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Canadian Building Permits

Canadian building permits declined 4.1 per cent in December to $6.5 billion, the second consecutive monthly decrease following November's 6.6 per cent drop. The decline in building permits was led by weaker permitting activity for Ontario and BC multi-family projects.

Construction intentions in BC tumbled 30 per cent from November as both residential and non-residential permits experience substantial monthly declines. On a year-over-year basis, the value of total BC building permits was down 4.8 per cent compare to December 2012.  For all of 2013, the total value of BC building permits fell 8 per cent from 2012. 

Building permit activity was down across all of BC's four major census metropolitan areas (CMA) in December. In the Abbotsford-Mission CMA, permits fell 7.1 per cent on a monthly basis and were down 31 per year-over-year.  Construction intentions in the Victoria CMA declined 2.3 from November and 22.6 per cent year-over-year. In the Kelowna CMA, permits were down 29 per cent from November and 26 per cent year-over-year.  Finally, in the Vancouver CMA  building permits were off 31.4 per cent cent month-over-month but rose 12.4 per cent compared to December 2012.

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Canadian Monthly GDP Growth

The Canadian economy grew 0.2 per cent in November, the fifth consecutive month of expanding real GDP growth. At the industry level, growth was led by rising output in the mining and oil and gas industry, while output declined in the manufacturing and wholesale trade industries.  With today's release, we now have two months of GDP data for the fourth quarter of 2013. Our quarterly tracking estimate is currently indicating that real GDP will expand between 2.5 and 3 per cent in the fourth quarter.

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Housing Demand to Trend Higher

BCREA 2014 First Quarter Housing Forecast Update

The British Columbia Real Estate Association (BCREA) released its 2014 First Quarter Housing Forecast Update today.

BC Multiple Listing Service® (MLS®) residential sales are forecast to increase 4.8 per cent to 76,450 units this year, before increasing a further 7 per cent to 81,800 units in 2015. The five-year average is 75,400 unit sales, while the ten-year average is 84,400 unit sales. A record 106,300 MLS® residential sales were recorded in 2005.

"Housing demand in the province has nearly fully recovered from the 2012 downturn,” said Cameron Muir, BCREA Chief Economist. “Over the next year, BC will be the beneficiary of more robust global economic growth, led by a resurgent US economy and a favourable exchange rate. The resulting boost in employment will help underpin the housing market." 

"Home prices are not expected to climb much higher than the overall inflation rate as housing starts are expected to keep pace with consumer demand, added Muir. The average MLS® residential price is forecast to increase 1.8 per cent to $547,300 this year and a further 1.7 per cent to $556,800 in 2015.

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US Real GDP Growth

The BEA's preliminary estimate of Q4 US GDP came in at 3.2 per cent, modestly higher than consensus expectations of 3.1 per cent and a deceleration from Q3's 4.1 per cent growth.  The details of the report were overwhelmingly positive with personal consumption, exports and business investment all making healthy contributions to growth. In fact, GDP would have grown by over 4 per cent in the fourth quarter were it not for a contraction in US government spending.  For all of 2013, the US economy grew at a somewhat disappointing 1.9 per cent rate, though showed significant momentum in the second half of the year with quarterly growth averaging 3.7 per cent. It is worth noting that today's release is a preliminary estimate and will be revised in subsequent months.

Bond markets have thus far shrugged off further Fed tapering announced at yesterday's US Federal Reserve meeting as well as today's positive news regarding economic growth.  Interest rates in the US are modestly higher this morning while the yield on 5-year Government of Canada bonds, the key benchmark rate for 5-year mortgages, have remained relatively unchanged at less than 1.6 per cent.

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Canadian Consumer Price Inflation

Canadian consumer prices rose 1.2 per cent in the twelve months to December, a modest increase from 0.9 per cent inflation in November.  The Bank of Canada's index of core inflation, which strips out the most volatile components of the CPI, such as food and energy prices, increased 1.3 per cent in December. Consumer prices in BC were unchanged in December on a year-over-year basis.

The Bank of Canada's repeated messaging around downside risks to inflation continue to have their desired effect. The five-year Government of Canada bond yield, the key benchmark for fixed mortgage rate pricing, has now fallen over 30 basis points since the beginning of the year to under 1.6 per cent, prompting lenders to cut posted mortgage rates. While we still anticipate that mortgage rates will be higher at the end of the year, a continued low-rate environment early in the year should provide a boost to the market heading into the spring home-buying season.

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Canadian Retail Sales

Canadian retail sales rose 0.6 per cent in November, the fourth increase in the past five months. The advance in sales was largely attributable to higher sales of motor vehicles and parts as well as electronics and appliances. In inflation-adjusted terms, retail sales rose 0.8 per cent, a higher rate than nominal sales growth due to holiday discounting and heightened retail competition.  

Retail sales are finally showing signs of strength following close to a year of meager gains. Sales in BC were up 1.4 per cent in November, the third increase in the past four months.  Compared to November 2012, sales were up 4.3 per cent.  Year-to-date, BC retail sales have grown 1.7 per cent over 2012.

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Bank of Canada Interest Rate Announcement

The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent.  In its statement, the Bank once again highlighted that inflation remains stubbornly below the Bank's 2 per cent target due to significant excess supply in the Canadian economy, as well as heightened competition in the retail sector.  The Bank now see inflation returning to target in about 2 years as the effects of retail competition dissipate and excess capacity is absorbed through faster economic growth. In its concluding paragraph, the Bank notes that although the fundamental drivers of inflation appear to be strengthening, inflation remains below target and downside risk to inflation have grown in importance. Most importantly, the Bank notes that the timing and direction of the next change in interest rates will depend on how new information influences the balance of risk between low inflation and elevated household imbalances.

There has been substantial speculation of late that if inflation remains near the bottom of the Bank of Canada’s 1-3 per cent control range over the next six months, then the next move by the Bank will be a rate cut rather than the rate-hike most economists have penciled into forecasts.  Indeed, the Bank’s messaging and guidance has been much more dovish of late, essentially reversing the unequivocal tightening bias at the Bank under Mark Carney.  The macroeconomic impact of the change in messaging is significant, prompting both a decline in long-term interest rates as well as a substantial decline in the dollar.  A result that is both welcome to a slow-growing Canadian economy as well as very likely engineered by policymakers. While we are not in the rate-cut camp (though that outcome is far more likely that it was six months ago), particularly with economic growth in the global economy set to dramatically improve, we believe that an eventual rate tightening is still far out on the horizon.

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