people
  • Reform criminal justice system and law enforcement
  • Encourage immigration and family unification
  • Invest more in developing economies
  • Support human rights, bring detained Canadians home

BOTTOM LINE

This is an ambitious agenda. Many of these proposals are sweeping commitments. Spending details will come later, likely in a fiscal update in November or December.

The speech did not extend the CERB, which the NDP said was a condition of support. Also, the NDP asked for paid sick leave, which was not mentioned.

Quickly following the speech,  the Conservatives’ initial response was that they could not support this proposal. Among other things, they berated that there was no fiscal framework or anchor to prevent further downgrades of Canadian credit ratings. According to deputy leader Candice Bergen, Conservatives will not support a speech from the throne filled with “buzzwords” and “grand gestures” that ignores the ailing energy sector, farmers, the unemployed, and struggling small business owners.

The political posturing will continue.

In the next week, the speech will be debated, during which time, the government can make changes.

 

Original Post by:

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Canada’s Economy is Outperforming the US

General Michelle Foster 5 Aug

Canadian Economy Recovers Almost Half Its COVID-Induced Loss in May and June

The Canadian economy bounced back sharply in May and June as Canadian provinces eased lockdown measures.

GDP expanded 4.5% in May, and activity in June was even more robust at an estimated 5% rise. Cumulatively, GDP rose 10% in May and June, after plummeting more than 18% in March and April. These figures are calculated on a month-over-month basis.

These figures point to about a 40% annual rate decline in second-quarter GDP in Canada, which is roughly in line with economists’ projections. South of the border, the US posted a 33% contraction in GDP for the second quarter, the most massive plunge on record (see details below). It’s not surprising that Canada’s economy tanked by more than the US in Q2, as Canada enacted more aggressive restrictions earlier than the US and eased them more slowly. These public health restrictions were well worth it, as Canada has had far greater success at flattening the curve of new cases and deaths. Moreover, Canada’s economy will likely outpace the US in Q3, showing the benefit of allowing the public health considerations to dominate.

Canadian output was up in most sub-sectors in May, with double-digit monthly gains by retailers coinciding with the reopening of many stores. Construction, too, recorded a strong rebound, with activity up 17.6% month-over-month in the sector.

Activity at food services and bars rose 35.1% in May as dining rooms and patios began to open in certain parts of the country, while other restaurants continued relying exclusively on take-out and delivery. Meanwhile, accommodation services dropped 2.3%, as ongoing restrictions on international and interprovincial travel kept most Canadians at home.

Real estate and rental and leasing increased 1.5% in May following a 3.4% decline in April. Activity at the offices of real estate agents and brokers jumped 57.1% in the month, as home resale activity in nearly all major urban centres increased in conjunction with a substantial increase in the number of newly listed homes. Nevertheless, the output of real estate agents and brokers remained 44% below February’s level.

Arts, entertainment, and recreation declined another 2.9%. We expect some of these services industries to continue to lag the recovery as demand will be slow to rise due to remaining safety protocols and concerns about virus spread.

Oil production remained sluggish in May, down another 2.7% from April and drilling activity has yet to show signs of a significant rebound into the summer.

US ECONOMY SHRINKS AT A RECORD 32.9% PACE IN Q2

US gross domestic product shrank 9.5% in the second quarter from the first, a drop that equals an annualized pace of 32.9%, the Commerce Department’s initial estimate showed on Thursday. That’s the steepest annualized decline in quarterly records dating back to 1947. The drop in GDP in the quarter was close to expectations but was still alone more than twice the total 6-quarter peak-to-trough decline in the 2008/09 recession.

Consumer spending, which makes up about two-thirds of GDP, slumped an annualized 34.6%, also the most on record. While employment, spending and production have improved since reopenings picked up in May and massive federal stimulus reached Americans, a recent surge in infections has tempered the pace of the recovery.

US Jobless Claims

A separate report Thursday showed the number of Americans filing for unemployment benefits increased for a second straight week. Initial claims through regular state programs rose to 1.43 million in the week ended July 25, up 12,000 from the prior week, the Labor Department said. There were 17 million Americans filing for ongoing benefits through those programs in the period ended July 18, up 867,000 from the prior week.

