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Canada GDP, Retail Sales, Employment

Economic output in Canada was slower than expected in October, as real GDP was unchanged after a 0.5% decline in September. Both the Goods and Service sectors recorded zero growth in October, below an expected 0.2% increase overall. It is now unlikely that GDP growth will reach the Bank of Canada's forecast of 1.5% this year. However, Canada's relative weak performance is tied to temporary factors concerning oil and gas extraction and global commodity demand. In related releases, retail sales in Canada rose at an unexciting 1.9% annual pace in October, while the Survey of Employment Payrolls and Hours (SEPH) indicated employment rose a marginal 0.8% annual rate. In contrast to these national figures, retail sales in BC climbed an impressive 6.3% over the past 12 months, while the SEPH recorded employment rising by 2.5% in the province. While the Canadian economy continues to grapple with the fallout from a collapse in oil prices, the BC economy has been largely unscathed and is leading the country in these key indicators.   Copyright BCREA – reprinted with permission

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The Consumer Price Index

The Consumer Price Index (CPI) rose 1.4 per cent in November compared to the same month last year. While the transportation component, which contains gasoline prices, edged lower, prices were up in seven of the eight major index components. The largest increase came from food prices, which rose 3.4 per cent. The Core CPI, which excludes the volatile components like food and gasoline, was right on the Bank of Canada's target of 2 per cent.

Wholesale trade in Canada declined for the fourth consecutive month in October, down by 0.6 per cent. Wholesales sales in BC were down 1.2 per cent in October and it was the second consecutive month of decline in BC. The inventory-to-sales ratio in Canada during October was 1.34 per cent, reaching its highest level since June of 2009.

These tepid indicators suggest the Bank of Canada will continue its sideline stance and will likely not change its trend-setting target overnight interest rate at its next announcement.

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MORTGAGE RATES SET FOR MODEST RISE IN 2016

Mortgage Rate Outlook While the benchmark qualifying rate for Canadian mortgages has not changed in eight months, offered or discounted mortgage rates at banks and other lenders have recently moved higher. The average 5-year rate offered by lenders has increased about 20 basis points in recent weeks to 2.79 per cent and the discount from prime lending rates on variable rate mortgages has narrowed from 60 to 40 basis points. Rather than reflecting changes in underlying economic factors, these increases are largely due to regulatory and other market structure changes that are pushing banks’ cost of capital higher.

While these recent increases are likely one-time adjustments, the forthcoming normalization of US monetary policy will likely be a more persistent factor in determining future mortgage rates. Surveying the economic landscape, the case for the US Federal Reserve (the Fed) to raise rates is mixed at best. While the US unemployment rate is at its lowest level in seven years, the US economy is still, by most measures, far from what economist consider its potential or full-employment level. Economic growth in 2015 has been solid, if not brisk, and measures of inflation show that prices remain muted with inflation trending well below the Fed’s 2 per cent target. 

Despite the mixed evidence for doing so, after seven years of holding its target overnight rate at zero, the Fed is determined to raise its overnight rate at its upcoming meeting in December. Given that markets have already priced in a rate hike, the focus of the Fed’s December meeting has shifted to how much guidance is given regarding how quickly the Fed plans to move after its initial hike. 

We expect the Fed to go very slowly in raising rates, with the overnight federal funds rate being brought to 0.75 per cent by the end of next year. That magnitude of a rate hike has in the past correlated with a modest increase of about 20 basis points in Canadian 5-year bond yields which is then partially passed through to 5-year fixed mortgage rates. Canadian bond-yields have already drifted higher in anticipation of Fed tightening, rising 20 basis points since September. Given stable inflation and moderate economic growth in the Canadian economy, pressure from rising US rates will likely be the main source of upward pressure on mortgage rates over the next year. We are forecasting that 5-year qualifying rate on mortgages will increase to 4.79 per cent in early 2016 before gradually rising to 5.11 by the end of next year. 

Economic Outlook 

The Canadian economy rebounded from a first half slump, growing close to 2.5 per cent in the third quarter. Employment growth has trended at about 12,000 jobs per month in 2015, but with significant volatility and regional disparities while the unemployment rate remains near 7 per cent. Growth for all of 2015 will likely register a paltry 1.2 per cent with stronger second half growth offsetting consecutive negative quarters in the first half of the year. 

The outlook for growth in 2016 remains weighed down by low oil prices and the associated struggles in Canada’s energy producing provinces. Higher oil prices would provide a welcome boost to economic growth, but increasing prices are contingent on more robust global demand which may not materialize. While the IMF is forecasting an uptick in Global GDP growth, key markets like China are expecting slower growth. As a result, both forecasters and futures markets are pointing to oil prices stabilizing moderately higher at close to $50 per barrel in 2016.

