This morning’s release of the Canadian Real Estate Association (CREA) data for July confirmed that key housing markets in Canada continued to slow, led by the Greater Golden Horseshoe (GGH) region surrounding Toronto. This region’s marked slowdown began in late April with the announcement of a 15% foreign tax credit and a sixteen-point program to enhance housing affordability in the Ontario provincial budget.
Notably impacting psychology, was the Bank of Canada rate hike in July, the first such hike in seven years. Positive surprises in the Canadian economy this year caused the Bank to preempt inflation pressures sooner than many had expected. The Canadian dollar and mortgage rates rose in response to the Bank’s action. The posted mortgage rate has now increased 20 basis points to 4.84%, which is of particular importance because this is now the assumed borrowing rate at which mortgage applicants must qualify for insured loans. There is a proposal to extend this qualification criterion to uninsured borrowers as well–that is, those that put at least 20% down on their home purchase. Before October 2016, the eligibility rate was the contract rate, which is meaningfully lower than 4.84%.

CREA’s national data showed that the number of homes sold on the MLS Systems fell 2.1% in July, the fourth consecutive monthly decline. While this decrease in sales was about one-third the magnitude of those in May and June, it leaves sales activity 15.3% lower than the record set in March. Sales were down from the previous month in close to two-thirds of all local markets, led by the Greater Toronto Area (GTA), Calgary, Halifax-Dartmouth and Ottawa.

On a year-over-year basis, sales were down 11.9% last month. Sales were down from year-ago levels in about 60% of all local markets. However, excluding the GGH region, net national sales activity was little changed from one year ago.

“July’s interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer,” said CREA President Andrew Peck. “Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen.” Anecdotal reports suggest that foreign buyers were more active in Montreal where, in contrast to Toronto and Vancouver, there is no international buyers tax.

New Listings Slipped in July

The number of new listings edged down by 1.8% last month, led by the GTA. Many other markets in the Greater Golden Horseshoe region also saw new supply pull back after having surged immediately after the Ontario government housing policy changes in April 2017. New listings were also down in Calgary, Edmonton, Montreal and northern British Columbia, with the latter-most region hit by wildfires.

With sales down by about the same amount as new listings in July, the national sales-to-new listings ratio stabilized at a well-balanced 53.5%. By contrast, the ratio was in the high-60% range in the first quarter of 2017. The ratio in the range of 40%-to-60% is considered consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market.

Based on a comparison of the sales-to-new listings ratio with its long-term average, more than 60% of all local markets are in balanced market territory. In the Greater Golden Horseshoe region, housing markets that recently favoured sellers for an extended period are now balanced, with some beginning to tilt toward buyers’ market territory.

Number of Months of Inventory

The number of months of inventory is another important measure of the equilibrium between housing supply and demand. It represents how long it would take to completely liquidate current inventories at the current rate of sales activity. There were 5.2 months of inventory on a national basis at the end of July 2017, the highest level since January 2016. The 5.2 figure was up from 5.0 months in June and up by more than a full month from where it stood in March.

The number of months of inventory in the Greater Golden Horseshoe region is up sharply from where it was before the April provincial announcements. For the region as a whole, there were 2.6 months of inventory in July 2017. While this remains below the long-term average of just over three months, it is more than triple the all-time low of 0.8 months reached in February and March.

Prices Continue to Decline

Home prices continued to fall in July, extending the decline that began in late April. The Aggregate Composite MLS House Price Index rose by 12.9% year-over-year in July, a further deceleration from the pace earlier this year. The decline in price growth from June to July was the result of softening prices in the GGH.

The MLS Home Price Index (MLS HPI) provides the best way of gauging price trends because average price trends are prone to be strongly distorted by changes in the mix of sales activity from one month to the next.

Price gains diminished in all benchmark categories, led by single family homes. Apartment units posted the largest y-o-y gains in July (+20%), followed by townhouse/row units (+15.9%), two-storey single family homes (+10.7%), and one-storey single family homes (+9.7%).

After having dipped in the second half of last year, benchmark home prices in the Lower Mainland of British Columbia have recovered and are now at new highs (Greater Vancouver: +8.7% y-o-y; Fraser Valley: +14.8% y-o-y).

