Geoff Cowling

Canadian inflation, as measured by the Consumer Price Index (CPI), registered 2 per cent in the twelve months to December, a slight uptick from 1.7 per cent in November. Lower energy prices were offset by an increase in air transportation, and telephone services.  Excluding the impact of falling gasoline prices, consumer prices were up 2.5 per cent. The Bank of Canada's three measures of trend inflation were all unchanged, averaging 1.9 per cent.   In BC, provincial consumer price inflation was 3 per cent in the 12 months to December. 

With core inflation trending sideways and the economy expected to slow this year, the odds of further Bank of Canada tightening this year are diminishing, which is being reflected by lower 5-year yields in the Canadian bond market. That should result in a dip in Canadian mortgage rates relatively soon, which would provide a much needed boost to a housing market still struggling with the impact of the mortgage stress test.

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Vancouver, BC – January 15, 2019. The British Columbia Real Estate Association (BCREA) reports that a total of 78,345 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in 2018, a decline of 24.5 per cent from the 103,758 units sold in 2017. The annual average MLS® residential price in BC was $712,508, an increase of 0.4 per cent from $709,601 recorded the previous year. Total sales dollar volume was $55.8 billion, a 24.2 per cent decline from 2017.

The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the outlook for the Canadian economy is moderating due to  falling oil prices and mandatory production cuts in Alberta and a slowdown in global demand due to US-China trade tensions. As a result, the Bank has trimmed its forecast for Canadian economic growth in 2019 from 2.1 per cent to 1.7 per cent.  Total inflation is being dragged lower by falling gasoline prices, though core inflation remains near the Bank's 2 per cent target.

While the direction of future monetary policy remains tilted toward higher interest rates, our baseline forecast is for a single rate hike as the most likely outcome for 2019. With a housing market battered by the stress test and signs of slowing growth elsewhere in the economy, it will be difficult for the Bank to accelerate monetary tightening beyond a gradual pace.  A less hawkish Bank of Canada, along with a steep fall in Canadian bond yields, should translate to mortgage rates flattening out or even moving slightly lower in 2019.

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Canadian employment was up slightly in December, rising by 9,300 jobs. The national unemployment held steady at 5.6 per cent, the lowest it has been since 1976. Total employment for all of 2018 increased by 163,000 jobs, a 0.9 per cent rise over 2017.
 
In BC, employment grew by 4,400 jobs in December as full-time work jumped by almost 23,000 jobs but was offset by a drop in part-time employment.  On a year-over-year basis, employment was up 1.8 per cent and the provincial unemployment rate was unchanged at 4.4 per cent, the lowest rate among all provinces. 

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Vancouver, BC – December 14, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 5,179 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in November, down 33.1 per cent from the same month last year. The average MLS® residential price in BC was $718,903, a decline of 1.9 per cent from November 2017. Total sales dollar volume was $3.7 billion, a 34.3 per cent decline from November 2017.

“BC households continue to struggle with the sharp decline in purchasing power caused by the B20 mortgage stress test,” said Cameron Muir, BCREA Chief Economist. “Most BC regions are now exhibiting relative balance between supply and demand.”

Total active residential listings were up nearly 31 per cent to 33,500 units in November, compared to the same month last year. However, it should be noted that this compares to 2017, when active listings for the month of November were at their lowest level in more than 15 years.

Year-to-date, BC residential sales dollar volume was down 23.1 per cent to $53.4 billion, compared with the same period in 2017. Residential unit sales declined 23.6 per cent to 74,847 units, while the average MLS® residential price was up 0.7 per cent to $713,302.

Total Canadian employment surged 94,000 jobs in November, almost all in full-time work. The national unemployment rate fell 0.2 points lower to 5.6 per cent, the lowest it has been since 1976. Total employment was up 1.5 per cent, or 227,000 jobs compared to this time last year.
 
In BC, employment grew by 16,000 in November, though full-time employment declined.  On a year-over-year basis, employment was up 1.7 per cent and the provincial unemployment rate rose 0.3 points to 4.4 per cent as the number of people looking for work expanded faster than those finding employment.