In addition, the economy may have to adjust to a slight increase in mortgage rates which could temper the pace of residential construction and home sales. Offsetting these downside risks is the low Canadian dollar, which should provide a boost to the trade and manufacturing sector. Overall, we forecast growth in the Canadian economy will pick-up next year to 2.4 per cent.

Interest Rate Outlook Canadian and US monetary policy is set to diverge this month as the Fed begins its first tightening cycle in close to a decade while the Bank of Canada is on the sidelines after lowering rates twice in early 2015. In contrast with the US, core inflation in Canada has been at or slightly above the Bank’s 2 per cent target for 15 consecutive months, largely due to a falling Canadian dollar pushing up the price of imported goods.

Absent a substantial recovery in global commodity prices, the Canadian economy will more than likely grow near its long-term trend rate over the next two years. That growth rate will keep inflation relatively anchored at or below its 2 per cent target. A baseline scenario of economic growth above 2 per cent, paired with low inflation and steady job growth should keep the Bank of Canada sidelined over the medium run. However, several quarters of steady growth following the oil price shock of late 2014 may convince policymakers that the economy is no longer in need of monetary stimulus injected into the economy via the two rate cuts in early 2015. If so, the Bank may shift back to a tightening bias with a potential rate increase as early as 2017.

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Canadian Housing Starts

Canadian housing starts increased 7.2 per cent in November to 211,916 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts of 208,401 units SAAR has risen for several months and is currently above the rate of household formations in Canada, a sign that new home construction could slow next year.

Housing starts in BC fell 24 per cent following a similar size increase the previous month, registering 25,507 units SAAR.  On a year-over-year basis, housing starts were down 10 per cent with both single detached and multiple starts posting declines compared to last year. Year-to-date, total housing starts in BC are up 11 per cent compared to 2014.

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were down 9 per cent year-over-year in November following a large increase in new home construction in October.  Single detached units were down 5 per cent while multiple units were off 10 per cent year-over-year.  In the Victoria CMA, new home construction was 55 per cent lower compared to November 2014. Multiple starts accounted for all of the decline while single units starts were 2 per cent higher. Total housing starts in the Kelowna CMA fell 28 per cent year-over-year with both single and multiple unit starts posting weaker November new home construction than in 2014.  Housing starts in the Abbotsford-Mission CMA were the lone CMA to post a gain in November with housing starts more than quadrupling to 111 total units compared to just 25 units in November 2014.

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Canadian Government Change to Minimum Down Payment on Insured Mortgages

Policy Change

The Canadian government announced today that it is increasing the minimum down payment on insured mortgages from 5 per cent to a two tiered system under which the minimum down payment on houses priced above $500,000 will remain at 5 per cent, but there will be an additional 10 per cent required on the portion of the house price above $500,000.

As an example, for a house priced at $700,000, the minimum down payment for mortgage insurance purposes under the status quo would be $35,000. Under the new system, the minimum down payment would be 5 per cent x $500,000 + 10 per cent x ($700,000-$500,000) or $45,000. It is important to note that the homes priced at or above $1 million already require a minimum down payment of 20 per cent.

The changes to minimum down payments will take effect on February 15, 2016 and apply to new mortgage loans where a mortgage insurance application is received on February 15, 2016 or later.

Market Impact

The increase in minimum down payments on homes above $500,000 is designed to target excess risk taking in Canada's most expensive housing markets. Most homes in BC are priced below $500,000 and therefore this change will have limited impact in much of the province. However, 35 per cent of homes sold in Metro-Vancouver are priced between $500,000 and $1 million and so this change could adversely affect or delay demand in those markets, particularly for first-time homebuyers. That said, given the incremental nature of the change, and since minimum down payments are less frequent at higher home prices, we expect the overall impact to be relatively minor.

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November Home Sales Second Strongest on Record

The British Columbia Real Estate Association (BCREA) reports that a total of 8,032 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in November, up 34.5 per cent from the same month last year. Total sales dollar volume was $5.38 billion, up 56.4 per cent compared to the previous year. The average MLS® residential price in the province rose to $668,317, up 16.3 per cent from November 2014.

“Housing demand last month was the second strongest ever recorded for the month of November,” said Cameron Muir, BCREA Chief Economist. “You’d need to look all the way back to the frenetic market of 1989 to find more homes trading hands in November.“

The largest increase in consumer demand occurred in the Fraser Valley, where home sales climbed over 60 per cent from November 2014. Vancouver and Chilliwack experienced an increase of over 40 per cent, while Kamloops home sales were up 30 per cent.

