Geoff Cowling

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. 

Copyright British Columbia Real Estate Association. Reprinted with permission.

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.

Copyright British Columbia Real Estate Association. Reprinted with permission.

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.

Copyright British Columbia Real Estate Association. Reprinted with permission.

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.

Copyright British Columbia Real Estate Association. Reprinted with permission.

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.

Copyright British Columbia Real Estate Association. Reprinted with permission.

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.

Copyright British Columbia Real Estate Association. Reprinted with permission.