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Vancouver, BC – December 6, 2018.

The BCREA Commercial Leading Indicator (CLI) was essentially unchanged from the second to the third quarter of 2018. Compared to this time one year ago, the index is 1.3 per cent higher.

“Slowing activity, particularly in the retail sector, led to a flattening of the CLI last quarter,” says BCREA Deputy Chief Economist Brendon Ogmundson. “A flattening index tends to point to a slower, yet still positive growth environment over the next year.”

While overall economic activity supportive of increased demand for commercial real estate has moderated, the third quarter did see a significant jump in office employment. If that increase is sustained, it would reflect an increased need for office space in the future, leading to increased investment and leasing activity in the office sector.

The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that growth in the Canadian economy will be challenged by Alberta's cutbacks in oil production but investment outside of the energy sector is expected to strengthen.  On inflation, the Bank judges that prices in the economy are evolving in a way consistent with an economy operating at full capacity.  Given the Bank of Canada judges the economy is currently acting at full capacity and inflation is running slightly above its 2 per cent target, its bias remains tilted towards “normalizing” its policy rate back to its estimated neutral level of between 2.5 and 3.5 per cent.  With that bias in place, the timing of rate increases, rather than their direction, is the more pertinent issue.

However, the deep discount for Canadian Western Select oil, and the ramifications of limited Alberta oil production, is one reason to be skeptical that the Bank will accomplish its objective to return to a neutral 3 per cent rate over the medium term. However, other cracks in the economy are starting to appear as well, including the highly publicized closing to GM’s Oshawa plant which will have a material impact on growth in Ontario.  Those factors, along with a slowing housing market across Canada and a potentially sharp slowdown in US economic growth next year, may give the Bank pause.  For those reasons, our baseline forecast is that the Bank will only be able to bring its overnight rate to 2.5 per cent during this tightening cycle.

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The Canadian economy expanded at a 2 per cent rate in the third quarter, led by strong export volumes. On the downside, household spending slowed, residential investment fell 1.5 per cent and business investment also declined following six consecutive quarterly increases.

Although economic growth was relatively strong in the third quarter, the underlying trends in household spending and in residential and business investment are not encouraging. Those trends, along with a struggling Alberta oil sector, the prolonged impacts of the mortgage stress test, and the recent GM plant closure in Ontario should mean a pause in the Bank of Canada's rate tightening cycle. We anticipate the Bank will hold off on further rate increases until its April 2019 meeting, though inflation at target and the economy growing above trend does mean that the Bank's bias toward a higher policy rate remains in place. 

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Canadian retail sales rose 0.2 per cent on a monthly basis in September, led by sales in food and beverage stores. Retail sales were higher in 6 of 11 sub-sectors representing 75 per cent of total retail trade.  In BC, retail sales were unchanged on a monthly basis in September and were only 0.7 per cent higher year-over-year.  Provincial retail sales were dragged lower by a nearly 3 per cent year-over-year decline in retail spending in the Metro Vancouver area.

Canadian inflation, as measured by the Consumer Price Index (CPI), accelerated in October to 2.4 per cent after recording 2.2 per cent in September. The Bank of Canada's three measures of trend inflation ticked slightly higher as well with two of the three measures at or above the Bank's 2 per cent target.   In BC, provincial consumer price inflation was 3 per cent in the 12 months to October.  Given an uptick in inflation, there is a higher probability of a rate increase by the Bank of Canada at its next meeting in December, though we still expect the Bank to hold off until early in the new year.

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Vancouver, BC – November 14, 2018.

The British Columbia Real Estate Association (BCREA) reports that a total of 6,405 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in October, down 26.2 per cent from the same month last year. The average MLS® residential price in BC was $690,161, a decline of 4.1 per cent from October 2017. Total sales dollar volume was $4.2 billion, a 29.3 per cent decline from October 2017.

