Geoff Cowling

Canadian manufacturing sales increased 1.4 per cent on a monthly basis in May, pushed higher by gains in the chemical, machinery and wood product industries.  Sales were higher in 14 of 21 manufacturing sub-sectors, representing almost two-thirds of manufacturing sales.  On a year-over-year basis, Canadian manufacturing sales were up 3.7 per cent over May 2017.

In BC,  manufacturing sales were up 3.2 per cent in May on a monthly basis and were 9.7 per cent higher year-over-year.  The province's forestry sector led the way as sales of manufactured wood products rose 9.2 per cent from April. The BC manufacturing sector continues to be a bright spot in the economy, with sales up 8.5 per cent year-to-date.
  

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Vancouver, BC – July 13, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 7,884 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in June, a 32.5 per cent decrease from the same month last year. The average MLS® residential price in BC was $716,326, down 1.3 per cent from June 2017. Total sales dollar volume was $5.6 billion, a 33 per cent decline from June 2017.

“The impact of the B20 stress test is still being felt across the province,” said Brendon Ogmundson, BCREA Deputy Chief Economist. “Lower demand as the result of higher mortgage rates and stringent mortgage qualification rules are bringing most markets around the province back into balanced conditions.”

Although the supply of active listings in the province is on the rise, inventory remains low by historical standards and markets like Vancouver Island and the Okanagan remain undersupplied.

Year-to-date, BC residential sales dollar volume was down 18 per cent to $32 billion, compared with the same period in 2017. Residential unit sales decreased 20 per cent to 43,863 units, while the average MLS® residential price was up 2.4 per cent to $730,492.

The Bank of Canada opted to raise its target for the overnight rate 25 basis points to 1.5 per cent this morning. In the statement accompanying the decision, the Bank cited that the economy is operating close to capacity and as a result inflation is expected to edge higher over their two year forecast horizon. The Bank noted that incoming data suggests housing markets are starting to stabilize after the implementation of the B20 stress test.
   
With inflation rising to the Bank's two per cent target and the Canadian economy operating at or near capacity, the Bank of Canada is unlikely to be finished tightening. At its current level, the overnight rate is about 150 basis points below the 3 per cent rate the Bank would ultimately prefer it to be. However, the Bank may take a brief pause to assess the impact of its past tightening as well as the ongoing effects of the B20 stress test on housing markets. It may also be dissuaded from further tightening should there be a further escalation in trade tariffs from the United States. Overall, we expect at least one more round of rate increases from the Bank of Canada in 2018.

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Canadian housing starts rose 28 per cent on a monthly basis in June to 248,000 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts was steady at about 222,000 units SAAR.

In BC, total housing starts declined 16 per cent on a monthly basis to 34,300 units SAAR and were down 10 per cent year-over-year. On a monthly basis, starts of multiple units were down 21 per cent to an annual rate of 24,563 units. Multiple unit and single detached starts were both down10 per cent compared to June of last year.
 
Looking at census metropolitan areas (CMA) in BC: 

• Total starts in the Vancouver CMA were down 28 per cent year-over-year due to a 34 per cent decline in multiple unit starts and were down 36 per cent from May 2018. In the first six months of the year, housing starts in the Vancouver CMA were essentially flat compared to the first six months of 2017.

• In the Victoria CMA, housing starts nearly doubled year-over-year and were up 85 per cent on a monthly basis to a seasonally adjusted annual rate of nearly 6,000 units. New home construction is up 45 per cent year-over-year in the first six months of the year. Much of that new construction is the result of a doubling of rental starts compared to last year.
• In the Kelowna CMA, new home construction increased 43 per cent year-over-year as a result of continued growth in multiple unit starts. However, on a monthly basis, total starts were down 6 per cent from May to a rate of 3,590 units SAAR.

• Housing starts in the Abbotsford-Mission CMA  fell 5 per cent from May to 515 units SAAR due to a dip in multiple unit starts. Year-over-year, total housing starts fell 82 per cent as only 47 total units including only 16 multiple units were started in June.

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After two months of relatively little change, Canadian employment increased by 32,000 jobs in June and was up 1.2 per cent year-over-year. However, due to an increase in the number of people actively looking for work, the national unemployment rate rose 0.2 points to 6 per cent.