While the economic restart has helped put 7.5 million Americans back to work in May and June combined, payrolls are down more than 14.5 million from their pre-pandemic peak.

“We have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity,” Fed Chairman Jerome Powell said at a news conference Wednesday after the central bank’s two-day policy meeting. “On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” though it was too soon to say how extensive — or sustained — this period would be, he said. This is a reminder that there are limits to how much the economy can rebound to a ‘new normal’ in the absence of a vaccine or more effective treatments.

According to Bloomberg News, The US economy has stalled for the fourth consecutive week as new virus cases continue to surge and some lockdown measures have been reinstated. In the week ending July 24, we saw a decline in US public transit ridership, airline passengers, mortgage applications, consumer confidence, and same-store sales.

With the election only three months away, American voters will have to decide whether to re-elect President Donald Trump to a second term against a backdrop of the virus-induced recession and his response to the health crisis. Not surprisingly, Donald Trump floated the idea of delaying the election in a tweet yesterday morning, suggesting once again the false claim that widespread mail-in voting would make the election “inaccurate and fraudulent.” The president has no power to postpone or cancel an election on his own, and his comment triggered a hugely negative response from both his own party and the Democrats. 

In the meantime,a $600 weekly supplement to unemployment benefits that has provided a key economic lifeline for millions of Americans ends today with Republicans and Democrats still quarrelling over a path forward. This, while US coronavirus deaths now top 152,000, hitting records in Texas and Florida and Dr. Anthony Fauci warns that the disease is spreading rapidly to the Midwest.

BOTTOM LINE

The Canadian economy is outpacing the US in the early recovery period.

Some of the initial bounce-back in Canada – particularly in the housing market – probably reflects the release of pent-up demand generated during the lockdown. Unprecedented income supports have also helped prop up near-term household purchasing power. Payments from CERB alone looked larger than total wage losses through the downturn in April, and we expect to see more of the same in May payroll employment and wage numbers in the week ahead.

The threat of a resurgence in virus spread will still limit the amount that the economy can recover over the second half of this year – and activity in the oil and gas sector still looks exceptionally soft. We still expect GDP to be more than 5% below year-ago levels, and the unemployment rate elevated, in Q4. But there is some scope for Canada to outperform the US in the very near-term, provided virus spread can remain relatively well contained.

According to early advance data for July published by RBC economics, retail and recreation activity in Canada continues to recover more quickly than in the US states suffering surging COVID cases (see chart below).

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Bank Of Canada Holds Rates Steady and Continues QE Program

Latest News Michelle Foster 17 Jul

Bank of Canada Holds Target Rate Steady Until Inflation Sustainably Hits 2%

The Bank of Canada under the new governor, Tiff Macklem, wants to be “unusually clear” that interest rates will remain low for a very long time. To do that, they are using “forward guidance”–indicating that they will not raise rates until capacity is absorbed and inflation hits its 2% target on a sustainable basis, which they estimate will take at least two years. As well, they indicate that the risks to their “central” outlook are to the downside, which would extend the period over which interest rates will remain extremely low. The Bank also made it clear that they are not considering negative interest rates. The benchmark interest rate remains at 0.25%, which is deemed to be its the lower bound.

The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

With the benchmark rate at its effective lower bound, the Bank’s quantitative easing is the way it is lowering mid- to longer-term interest rates, reducing the borrowing costs for Canadian households and businesses. The Bank assumes that the virus will be with us for the entire forecast range, which is two years.

The Bank released its new economic forecast in today’s July Monetary Policy Report (MPR). The MPR presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus in Canada or globally.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the most profound decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.

Mincing no words, the MPR acknowledged that the COVID-19 pandemic has caused a “worldwide health-care emergency as well as an economic calamity.” The course of the pandemic is inherently unknowable, and its evolution over time and across regions remains highly uncertain.