“The BC housing market continued to grapple with tougher mortgage qualifications in October,” said Cameron Muir, BCREA Chief Economist. “However, more moderate consumer demand has led to a much-needed increase in the supply of homes for sale.”

Total active residential listings were up nearly 30 per cent to 36,195 units in October, compared to the same month last year. While the BC housing market exhibited balanced conditions overall in October, market conditions do vary between regions and by product type.

Year-to-date, BC residential sales dollar volume was down 22.1 per cent to $49.7 billion, compared with the same period in 2017. Residential unit sales decreased 22.8 per cent to 69,664 units, while the average MLS® residential price was up 1 per cent to $713,662.

BCREA 2018 Fourth Quarter Housing Forecast

Vancouver, BC – November 8, 2018. The British Columbia Real Estate Association (BCREA) released its 2018 Fourth Quarter Housing Forecast today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to decline 23 per cent to 80,000 units this year, after recording 103,768 residential sales in 2017. MLS® residential sales are forecast to increase 12 per cent to 89,500 units in 2019. The 10-year average for MLS® residential sales in the province is 84,800 units.

“The marked erosion of affordability and purchasing power caused by the mortgage stress test and rising interest rates continue to be a drag on the housing demand,” said Cameron Muir, BCREA Chief Economist. “However, continuing strong performance in the economy combined with favourable demographics is expected to push home sales above their 10-year average in 2019.”

Despite the mortgage policy drag on the sector, strong performance of the BC economy continues to be highly supportive of housing demand. Five consecutive years of above trend growth in the province has led to a high level of employment and an unemployment rate that appears to be at a cyclical low.

The combination of fewer home sales and a larger inventory of homes for sale has helped trend most markets to balanced conditions. As a result, home price growth has slowed considerably, and is expected to more closely reflect overall consumer price inflation through 2019. In addition, a record number of homes are under construction in BC, which will provide for much needed expansion of the housing stock and greater price stability.

Total Canadian employment was up by 11,200 jobs in October after jumping by 62,000 jobs in September. Part-time employment declined by 23,000 jobs while full-time work was up 34,000 jobs. The national unemployment rate ticked 0.1 points lower to 5.8 per cent. Total employment was up 1.1 per cent, or 206,000 jobs compared to this time last year.

In BC, employment fell by 1,100 jobs in October after adding 33,000 jobs in September.  On a year-over-year basis, employment was up 2 per cent and the provincial unemployment rate fell 0.1 points to 4.1 per cent, the lowest rate of unemployment in the province since December 2007.

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There were more treats than tricks in today's monthly GDP data. The Canadian economy expanded for a seventh consecutive month in August, growing at a 0.1 per cent monthly rate.  Growth was driven by the oil and gas and finance and insurance sectors.  The output of real estate agents and brokers jumped 2 per cent, the third straight monthly increase. However, output from Canadian real agents and brokers remained close to 17 per cent lower than the December 2017 level prior to the introduction of the B20 mortgage stress test.

With two months of third quarter GDP data now available, we are tracking overall third quarter growth at close to 2 per cent.  With the economy on solid footing, the Bank of Canada will continue to raise its policy rate over the next year. While we expect that the next move will be in January, a December rate hike can not be ruled out completely.

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US real GDP growth remained strong in the third quarter at 3.5 per cent, albeit down from 4.2 per cent in the second quarter. Economic growth was led by a strong contribution from consumer spending, which grew at its fastest rate since 2014, while an accumulation of business inventories made its largest contribution to growth since 2015.  Government spending grew at its fastest rate in two years, but business investment slowed and net exports created their largest drag on growth in 33 years as US tariffs dampened trade.  Today's data gives the US Federal Reserve further reason to keep tightening monetary policy, which will put further upward pressure on medium term interest rates in the US and Canada.
 
  The US economy has been riding high this year from debt-financed government stimulus, but that growth is expected to slow in 2019 as that stimulus fades and higher interest rates and a continued trade war act to slow the economy.