In BC, employment fell by 8,000 jobs as over 10,000 part-time positions were lost and only 2,100 full-time jobs were gained. On a year-over-year basis, employment was down 0.8 per cent.  The provincial unemployment rate moved 0.4 points higher in June to 5.2 per cent.

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Canadian real GDP rose 0.1 per cent in April with 12 of 20 industrial sectors posting growth in output. The manufacturing sector was a main contributor to overall growth in real GDP, expanding its output by 0.8 per cent in April while offices of real estate agents and broker was up 0.3 per cent, the industry's first positive growth in 2018.  With today's release, we are tracking second quarter real GDP growth in Canada at about 2 per cent.

Given solid economic growth and inflation firming around the Bank of Canada's 2 per cent target, the likelihood of a July rate increase from the Bank of Canada is fairly high. However, the threat of a damaging trade war will loom large over the Bank's ultimate decision.

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Canadian retail sales declined for the first time in three months, falling 1.2 per cent in April on a monthly basis. On year-over-year basis, retail sales in April were up just 1.6 per cent over last year.  Sales were down in 8 of 11 sub-sectors representing 65 per cent of total retail trade with the biggest declines coming in the motor vehicle and parts sector.  Conversely, in BC, retail sales were up 1.1 per cent on a monthly basis and 5.9 per cent year-over-year.

Canadian inflation, as measured by the Consumer Price Index (CPI), held steady at 2.2 per cent in May. Likewise,  the Bank of Canada's three measures of trend inflation were all essentially unchanged at 1.9 per cent.   In BC, provincial consumer price inflation was 2.7 per cent in the 12 months to May, the same rate of increase as in April. 

While we still expected at 25 basis point increase in the Bank's policy rate at its July meeting, today's poor retail sales figures and non-accelerating inflation, along with yet another Trump trade tantrum, may prompt some caution at the Bank of Canada.

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Canadian manufacturing sales fell 1.3 per cent on a monthly basis in April, dragged lower by a third straight month of declining sales of petroleum and coal products and a drop in transportation equipment shipments.  Sales were down in 10 of 21 manufacturing sub-sectors, representing about half of total manufacturing sales.  On a year-over-year basis, Canadian manufacturing sales were up 3.6 per cent over April 2017.

In BC,  manufacturing sales were down 0.1 per cent on a monthly basis but were up 7.6 per cent year-over-year. A strong forestry sector, particularly paper manufacturing, continues to be a significant driver of BC's manufacturing sales. That strength helped offset some weakness in sectors like machinery and equipment manufacturing and coal products.

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Vancouver, BC – June 15, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 8,837 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in May, a 28.7 per cent decrease from the same month last year. The average MLS® residential price in BC was $739,783, down 1.7 per cent from May 2017. Total sales dollar volume was $6.54 billion, a 30 per cent decline from May 2017.

“BC home sales continued to slow in May because of more stringent qualifications for conventional borrowers,” said Cameron Muir, BCREA Chief Economist. “The changes in mortgage policy are taking their toll on housing demand, not only in British Columbia, but across the country by reducing household purchasing power and housing affordability.”

While the decline in consumer demand has lifted the inventory of homes for sale, total active residential listings in the province are still relatively low by historical comparison.

Year-to-date, BC residential sales dollar volume was down 13.8 per cent to $26.4 billion, compared with the same period in 2017. Residential unit sales decreased 16.6 per cent to 35,976 units, while the average MLS® residential price was up 3.4 per cent to $733,616.

Canadian employment declined by 7,500 jobs on a monthly basis in May, but was up 1.3 per cent compared to 1 year ago. The national unemployment rate remained unchanged for a second consecutive month at 5.8 per cent while total hours worked across the economy grew by 2 per cent.

In BC, employment fell by 12,000 jobs. For the first time since May 2015, employment in BC has recorded virtually zero growth on a year-over-year basis. Despite the loss of jobs, the provincial unemployment rate moved 0.2 points lower in May to 4.8 per cent due to a decline in the overall number of people actively searching for work.

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The total value of Canadian building permits declined 4.6 per cent on a monthly basis in April, with all classes of permits declining with the exception of commercial buildings. Year-over-year, the value of permits was up 6.5 per cent. 