In Canada, the number of new COVID-19 cases has fallen sharply from its April high, and the economic recovery has begun in all provinces and territories and across many sectors. Consequently, economic activity is picking up notably as measures to contain the virus are relaxed. The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors (Figure 1 below). As a result, Canada’s economic output will likely take some time to return to its pre-COVID-19 level. Many workers and businesses can expect to face an extended period of difficulty.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

Bottom Line

Governor Macklem said in the press conference that what he wants Canadians to take away from today’s Bank of Canada’s actions is “Canadian interest rates are very low and will remain very low for a very long period”. The reopening of the Canadian economy is well underway. Economic activity hit bottom in April and began expanding in May and accelerated in June. About 1.25 million of the 3.0 million jobs that were lost in March-April, were added in May and June.

Some activities, including motor vehicle sales, have already seen a strong pickup since April. Likewise, housing activity fell sharply during the lockdown but is beginning to recover quickly. In contrast, some of the hardest-hit businesses, such as restaurants, travel and personal care services, have only just started to see improvements in recent weeks and are expected to continue to face significant challenges.

The chart below, from July’s MPR, shows that household spending patterns have shifted since the onset of the pandemic. Some of these shifts might last. In the central scenario, the effects of the downturn and lower immigration hold down housing activity over the next few years. After a near-term boost from pent-up demand, residential investment slowly increases as income and confidence recover.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

CMHC Makes It Harder To Qualify For An Insured Mortgage

General Michelle Foster 12 Jun

CMHC MAKES IT HARDER TO QUALIFY FOR AN INSURED MORTGAGE

Once again, the Canadian Mortgage and Housing Corporation (CMHC) is tightening the criteria to get a mortgage with less than a 20% down payment. Any potential home buyer with less than a 20% down payment must purchase default insurance on their loan and have a minimum down payment of 5%. CMHC is a federal Crown Corporation that provides such default insurance. Its mandate is to help Canadians access affordable housing options. Providing mortgage insurance to home buyers is one of its main activities. Mortgage default insurance protects lenders in the event a borrower ever stopped making payments and defaulted on their mortgage loan–a very infrequent occurrence in Canada.

There are private providers of default insurance as well–Genworth Financial Canada and Canada Guaranty. CMHC is the only insurer of mortgages for multi-unit residential properties, including large rental buildings, student housing and nursing and retirement homes. It is the largest provider of mortgage default insurance by far and is also the primary insurer for housing in small and rural communities.

Investment properties are not eligible for mortgage insurance. Because of this, the buyer needs at least a 20% down payment to buy an investment property. Homes costing more than $1 million, as well, are not eligible for mortgage insurance. Typically, the lender chooses the mortgage insurer.

Why is CMHC Tightening Qualifications?

The economics team at CMHC has predicted that owing to the pandemic lock down, home prices will likely fall by 9% to 18% over the next 12 months. They also believe that it will take at least two years for prices to return to pre-pandemic levels. The CMHC forecast for the economy is more pessimistic than many other forecasts, particularly that of the Bank of Canada, which asserted yesterday that the outlook for the economy was better than their April forecast suggested. Moreover, CMHC acknowledges the high degree of uncertainty associated with any forecast at this time. The Crown Corporation highlights the post-shutdown job losses, business closures and the drop in immigration that adversely affect Canadian housing.

They also have emphasized the 15% of existing mortgages that are now in deferral and believe there is a risk that 20% of all mortgages could be in arrears when deferrals end. Their stated justification for tightening qualification requirements is “to protect future home buyers and reduce risk“.

What Are These Changes In Underwriting Policies

Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:

  • The maximum gross debt service (GDS) ratio drops from 39 to 35
  • The maximum total debt service (TDS) ratio drops from 44 to 42
  • The minimum credit score rises from 600 to 680 for at least one borrower
  • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes

CMHC goes on to say that “to further manage the risk to our insurance business, and ultimately taxpayers, during this uncertain time, we have also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. Consultations have begun on the repositioning of our multi-unit mortgage insurance products.”

Here’s What We Know So Far

Anecdotal reports suggest that it is likely that private default insurers will not match CMHC’s lower debt ratios. They might, however, be more selective in their approval processes.

