Geoff Cowling

The Canadian economy contracted on a monthly basis in January with real GDP edging down 0.1 per cent.  The decline was the result of lower output in the energy extraction sector as well as lower real estate activity due to the implementation of new mortgage qualification rules.  The output of real estate agents and brokers fell 12.8 per cent in January, the largest monthly decline since November 2008.

Given today's release, growth in the Canadian economy is tracking at about 1 per cent for the first quarter, a further slowdown from the already somewhat sluggish fourth quarter of 2017. Despite rising inflation, sharply slower economic growth should give the Bank of Canada pause about further increases in its overnight rate.

Copyright British Columbia Real Estate Association. Reprinted with permission.

Canadian retail sales increased 0.3 per cent on monthly in basis in January and were 3.6 per cent higher compared to last January. Sales were higher in 7 of 11 sub-sectors representing 63 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 just 0.9 per cent for the first quarter of 2018.  In BC, after growing nearly 10 per cent in 2017,retail sales growth has slowed, falling 1 per cent on a monthly basis in January but rising 6.2 per cent compared to January 2017.

Canadian inflation, as measured by the Consumer Price Index (CPI), jumped higher in February, registering 2.2 per cent year-over-year, up from 1.7 per cent in January. The Bank of Canada's three measures of trend inflation were all higher as well and now are either very close to or exceeding the Bank's 2 per cent inflation target.   In BC, provincial consumer price inflation was 2.8 per cent in the 12 months to February.

Today's data is somewhat mixed in its impact on monetary policy in Canada. On the one hand, the Canadian economy appears to be slowing considerably, while on the other, inflation continues to close in on the Bank's target of 2 per cent.  We believe the Bank will continue to hold interest rates steady until summer or fall to get a better grasp on the direction of the economy before acting.
 
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Vancouver, BC – March 14, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 6,206 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in February, a 5.7 per cent decrease from the same period last year. The average MLS® residential price in BC was $748,327, up 8.8 per cent from the previous year. Total sales dollar volume was $4.64 billion, a 2.6 per cent increase from February 2017.

“More stringent mortgage qualification rules for conventional borrowers are dampening housing demand in the province,” said Cameron Muir, BCREA Chief Economist. “Since the new rules came into effect, BC home sales have fallen more than 26 per cent, on a seasonally adjusted basis.”

Previous mortgage policy tightening has negatively impacted housing demand for a period of four to seven months, with the largest impact occurring in the third month after implementation.

Year-to-date, BC residential sales dollar volume was up 15.9 per cent to $8.47 billion, compared with the same period in 2017. Residential unit sales increased 4.1 per cent to 11,516 units, while the average MLS® residential price was up 11.3 per cent to $735,755.

Canadian housing starts increased 6.7 per cent on a monthly basis in February to 229,737 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts rose to 225,276 units SAAR.

In BC, total housing starts fell 26 per cent monthly basis to 30,622 units SAAR with both single and multiple unit starts posting monthly declines of over 20 per cent. On a year-over-year basis, total starts in the province were 9 per cent higher. 

Looking at census metropolitan areas (CMA) in BC: 

• Total starts in the Vancouver CMA were down 37 per cent on a monthly basis at 20,000 units SAAR but were 12 per cent higher compared to February of last year.  Construction activity is particularly strong in the condo markets of Burnaby, the North Shore and the city of Vancouver.

• In the Victoria CMA, housing starts nearly tripled on a monthly basis to an annualized rate of almost 4,000 units due to a number of multiple unit projects breaking ground. Total starts in the Victoria CMA were up 48 per cent year-over-year. Construction activity is being driven by new apartment rentals and condos.
• The Kelowna CMA saw housing starts decline over 60 per cent on a monthly basis in February with relatively little new construction occurring in the month. The CMHC counted just 22 single units and 15 multiple unit starts.

• Housing starts in the Abbotsford-Mission CMA  increased 200 per cent year-over-year as construction of more than 300 new multiple units got underway in February.  However, the annualized pace of starts fell 6 per cent from January at just under 800 units SAAR.

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The Bank of Canada opted to maintain its target for the overnight interest rate this morning at 1.25 per cent.  In the statement accompanying the decision, the Bank noted that although growth in the Canadian economy slowed more than expected in the fourth quarter of 2017, the economy is expected to operate at capacity going forward. The bank cited recent trade policy developments, mainly the threat of a trade war with the United States, as a significant risk to its outlook for growth and inflation.

The Canadian economy is at or very close to full-employment, meaning there is little room for Canadian firms to expand output without putting undue pressure on inflation. There are signs core inflation is already firming up. Two of the Bank’s three core inflation measures are closing in on the Bank’s 2 per cent target and all three measures have increased significantly in the past six months. Absent any unforeseen challenges to the Canadian economy, monetary policy will be biased in the direction of higher interest rates.  However, the Bank will likely hold off raising its overnight rate while it assesses the impact of tighter monetary policy over the past year, the impact of newly implemented B-20 guidelines on mortgage qualification rules, and heightened risk to Canadian exports from US trade policy.

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The Canadian economy closed 2017 on somewhat of a disappointing note, growing just 1.7 per cent in the fourth quarter. The consensus forecast of economists was for growth north of 2 per cent.  The slowdown in growth was primarily due to slower household spending, which posted its lowest rate of growth in almost two years. Due to a very strong first half of the year win which the economy expanded at a more than 4 per cent rate, for the year as a whole Canadian real GDP grew at a rate of 3 per cent, the strongest growth since 2011.

Most estimates now put the Canadian economy at or very close to full-employment, meaning that there is little room for Canadian firms to expand output without putting undue pressure on inflation. Given that, we are forecasting that the Bank of Canada will follow up its January rate increase with at least one more rate increase in 2018. However, a larger than expected slowdown in growth over the second half of 2017 means the Bank will likely hold off until it can properly assess the impact not only of its own tightening over the past year, but also the impact of newly implemented B20 guidelines on mortgage qualification rules.

Copyright British Columbia Real Estate Association. Reprinted with permission.