The largest declines in permitting activity were posted in BC, which saw the total value of permits fall 22.6 per cent in April after posting a record high in March.  Year-over-year, total permits values were down only 1.9 per cent at $1.24 billion. Non-residential permits were down 31.8 per cent on a monthly basis  and were 28 per cent lower year-over-year. Residential permits fell 19.6 per cent on a monthly basis but were 10.1 per cent higher year-over-year.

Construction intentions in April were down in three of BC's four census metropolitan areas (CMA):

• Permits in the Abbotsford-Mission CMA fell 26.7 per cent on a monthly basis to $23.8 million. Year-over-year, permit values were down more than half.

• In the Victoria CMA, total construction intentions increased 16.4 per cent to $109.1 million , a 5.6  per cent rise over this time lats year.

• In the Kelowna CMA, permits tumbled 30.6 per cent monthly basis, and were down 37.7 per cent year-over-year to $60 million.

• The Vancouver CMA recorded permit activity valued at $755.9 million, falling 27.3 per cent from the over $1 billion in total permits registered in March. Year-over-year, permits were up 11.9 per cent.

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Growth in the Canadian economy was disappointing in the first quarter of 2018, growing at just 1.3 per cent. That was well below the 2 per cent consensus forecast of economists. Slow growth was the result of a moderation in household spending, which grew at its slowest rate since 2015,  and a decline in residential investment. On the positive side, business investment was strong with purchases of machinery and equipment up 4.2 per cent and investment in commercial and other non-residential structures up 1.5 per cent.

Although economic growth slowed in the first quarter, the Canadian economy is still operating at or above capacity. We expect the Canadian economy to grow at a 2 to 2.5 per cent annual rate in 2018, which is above its estimated long-run trend rate of 1.7 per cent.  As a consequence, inflationary pressure are building and interest rates are very likely headed higher as early as the Bank' of Canada's July meeting. 

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Vancouver, BC – May 31, 2018.

The British Columbia Real Estate Association (BCREA) released its 2018 Second Quarter Housing Forecast today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to decline 9 per cent to 94,200 units this year, after posting 103,700 unit sales in 2017. MLS® residential sales are forecast to remain relatively unchanged in 2019, albeit down 0.2 per cent to 94,000 units. Housing demand is expected to remain above the 10-year average of 84,800 units into 2020.

“The housing market continues to be supported by a strong economy,” said Cameron Muir, BCREA Chief Economist. “However, slower economic growth is expected over the next two years as the economy is nearing full employment and consumers have stepped back from their 2017 spending spree.”

“Demographics will play a key role in the housing market over the next few years,” added Muir, “as growth in the adult-aged population is bolstered by immigration and the massive millennial generation enters its household forming years.”

Muir notes there are, however, significant headwinds in the housing market. “Rising mortgage interest rates will further erode affordability and purchasing power, with the effect being exacerbated by an already high price level. The legacy of tougher mortgage qualifications for conventional mortgagors will be a reduction of their purchasing power by up to 20 per cent, and the provincial government’s expansion of the foreign buyer tax and several other policies aimed at taxing wealth is sending a negative signal to the market and likely diverting investment elsewhere.”

The combination of slowing housing demand and rising new home completions is expected to trend most BC markets toward balanced conditions this year, and lead to less upward pressure on home prices.

The Bank of Canada decided to leave the target for the overnight policy rate unchanged at 1.25 per cent this morning. In the statement accompanying the decision, the Bank noted that inflation has been close to its two per cent target and will likely be higher in the near term than was previously forecast due to higher gasoline prices. Economic growth in the first quarter was stronger than expected due to rising exports and business investment, which helped to offset a B20 induced softening in housing activity.  Overall, the Bank's view is that higher interest rates will be warranted to keep inflation near its target.
   
Although the Bank held steady today, with inflation rising to the Bank's two per cent target and the Canadian economy operating at or near capacity, interest rates are very likely headed higher,  perhaps at the Bank's next meeting in July.  That will translate to higher mortgage rates which, combined with the erosion of purchasing power from the mortgage stress test, will continue to temper housing demand in 2018.