The year-to-date, BC residential sales dollar volume increased 35.4 per cent to $60.7 billion, when compared with the same period in 2014. Residential unit sales climbed by 21.5 per cent to 95,927 units, while the average MLS® residential price was up 11.4 per cent to $632,209.

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CLI Points to Stable Commercial Real Estate Activity Next Year

The BCREA Commercial Leading Indicator (CLI) declined for a second consecutive quarter, falling 0.2 index points in the third quarter to 120.0. The index was still 1.2 per cent higher year-over-year, due to strong momentum from 2014 that carried into the early months of this

Third quarter jitters in financial markets and modest employment losses overwhelmed strong gains in provincial economic activity to pull the CLI lower.

“The BC economy remains very strong,” said BCREA economist Brendon Ogmundson. “This underlying strength should help to offset some of the temporary financial market, as well as other factors that pulled the CLI lower over the summer.”

A flattening underlying trend in the CLI points to some stability in commercial real estate activity on the horizon, though a very strong economic climate in the province should continue to support modest growth in the commercial market.

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Will Interest Rates Rise or Will They Fall?

Over the past few weeks interest rates, specifically longer term (5 year term) fixed rates, have risen on average 0.25%. Not a massive leap, and not the beginning of the end of low rates by any stretch.

Understanding the Basics

Fixed interest rates are predicated on the bond market. Where the bond market goes is where longer term (4yr – 10yr term) fixed rates follow.

Over the past few weeks the bond market has seen new life, and thus rates have risen slightly. This is partly due to speculation around the new federal government's expensive commitments to inject many billions of dollars into the economy. These will be good for business, and in turn should further fuel a recovery in the bond market, making investors happier.

For those seeking longer-term fixed-rate mortgages there will be less happiness, although to be fair, for some time yet interest rates are likely to remain quite close to the record lows we have enjoyed. An increase from 2.59% to 2.79% is hardly cause for alarm.

Variable-rate mortgages, and to some extent 1, 2 and 3yr fixed-rate mortgages, are predicated on the Bank of Canada’s Prime rate, which saw two 0.25% cuts earlier this year. It's currently at 2.70% with lenders, who passed only a 0.15% reduction on to the mortgage market.

(Side Note: When the Bank of Canada increases rates by 0.25% again, will lenders increase their Prime by only the 0.15% they cut, or will we get two partial cuts, but the full lump on an increase? Time will tell.)

The Bank of Canada has repeatedly said that what happens in the real estate market is not a significant part of their decision-making process; instead movement in the Prime lending rate is more of a large lever designed to guide the nation's economy as a whole. The manic goings-on in two cities' housing markets (Vancouver and Toronto) do not play a material role and are instead, to some extent, a by-product, not a basis for decisions.

Most notable were recent comments by our new Minister of Finance, Mr. Bill Morneau, in his Fall Fiscal Update which referenced a ‘stalling economy’ and a reduction in expected economic growth from 2% to perhaps 1.2%. These are clear indications that the Bank of Canada is unlikely to increase Prime any time soon.

Consider that the idea of the Liberals' commitment to infrastructure spending is an attempt to step on the gas pedal and power up the economy. Then, equally, consider that a Bank of Canada increase to Prime would be akin to stepping on the brake pedal of the economy. It seems reasonable to expect some degree of volatility in the bond market and thus longer-term fixed rates — and equally reasonable to expect stability when it comes to Prime — and thus stability for variable-rate mortgages and shorter-term fixed-rate offerings.

Low rates are here for some time to come, albeit in a different form than we have grown accustomed to.

Paying your mortgage down faster

The best way to prepare for potentially higher rates is to have a lower mortgage balance come renewal time. If you truly want to take advantage of today’s low rates, there are many ways to pay down your mortgage sooner to save you thousands of dollars in interest payments.

Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 15% or 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money. Few of us have such lump sums, mind you.

A more reasonable and highly effective approach is to increase the frequency of your mortgage payments by opting for accelerated bi-weekly payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but are guaranteed to save you a significant amount of money over the term of your mortgage.

Even just adding extra, e.g. $25.00, $50.00 or if you can $100.00, to your mortgage payment each passing year will have a powerful cumulative effect over the term of your mortgage. As always, if you have any questions about refinancing, reducing debt or paying down your mortgage quicker, I’m here to help!

Creating Sustainable Neighbourhoods

A neighbourhood with sustainable features is one that meets your needs while protecting the environment and leaving an affordable legacy. This type of neighbourhood offers homes that are located near shops, schools, recreation, work and other daily destinations. Like a village, these places are a pleasant, convenient and safe walk, cycle or bus ride from home. This helps you reduce driving costs and enjoy the health benefits of walking and cycling. Land and services, like roads, are used efficiently. Old or new, they also feature a choice of homes that you can afford.