Canadian fiscal and monetary authorities are expending huge sums to keep the economy afloat, cushion the blow of the shutdown, and to make sure ample credit is available. These actions are intended to minimize unnecessary insolvencies. It is, therefore, surprising that a federal Crown Corporation would take these pro-cyclical actions now.

The exact impact of these changes will not be known until more details are available: How the Big Banks will respond with their own prime mortgage underwriting rules; how these new rules will apply to the securitization market; and how far the private default insurers will go along with these new rules.

Suffice it to say that this batters buyer and seller confidence and, all other things equal, has a net negative impact on the near-term housing outlook.  Most importantly, in my view, these changes are unnecessary to protect the prudence of Canada’s home lending practices. Mortgage delinquency rates are meager, and even the Bank of Canada’s forecast is for delinquencies to remain less than 1% of all outstanding mortgages. Moreover, home buyers with jobs who meet former qualifications would undoubtedly have a longer than two-year time horizon when buying their first homes. They were already qualifying at the posted rate that is more than 250 basis points above the contract rate. If anything, the pandemic recession assures that interest rates will remain very low over the next two years.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres

The Top 7 Misconceptions About Reverse Mortgages

General Michelle Foster 29 Apr

The Top 7 Misconceptions About Reverse Mortgages

How much do you really know about reverse mortgages? Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free. Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan. But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada. As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

  1. If you have a reverse mortgage, you no longer own your home

Nothing could be further from the truth. You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

  1. You will owe more than the value of your home in the end

Also, untrue. Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home. In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

  1. Only people younger than 62 can apply for a reverse mortgage

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older. In fact, as you age you are more likely to qualify for a higher amount on your loan. A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

  1. Failure to make payments can result in eviction

This myth is one of the most common when it comes to reverse mortgages. The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

  1. Arranging a reverse mortgage is very expensive

This is also untrue. Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee. When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

  1. Reverse mortgages have much higher interest rates than conventional mortgages

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive. Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place. For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

  1. You won’t be able to pass on your home to your children

The idea that your children won’t be able to inherit your home is a complete myth. Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away. Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact your DLC Mortgage Broker.

[1] The guarantee excludes administrative expenses and interest that has accumulated after the due date.

 

Posted by: Agostino Tuzi
National Partnership Director, Mortgage Brokers
HomeEquity Bank

Agostino Tuzi

AGOSTINO TUZI

Agostino Tuzi is the National Partnership Director, Mortgage Brokers at HomeEquity Bank.

WHY ARE MORTGAGE RATES RISING?

General Michelle Foster 31 Mar

Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.

In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.

What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.

The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.

So Why Are Mortgage Rates For New Loans Rising?

These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.

Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.

Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”

To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.

Lenders have also been swamped by thousands of applications to defer mortgage payments.

Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

BANK OF CANADA CUTS RATES 50 BPS TO 0.25%

General Michelle Foster 27 Mar

 

Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing. The Governing Council has been meeting every day during the pandemic crisis. Market illiquidity is a significant problem and one the Bank considers foundational. These large-scale purchases of financial assets are intended to improve the functioning of financial markets.

Credit risk spreads have widened sharply in recent days. People are moving to cash. Liquidity has dried up in all financial markets, even government-guaranteed markets such as Canadian Mortgage-Backed securities (CMBs) and GoC bills and bonds. The commercial paper market–used by businesses for short-term financing–has become nonfunctional. The Bank is making large-scale purchases of financial assets in illiquid markets to improve market functioning across the yield curve. They are not attempting to change the shape of the curve for now but might do so in the future.

These large-scale purchases will create the liquidity that the financial system is demanding so that financial intermediation can function. Risk has risen, which creates the need for more significant cash injections.

At the press conference today, Senior Deputy Governor Wilkins refrained from speculating what other measures the Bank might take in the future. When asked, “Where is the bottom?” She responded, “That depends on the resolution of the Covid-19 health issues.”