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Canadian retail sales increased 0.6 per cent on a monthly basis in March and were 4.1 per cent higher year-over-year.  Sales were higher in 6 of 11 sub-sectors representing 53 per cent of total retail trade.  With today's data, and all other data available thus far for the first quarter, we are tracking Canadian economic growth at about 2.1 per cent for the first quarter of 2018.  In BC, retail sales were up 0.6 per cent on a monthly basis and 5.1 per cent year-over-year. Retail sales in the province continue to moderate back to historical trend after growing more than 9 per cent in 2017.

Canadian inflation, as measured by the Consumer Price Index (CPI), ticked slightly lower in April to 2.2 per cent after registering 2.3 per cent in March. The Bank of Canada's three measures of trend inflation were slightly higher with two of the three measures moving above 2 per cent.   In BC, provincial consumer price inflation was 2.7 per cent in the 12 months to March.  Stronger than expected first quarter growth and inflation at or near the Bank of Canada's target of 2 per cent means an interest rate increase from the Bank is very likely, potentially at its next meeting on May 30th.

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Canadian manufacturing sales rose 1.4 per cent on a monthly in March, led by higher sales of primary metals, aerospace products and fabricated metal products.  Sales were up in 13 of 21 manufacturing sub-sectors, representing 72 per cent of the manufacturing sector.  On a year-over-year basis, Canadian manufacturing sales were up 6.4 per cent over March 2017.

In BC, manufacturing sales increased 4 per cent on a monthly basis and were up 10.5 per cent year-over-year. Those gains were primarily the result of higher sales in BC's forestry sector. The paper manufacturing industry saw a 33 per cent increase in sales year-over-year in March, while wood products were up 36.4 per cent.

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Vancouver, BC – May 14, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 8,203 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in April, a 16.8 per cent decrease from the same month last year. The average MLS® residential price in BC was $730,507, up 0.2 per cent from the previous year. Total sales dollar volume was $5.99 billion, a 16.7 per cent decline from April 2017.

“BC home sales were essentially unchanged in April compared to March, albeit up nearly 1 per cent on a seasonally adjusted basis," said Cameron Muir, BCREA's Chief Economist. “The impact of more burdensome mortgage qualifications for conventional borrowers is expected to soften over the next several months as potential buyers adjust both their finances and expectations.”

The supply of homes for sale in April increased 4 per cent from the previous month. However, total active listings on the market continue to remain low from a historical perspective. Most regions of the province have begun trending toward more balance between supply and demand, causing less upward pressure on home prices.

Year-to-date, BC residential sales dollar volume was down 6.7 per cent to $19.9 billion, compared with the same period in 2017. Residential unit sales decreased 11.8 per cent to 27,135 units, while the average MLS® residential price was up 5.7 per cent to $731,661.

Canadian employment was essentially unchanged in April on a monthly basis but up 1.5 per cent compared to 1 year ago. The national unemployment rate remained unchanged at 5.8 per cent and total hours worked across the economy grew by 1.9 per cent.

In BC, employment grew by 2,900 jobs. With the economy close to its full-employment level, part-time work is being largely converted into full-time work. In April, BC added 18,200  full-time positions while losing 15,300 part-time jobs. Overall, the level of employment in BC has been trending sideways for several months and was up just 0.9 per cent year-over-year in March. The provincial unemployment rate moved 0.3 points higher to 5 per cent.

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The Canadian economy bounced back in February after a down month in January. Real GDP grew 0.4 per cent on a monthly basis in February,  led by higher output in the manufacturing and construction sector as well as a rebound in mining and oil and gas extraction. The output of offices of real estate agents and brokers across Canada fell for a second consecutive month due to the ongoing impact of the B20 stress test.

Given today's release, growth in the Canadian economy is tracking at just under 2 per cent for the first quarter of 2018. Continued above trend growth and rising inflation signal further interest rates increases by the Bank of Canada, possibly as soon as the end of May.

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US real GDP growth registered 2.3 per cent in the first quarter of 2018, the slowest pace in a year due to a pullback in spending by households that saw consumer spending post its lowest growth in five years.  On the positive side, business investment was solid and exports rose nearly 5 per cent. However, US imports of goods and services from other countries grew only 2.6 per cent.

While steady growth in the United States is generally good news for the BC economy, slow growth in US imports and the ad-hoc approach to trade policy under the current administration still present a significant risk for BC's important export sector.

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