Did you know…?

·         The Heart and Stroke Foundation of Canada recommends at least 30 minutes of exercise every day, like walking or biking, to reduce the risk of obesity, heart disease and stroke. Where homes are within walking distance of stores and other services, people are 2.4 times more likely to meet the 30-minute minimum than those in homes that are not within a convenient or pleasant walk to stores/services.

·         The average annual cost to own and operate a car in Canada is $9,000+. If you can eliminate the need for a second car, drive less or avoid having a car at all, that’s money in your pocket.

·         A two-storey detached home loses 20% more heat than a semi-detached one, and 50% more than a middle home in a row of townhouses of the same size with the same heating system, insulation and windows.

• Trees shading your house can make it feel cooler in the summer. Healthy trees also increase your property value. They intercept rainwater, improve air quality, and make streets and public spaces more comfortable and attractive.
• Asphalt surfaces, like parking lots, can make urban areas hotter than the surrounding countryside in the summer. With less asphalt surface, neighbourhoods are more attractive and land-efficient. In mixed-use neighbourhoods, fewer parking spots are needed because places with high daytime needs, like offices, are close enough to share parking with places that need more parking at night, like homes and restaurants.
• Cars are a major source of smog in urban areas, so driving less helps everyone’s health, particularly children, the elderly and people at risk for cardio-respiratory problems.
• Half of the greenhouse gases from energy use by individual Canadians come from passenger road transportation, like cars. In the Toronto area, greenhouse gases from weekday passenger travel generated by people living in mixed-use, pedestrian and transit-friendly neighbourhoods near the urban core are about 1/3 of those by people living in dispersed, strictly residential neighbourhoods on the urban fringe.

Canadian and US Employment

Employment in Canada declined by 36,000 jobs in November, largely as the result of losses in part-time work. The national unemployment rate edged 0.1 points higher to 7.1 per cent.  Total hours worked, which is strongly correlated with economic growth, is up 1.1 per cent over the past 12 months while total employment is up 0.7 per cent over that time period.

In BC, employment fell by 1,400 jobs following strong gains in October. The provincial unemployment rate declined 0.1 points to 6.2 per cent . Year-to-date, employment in BC is up 1.2 per cent but has risen at a rate of 2.5 per cent over the past three months.

In the US, payrolls expanded by a robust 211,000 jobs while estimates of job growth in previous months were revised higher by 35,000 jobs. The US unemployment rate was unchanged at 5 per cent.

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Bank of Canada Interest Rate Decision

The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation is in line with its outlook with total CPI inflation near the bottom of the Bank's 1 to 3 per cent target range while core inflation remains close to 2 per cent.  On growth, the Bank cited ongoing and complex adjustments in the Canadian economy to low commodity prices, but expects growth to move above potential (usually estimated to be about 2 per cent) in 2016. 

 Absent a substantial recovery in global commodity prices, the Canadian economy will more than likely grow near its long-term trend rate over the next two years. That rate of growth will keep inflation relatively anchored at or below its 2 per cent target.  A baseline scenario of economic growth above 2 per cent, paired with low inflation and steady job growth should keep the Bank of Canada sidelined over the medium run. However, several quarters of steady growth following the oil price shock of late 2014 may convince policymakers that the economy is no longer in need of the monetary stimulus injected into the economy via two rate cuts in early 2015. If so, the Bank may shift back to a tightening bias with a potential rate increase late next year or in early 2017.

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Canadian Economic Growth (Q3'2015)

The Canadian economy rebounded from a first half contraction, growing 2.3 per cent in the third quarter in spite of a slowdown in the month of September. Economic growth was led by a 2.3 per cent gain in exports of goods and services, more than four times the rate of export growth recorded in the second quarter. Household consumption rose 0.8 per cent and residential investment grew 0.6 per cent. Business investment in machinery and non-residential structures continued to feel the effects of low commodity prices, falling 1.1 per cent and 1.7 per cent respectively. Growth for all of 2015 will likely register a paltry 1.2 per cent with stronger second half growth offsetting consecutive negative quarters in the first half of the year.

The outlook for growth in 2016 remains weighed down by low oil prices and the associated struggles in Canada’s energy producing provinces. Higher oil prices would provide a welcome boost to economic growth, but increasing prices are contingent on more robust global demand which may not materialize. In addition, the economy may have to adjust to a slight increase in mortgage rates which could temper the pace of residential construction and home sales. Offsetting these downside risks is that the low Canadian dollar should continue to provide a boost to the trade and manufacturing sector. Overall, we forecast growth in the Canadian economy will pick-up next year to 2.4 per cent.

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