The Bank will discuss the economic outlook in its Monetary Policy Report at their regularly scheduled meeting on April 15. In response to questions, Governor Poloz said it is challenging to assess what the impact of the shutdown of the economy will be. A negative cycle of pessimism is clearly in place. The Bank’s rate cuts help to reduce monthly payments on floating rate debt. He is hoping to maintain consumer confidence and expectations of a return to normalcy.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates. The Covid-19 medical emergency and the shutdown dramatically exacerbates the situation. All that monetary policy can do is to cushion the blow and avoid structural problems to the economy. The overnight rate of 0.25% is consistent with market rates along the yield curve.

High household debt levels have historically been a concern. Monetary policy easing helps to bridge the gap until the health concerns are resolved. The housing market, according to Wilkins, is no longer a concern for excessive borrowing by cash-strapped households.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. The Bank can do this in virtually unlimited quantities as needed. The policymakers are also focussing on the period after the crisis. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

Fiscal stimulus is crucial at this time. The newly introduced income support for people who are not covered by the Employment Insurance system is a particularly important safety net for the economy. There are many other elements of the fiscal stimulus, and the government stands ready to do more as needed.

The Canadian dollar has moved down on the Bank’s latest emergency action. The loonie has also been battered by the dramatic decline in oil prices. Canada is getting a double whammy from the pandemic and the oil price war between Saudi Arabia and Russia. The loonie’s decline feeds through to rising prices of imports. However, the pandemic has disrupted trade and imports have fallen.

The Bank of Canada suggested as well that they are meeting twice a week with the leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust. The level of collaboration between the Bank of Canada and the Big Six is very high.

THE STOCK MARKET HAS HAD THREE GOOD DAYS

As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago. These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

STOCK AND BOND YIELDS PLUMMET AFTER SUNDAY FED CUT

General Michelle Foster 17 Mar

Fed Cuts Overnight Rate One Percentage Point But Markets Plummet

In an unprecedented Sunday afternoon meeting, the US Federal Reserve cut their key policy rate by 100 basis points (bps) to a level of 0%-to-0.25% (see chart below). Also, the Committee announced increased access to the discount window where the Fed makes loans to banks. The Fed is the lender-of-last-resort and is signalling that it will provide liquidity wherever needed. As well, with interest rates already so low, the Fed is well aware that rate cuts can only do so much. Thus, they are returning to quantitative easing–the buying of large volumes of U.S. government Treasury bills and bonds as well as mortgage-backed securities (MBS), to inject liquidity into the financial system.

The Treasury and US MBS markets are usually the deepest, most liquid markets in the world. But over the past two weeks, liquidity has dried up. Financial instability has risen sharply with the high level of volatility. Banks have experienced significant withdrawals as consumers are hoarding cash like everything else. The cost of funds to banks has risen sharply because of the enhanced perception of risk. With the collapse in oil prices, banks exposed to the oil sector are building up reserves for nonperforming loans. As businesses everywhere in nearly every sector shutdown, the risk of delinquencies rises further. Consumers who are housebound spend less money, and those who are freelancers or hourly wage earners might not get paid. Moreover, the shuttering of schools puts an added burden on parents who have no other daycare options for their kids.

All of this disruption, which according to the Center for Disease Control, could last months–the CDC recommended yesterday the shutdown of meetings of more than 50 people for eight weeks–has led to rising concern about the riskiness of banks. Bank shares have plummeted, and the yields on bank bonds have surged. Besides, banks and other mortgage lenders are fearful of being inundated with requests for refinancings, especially in the US, where penalties for breaking a mortgage are much lower than in Canada. Because of the refinancing surge in the US, the price of MBSs has fallen sharply, raising their yields and making the market highly illiquid.

The rising risk premiums, likely recession and illiquidity are causing banks in Canada and the US to raise some mortgage rates. Lenders are tightening the discount off the prime rate on variable-rate mortgage loans. Some fixed rates have edged higher as well. Such spread widening between mortgage rates and government yields happened during the financial crisis. Bank balance sheets will expand as troubled businesses and consumers extend their borrowings on their open lines of credit. Many will be unable to make timely interest payments. Loan loss reserves, already climbing, will rise further. Liquid deposits will be depleted as many are forced to live off of savings while shying away from selling stocks at markedly depressed prices.

