Bank of Canada Interest Rate Announcement

Today's interest rate announcement will be Mark Carney's last as Governor of the Bank of Canada, however that is the only meaningful change as the Bank once again opted to leave its overnight target rate at 1 per cent.  The Bank expects first quarter growth to be stronger then its original projection of 1.5 per cent, and forecasts that the remainder of the year will remain in line with its April projection. The Bank expects inflation will remain subdued before rising to 2 per cent in mid-2015 when the economy returns to full capacity. The Bank once again stated that the considerable monetary policy stimulus currently in place will remain appropriate for an unspecified "period of time" after which some withdrawal will likely be required. 

The Bank of Canada remains caught between the rock of a muddling economy and the hard place of elevated household debt burdens. If the second half of this year unfolds as most forecasters expect, economic growth should accelerate, helping inflation to get back on a path to the Bank's 2 per cent target. However, if that scenario does not unfold and the economy continues its slow growth trend, the "period of time" the Bank has noted may stretch out longer than the Bank currently has in mind. Our own analysis of the Canadian economy suggests there will not be any movement on interest rates until late 2014. 

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BC Commercial Leading Indicator Points to Stability in Second Half of 2013

 The British Columbia Real Estate Association (BCREA) Commercial Leading Indicator (CLI) bounced back in the first quarter of 2013, rising 0.4 points and partially offsetting the decline in the fourth quarter of 2012. The index is currently sitting at 112.2. On a year-over-year basis, the CLI is 0.2 per cent above the first quarter of 2012.

The increase in the index was the result of stronger economic activity, particularly in the manufacturing sector due to a large increase in wood products output. Momentum in Canadian real estate investment trusts (REIT) returns and narrower risk spreads translated to a positive contribution in the index’s financial component. The employment component of the index, however, continues to lag due to a sharp slowdown in manufacturing employment.

"The increase in the CLI following last quarter’s decline has meant an overall flattening in the index’s underlying trend,” said Brendon Ogmundson, BCREA Economist. “This indicates that the slowdown signaled previously for the first half of this year will likely give way to modest growth in the second half of 2013."

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Canadian Retail Sales

Canadian retail sales were flat in March. Higher sales were reported in 6 of the 11 retail sub-sectors. Inflation adjusted sales rose 0.7 per cent. First quarter retail sales increased just 1 per cent over the first quarter of 2012. 

Retail sales in BC continued to slump in March, rising just 0.9 per cent on a monthly basis and declining 0.1 per cent year-over year. For the first quarter, BC retail sales are 0.4 per cent lower than the first quarter of 2012.  Slower employment growth and high debt burdens are likely taking a toll on household spending this year. However, an expected acceleration in economic growth in the second half of the year should spur faster job growth and higher consumer spending. 

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Canadian Consumer Price Inflation

Canadian inflation remained remarkably muted in April. Consumer price rose only 0.4 per cent in the 12 months to April, a significant deceleration from the already low 1 per cent reading in March. The dip in inflation was primarily the result of lower gasoline prices, though inflation was broadly weak across all CPI components. Core inflation, which strips out the most volatile components of the CPI, such as food and energy prices, increased 1.1 per cent in April. Consumer prices in BC actually declined, falling 0.8 per cent as consumers paid over 4 per cent less at restaurants due to the expiration of the HST. 

Inflation is now running near the bottom of the Bank of Canada's 1-3 per cent control range, a situation which in normal circumstances would be a very strong sign of an impending interest rate cut. Indeed, if inflation continues to fall well short of the Bank's mandate of targeting 2 per cent inflation, it may become difficult for the Bank to continue to prejudice concerns about the state of household debt over the health of the wider economy. 

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Housing Market Update (May 2013)

BCREA Chief Economist Cameron Muir discuss the April 2013 statistics and take an in depth look at BCREA's Q2 Housing Forecast:

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Soft landing still likely

Recently Genworth Canada hosted a half-day seminar for Realtors and mortgage industry professionals. The seminar featured a review of Genworth Canada’s annual Homeownership Study – a survey that looks at homebuyer trends and behaviour and financial fitness levels of Canadians.

The results of the survey were discussed in a panel discussion featuring some of prominent Canadian Real Estate industry leaders. The following provides a summary of key take-aways from the presentations and panel discussions:

* Canada has out-performed the U.S. during the economic recovery.