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The Bank of Canada raised its target for the overnight rate by 25 basis points to 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is expected to average growth of 2 per cent over the second half of 2018 before slowing to 1.9 per cent next year.  The renegotiation of NAFTA is expected to lower uncertainty and boost business investment and exports while households spending and the housing market are stabilizing after the implementation of the B20 mortgage stress test. Inflation is expected to remain close to 2 per cent over the Bank's two year projection horizon.
   
The resolution of NAFTA negotiations earlier in the fall paved the way for the Bank of Canada to resume its rate tightening this morning.  While inflation data came in slightly soft in September, the Canadian economy is still operating above its long-run trend which should keep inflation near the Bank's 2 per cent target. The Bank will meet one final time in 2018 at its December meeting, at which we expect policymakers will maintain the target rate at is current level before raising the target rate to 2 per cent in January 2019.  As the target rate continues on its path higher, Canadian mortgage rates will continue to rise, ultimately resulting in a 6 per cent qualifying rate by the end of 2019.

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Canadian retail sales declined 0.1 per cent on a monthly basis in August, but were 3.6 per cent higher on a year-over-year basis. Retail sales were lower in 7 of 11 sub-sectors representing 52 per cent of total retail trade. After a spending binge in 2017 which saw retail sales grow nearly ten per cent,  BC consumers have closed their wallets this year. BC retail sales declined 0.1 per cent on a monthly basis in August and were just 1.3 per cent higher year-over-year.  

Canadian inflation, as measured by the Consumer Price Index (CPI), registered 2.2 per cent in the 12 months to September, down from the nearly 3 per cent rate recorded in July and August. The Bank of Canada's three measures of trend inflation softened slightly in September, but still remain at or near the Bank's two per cent target.  In BC, provincial consumer price inflation was 2.5 per cent in the 12 months to September.  Although inflation numbers have softened slightly, it is still widely expected that the Bank of Canada will raise its overnight rate at its next meeting on October 24.

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Total Canadian employment increased by 62,000 jobs in September, reversing the similar sized decline from August. Part-time employment accounted for most of the gain, rising by 80,000 while full-time work declined.   The national unemployment rate declined 0.1 points to 5.9 per cent and total hours worked across the economy rose 0.6 per cent.  Total employment was up 1.2 per cent over this time last year.
 
In BC, employment rose for a third consecutive month as the economy added an astonishing 33,000 jobs in September (near the all-time record of 34,700 set in May 2015), including 26,000 full-time jobs. Employment in the third quarter was up 54,000 jobs after declining in the first half of the year.  On a year-over-year basis, employment was up 1.7 per cent and the provincial unemployment rate fell 1.1 points to 4.2 per cent, the lowest rate of unemployment in the province since June 2008.

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The Canadian economy expanded at a 0.2 per cent monthly rate in July after recording no change in June. Growth was fairly broad based with 12 of 20 industrial sectors reporting higher output, led by gains in manufacturing, wholesale trade and the recovery of real estate transactions after the introduction of the B20 mortgage stress test. With the first month of third quarter GDP data now available, we are tracking overall third quarter growth at 1.8 per cent .

While economic growth in Canada is on pace to slow down slightly compared to the second quarter, output is still expanding at slightly beyond its sustainable, long-run rate. That means continued upward pressure on inflation and further interest rate increases from the Bank of Canada.

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Canadian retail sales increased 0.3 per cent on a monthly basis in July, and were 3.7 per cent higher on a year-over-year basis. Retail strength was broad based with sales up in 8 of 11 sub-sectors representing 55 per cent of total retail trade. In BC, consumer spending continues to weaken as retail sales declined 0.5 per cent on a monthly basis and were just 1.2 per cent higher year-over-year. 

Canadian inflation, as measured by the Consumer Price Index (CPI), registered 2.8 per cent in the 12 months to August following a 3 per cent increase in prices in July. The Bank of Canada's three measures of trend inflation all increased in August and average 2.1 per cent.   In BC, provincial consumer price inflation was 2.9 per cent in the 12 months to August.  With inflation trending higher in recent months, the Bank of Canada is almost certain to raise its overnight rate at its next meeting in October.

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