Meanwhile, y-o-y benchmark home price increases were running a little below 20% in Victoria and just above 20% elsewhere on Vancouver Island.

Benchmark price gains slowed again on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph but remain well above year-ago levels (Greater Toronto: +18.1% y-o-y; Oakville-Milton: +12.7% y-o-y; Guelph: +23% y-o-y).

Calgary benchmark prices further edged into positive territory on a y-o-y basis in July (+1.1%). While Regina home prices popped back above year-ago levels (+3.6% y-o-y), Saskatoon home prices remained down (-2.2% y-o-y).

Benchmark home price growth accelerated in Ottawa (+5.8% overall, led by a 6.8% increase in two-storey single family home prices) and Greater Montreal (+4.9% overall, driven by a 7% increase in prices for townhouse/row units). Prices were up 5.4% overall in Greater Moncton, led by one-storey single family home prices which set a new record (+8.9%).

Canada’s red-hot jobs market took a breather in July, posting employment gains of 10,900, up just 0.1 percent following much stronger job gains since late last year. As the labour force participation rate edged downward, the jobless rate fell 0.2 percentage points to 6.3 percent, its best reading in almost nine years. Canada’s economy remains strong, causing the Bank of Canada to raise interest rates last month for the first time in seven years and we believe that another rate hike is likely later this year despite still muted inflation. According to Bloomberg News, “traders were pricing in 64 percent odds of a Bank of Canada interest rate increase in October” following the release of this morning’s employment report, “versus 60 percent yesterday”.

In recent weeks, the Canadian dollar has risen sharply and borrowing rates have increased significantly. Canada’s economy is now the strongest in the G7, posting growth of 3.7 percent in the first quarter, likely followed by a whopping 4 percent gain in the second quarter. Consumer spending, business investment, exports and residential construction all contributed to the strength in the first half.

With the Canadian dollar near 80 cents U.S. and a slowdown in home resales–particularly in the Greater Toronto Area–growth in the second half is likely to come in at about 2-1/4 percent, still above the potential long-term pace estimated by the Bank of Canada at about 1-3/4 percent. Indeed, in a separate release today, the government reported that exports fell 4.3 percent in June due mainly to lower exports of unwrought gold and energy products. In consequence, Canada’s merchandise trade balance posted a $3.6 billion deficit in June, a sharp increase from May.

Ontario and Manitoba enjoyed hiring gains, while employment declined in Alberta, Newfoundland and Labrador as well as in Prince Edward Island (see Table below). Nevertheless, Alberta’s job market is still in recovery mode as payrolls in the province increased by 35,000 (+1.5 percent) compared to year-earlier levels, led by gains in natural resources.

July saw continued job strength in the retail and wholesale trade sectors as well as in information, culture and recreation. Manufacturing gains were notable as well.

Hours worked increased sharply in the past year, a reliable indicator of rising incomes, as employment shifted from part-time to full-time jobs. However, wage rates continue to rise only modestly, up 1.3 percent in July, unchanged from the prior month, but still better than the record-low gain of 0.7 percent in April.

Strong Jobs Numbers in the U.S. Point to Continued Labour Shortages

There is mounting evidence in the U.S. that the economy is at full-employment as businesses report that it’s hard to find workers and consumers suggest that jobs are easy to get. U.S. employers added 209,000 jobs in July and the jobless rate ticked down to 4.3 percent–matching a fourteen-year low–according to data released today by the Labor Department. Wage rates rose 2.5 percent year-over-year, boosting consumer confidence and helping to fuel strong consumer spending. Increasing global growth is also boosting U.S. exports. Job vacancies are close to record highs, so employers are reluctant to fire workers, keeping unemployment benefit claims near a forty-year low.

The job gains were broadly based, led by an outsized increase in leisure and hospitality employment, driven by job growth at restaurants. Hiring was also robust in manufacturing and education and health services.

All of this good news will certainly keep the Federal Reserve in tightening mode. The central bank has suggested that it is ready to sell bonds accumulated on their balance sheet in response to the financial crisis. The Fed will also likely raise interest rates one more time this year. Both actions will cause the upward push in market interest rates and borrowing costs to continue. The U.S. economy will grow at a 2 to 2-1/2 percent pace this year.