These are not normal times. The Fed’s actions did nothing to calm markets. Indeed, stocks and bond yields plummeted in overnight trade, and the stock markets opened sharply lower in North America. The S&P 500 opened down over 8% while the TSX opened down 11%, triggering a circuit-breaker time out. This is the third time in a week the circuit breaker has hit. The TSX is down roughly 35% from its recent high (see chart below). The S&P 500 is down over 20%. The relative underperfomance of the Canadian stock market reflects our out-sized representation of the energy sector. The two weakest sectors in the TSX are the energy and financial sectors.

The world knows that the Fed and other central banks are running out of ammunition. Governor Powell said yesterday that he would not take the key fed funds rate into negative territory but instead would use “forward guidance” and asset purchases (quantitative easing) going forward.

The good news is that the banks are highly capitalized and much more resilient than during the financial crisis. Central banks since that time have put in place measures to monitor financial stability. Last Friday, the Canadian Office of the Superintendent of Financial Institutions (OSFI) reduced the capital requirements for Canadian banks to free up $300 billion for banks to support troubled borrowers. OSFI warned against the use of these funds to buy back stocks or raise dividends.

OSFI also suspended the proposed revision in the qualifying mortgage rate slated to begin April 6. The posted mortgage rate, published weekly by the Bank of Canada, will remain the qualifying mortgage rate. It is currently 5.19%, but it is expected to fall this week to around 4.95%.

But in these extraordinary times, there is a loss of confidence in the financial system. Some are calling for a full shutdown of the stock markets–but imagine the panic if no one could sell assets. There would truly be a run on the banks. Now is not a time to panic.

THE CANADIAN HOUSING MARKET
The Canadian Real Estate Association announced this morning that home sales recorded over the Canadian MLS Systems rose 5.9% in February, marking one of the more substantial month-over-month gains of the past decade. Actual (not seasonally adjusted) sales activity stood 26.9% above year-ago levels–keeping in mind that activity was quite weak one year ago. February 2019 marked a decade-low for the month, so a good part of the significant y-o-y gain reflects low levels of activity recorded at the time. February 2020 also benefited from an additional day due to the leap year.

The CREA President, Jason Stephen, said, “Home prices are accelerating in markets where listings are in increasingly short supply, specifically in Ontario, Quebec and the Maritimes which together account for about two-thirds of national sales activity. Meanwhile, ample supply across the Prairies and in Newfoundland and Labrador means increased competition among sellers.”

The number of newly listed homes jumped 7.3% in February compared to January, more than erasing the declines of late last year. New supply gains were posted in some large markets, including the Fraser Valley, Calgary, Edmonton, the GTA, Hamilton-Burlington, Kitchener-Waterloo, Windsor-Essex, Ottawa and Montreal.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.7% in February 2020 compared to January, marking its ninth consecutive monthly gain. The actual (not seasonally adjusted) national average price for homes sold in February 2020 was around $540,000, up 15.2% from the same month the previous year. See the table below for the regional move in prices.

But this is old news, particularly given all that has happened in the past two weeks. What comes next for the housing market? That depends on the course of the pandemic. Lower interest rates would typically be great news for the housing market, particularly for first-time homebuyers. But social distancing is hardly consistent with open houses and home shopping.

Moreover, volatility and instability reduce consumer confidence. Buyers that parked their downpayment savings in the stock markets have lost nearly a third of their money on paper. And how many sellers want a trail of strangers wandering through their homes during the pandemic. So the housing market, like everything else, is likely going to slow over the near term.

The Bank of Canada is hopeful that its rate cuts will stabilize the housing market from what might have otherwise been a substantial shutdown. Lower rates will filter through to lower monthly payments for floating-rate mortgage borrowers. Expect the Bank to cut rates again to near-zero levels, following in the footsteps of the Fed. So far, as of this writing, the Canadian banks have not responded to Friday’s BoC rate cut. The prime rate went down a full 50 bps on March 5 after the Bank cut its key rate by that amount on March 4. But so far, the Big-Six banks have not responded to the 75 bps cut three days ago.

Dr. Sherry Cooper
DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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