* The Canadian economy is expected to deliver moderate economic growth in 2013 and 2014.

* A soft landing is expected in Canadian real estate.  Home sales have fallen in response to the tightening of mortgage insurance rules and slower economic growth, but there has not been a price correction (outside of Vancouver). This reflects the fact that listings have declined in tandem with sales.  The result is balanced market conditions in most Canadian cities.

* The effects of the recent tightening of mortgage insurance rules will abate with time. There is no catalyst for a major correction in real estate, as Canada’s labour market will remain healthy and interest rates will remain low.

* Consumers have reduced their willingness to take on additional debt. This will constrain household spending, but it is a healthy outcome and spending will likely continue to advance at roughly the pace of income growth.

* TD Bank does not expect interest rates to rise until late 2014 to early 2015. The exception would be if the housing market rebounds and it leads to acceleration in debt growth, in which case the Bank of Canada could be forced to raise interest rates sooner or the government could tighten mortgage lending rules further.  An option that does not get attention, but could be prudent, is a change in the qualifying interest rate.

* People are putting more money down, but people are also buying smaller homes. Both are indications that people are opting for more affordable mortgages.

* There is still a need for increased financial literacy among Canadians (27 per cent do not even know what their credit rating is).

* The Canadian government was concerned with a rising debt-to-income ratio and changes to mortgage regulations in the past few years were a quick way to address the issue.

* This is likely not the end of changes in the mortgage industry; much depends on how changes made to date continue to affect the industry.

Kiki Sauriol-Roode is VP, strategic alliances for Genworth Canada

US Housing Starts

US housing starts fell to a five-month low in April, slumping nearly 17 per cent to 853,000 at a seasonally adjusted annual rate (SAAR). Housing starts had reached a 1.02 million (SAAR) pace in March. Slower construction activity in April likely reflects a temporary pause in the housing recovery underway down South. Building permits, a key proxy for future activity, increased 14.3 per cent.

The strong recovery in US home construction continues to boost BC wood product exports and manufacturing output. Sales of BC manufactured wood products rose 40 per cent year-over-year in March and are up 34 per cent through the first quarter.

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Canadian Manufacturing Sales

Canadian manufacturing sales edged 0.3 per cent lower in March, the third decline in the past four months. Sales declined in just under half of manufacturing sub-sectors  with declines driven by falling output in the petroleum, coal and chemical industries. In spite of this morning's weak manufacturing report, a slate of better than expected economic data has pushed our quarterly Canadian GDP growth tracking estimate to 2.2 per cent for the first quarter of 2013. 

In BC, manufacturing sales rose 1.2 on a monthly basis and were 2.6 per cent higher than March 2012. Provincial manufacturing sales have also risen 2.6 per cent through the first quarter of 2013. BC has been able to buck the national trend of declining manufacturing sales this year due to the sharp turnaround in the wood products sector. The sale of manufactured wood products rose an astounding 34 per cent year-over-year in the first quarter as a result of the strong recovery in US housing starts. 

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Housing Market Conditions Improve on the South Coast

The British Columbia Real Estate Association (BCREA) reports that a total of 6,904 residential sales were recorded by the Multiple Listing Service® (MLS®) in BC during April, up 1.9 per cent from March on a seasonally adjusted basis, but down 2.2 per cent compared to April 2012. Total sales dollar volume declined 3 per cent to $3.65 billion. The average MLS® residential price in the province was $528,507, down 0.8 per cent from a year ago.

"BC home sales trended higher again in April, with seasonally adjusted unit sales now 8 per cent higher since the beginning of the year," said Cameron Muir, BCREA Chief Economist. "Market conditions were at or near balanced conditions in Victoria, Vancouver, the Fraser Valley and the North last month, leading to a firming up of home prices." The MLS® Home Price Index edged up 0.7 per cent over the past month in the Lower Mainland, and 1.5 per cent over the past three months.

Year-to-date, BC residential sales dollar volume was down 16.6 per cent to $10.8 billion, compared to the same period last year. Residential unit sales dipped 13.9 per cent to 20,476 units, while the average MLS® residential price was down 3.1 per cent at $529,785.

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