This morning’s release of the Canadian Real Estate Association (CREA) data for August posted a modest uptick in sales last month, ending a string of four consecutive monthly declines. However, activity remained 13.8% below the record set in March, prior to the April announcement of a 15% foreign buyers’ tax and a sixteen-point program to enhance housing affordability in the Ontario provincial budget.
In a surprise move, the Bank of Canada increased its benchmark overnight interest rate for the second consecutive time in September, which put further upward pressure on mortgage rates. As well, banks increased their prime rate, which drives up the cost of borrowing on home equity lines of credit (HELOCs)–a popular method of tapping homeowner equity. Consumers pumped up their credit balances in each of the last four quarters by $10-billion to $12-billion, with HELOCs a key part of that. Positive surprises in the Canadian economy this year caused the Bank of Canada to preempt inflation pressures. The Canadian dollar also 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 since October 2016 this is the assumed borrowing rate at which mortgage applicants must qualify for insured loans. The Office of the Superintendent of Financial Institutions (OSFI) issued a proposal in July to tighten the qualification criterion for uninsured borrowers as well–that is, those that put at least 20% down on their home purchase. If the proposal is implemented, high loan-to-value mortgage borrowers would need to meet debt-servicing requirements at mortgage rates 200 basis points above the contract rate.

Many believe this would have an even bigger negative impact on housing that the October 2016 measures. The volume outstanding of insured mortgages has declined over the past year. Only 20% to 30% of all mortgages are insured. With credit conditions tightening, lenders have become more risk averse and appraisers are lowering home values in some regions, especially those surrounding Toronto. In addition, Statistics Canada released data today showing that mortgage borrowing by households (adjusted for seasonal factors) decreased $2.6 billion in the second quarter–reflecting a pullback in national housing activity–while borrowing in the form of consumer credit and non-mortgage loans increased by $6.1 billion.

CREA’s national data showed that the number of homes sold on the MLS Systems inched up by 1.3% from July to August. The monthly rebound in the Greater Toronto Area (GTA) sales of 14.3% fueled the national increase. For Canada excluding the GTA, sales activity was flat. The pop in sales in the GTA was the first monthly rise since the April announcement of the Ontario Fair Housing Policy, the number of sales remained 36% below the peak reached in March and 32% below year-ago levels.

Actual (not seasonally adjusted) sales activity was down nearly 10% year-over-year in August. Sales were down from year-ago levels in about 60% of all local markets, led by the GTA and surrounding housing markets.

“The impact of recent mortgage rate increases on housing activity will become clearer once mortgages that were pre-approved prior to the recent interest rate hikes expire,” said Gregory Klump, CREA’s Chief Economist.

New Listings Slipped Further in August

The number of newly listed homes declined by 3.9% last month, marking a third consecutive monthly decline.The national result largely reflects a reduction in newly listed homes in the GTA, Hamilton-Burlington, London-St. Thomas and Kitchener-Waterloo, as well as the Fraser Valley.

With sales up and new listings down in August, the national sales-to-new listings ratio rose to 57% compared to 54.1% in July. 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, about 70% of all local markets are in balanced market territory in August–up from 63% balanced in July. A decline in new listings has firmed market balance in a number of Greater Golden Horseshoe housing markets where it had recently begun tilting 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 months of inventory on a national basis at the end of August 2017, down from 5.1 months in July and slightly below the long-term average of 5.2 months.

At 2.3 months of inventory, the Greater Golden Horseshoe region is up sharply from the all-time low of 0.8 months reached in February and March just before the Ontario government announced housing policy changes in April. However, it remains well below the long-term average of 3.1 months (see chart below)

Price Gains Diminish Nationally

Aggregate average home prices continued to fall in August–down 0.8% from one month ago and down 2.33% from 3 months ago–extending the decline that began in late April. The Aggregate Composite MLS House Price Index rose by 11.2% year-over-year in August, a further deceleration from the pace earlier this year.The slowdown in price gains primarily reflects softening price trends in Greater Golden Horseshoe housing markets tracked by the index (see table below).

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 two-storey single family homes. Apartment units posted the largest year-over-year (y-o-y) gains in August (+19.5%), followed by townhouse/row units (+14.4%), two-storey single family homes (+8.3%), and one-storey single family homes (+8.1%).

While benchmark home prices were up from year-ago levels in 12 of 13 housing markets tracked by the MLS® HPI, price trends continued to vary widely by region.

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: +9.4% y-o-y; Fraser Valley: +14.8% y-o-y).

Benchmark home price increases have slowed to about 16% on a y-o-y basis in Victoria, and are still running at about 20% elsewhere on Vancouver Island.

Price gains slowed further on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph; however, prices in those markets remain well above year-ago levels (Greater Toronto: +14.3% y-o-y; Oakville-Milton: +11.4% y-o-y; Guelph: +19.5% y-o-y).

Calgary benchmark price growth remained in positive territory on a y-o-y basis in August (+0.8%). While Regina home prices popped back above year-ago levels (+5.6% y-o-y), Saskatoon home prices remain down (-0.3% y-o-y). That said, prices of late have been trending higher in both Regina and Saskatoon, and if recent trends hold, Saskatoon prices will also turn positive on a y-o-y basis before year-end.

Benchmark home price growth accelerated in Ottawa (+5.9% y-o-y overall, led by a 7% increase in one-storey single-family home prices) and was up in Greater Montreal (+4.6% y-o-y overall, led by a 7.1% increase in prices for townhouse/row units). Prices were up 5.1% overall in Greater Moncton, led by a 7.9% y-o-y gain in townhouse/row unit prices. (Table 1)

The actual (not seasonally adjusted) national average price for homes sold in August 2017 was $472,247, up 3.6% from where it stood one year earlier. Sales in Greater Vancouver and Greater Toronto–the highest-priced and most active markets by far–heavily skew the national average home price. Excluding these two markets from calculations trims almost $100,000 from the national average price ($373,859).

The Bank of Canada raised the target overnight rate another 25 basis points to 1.0% making it two hikes in a row following seven years of increasing monetary stimulus. The outsized 4.5% growth in GDP in the second quarter precipitated this action, despite two offsetting factors: the recent surge in the Canadian dollar, up more than 8% in the past three months, to over 81 cents U.S.; and the continued below-target rate of inflation.
Today’s monetary tightening comes at the same time that Federal Reserve officials are suggesting that another rate hike in the U.S. next week is unwarranted–adding further upward pressure on the loonie. The economic and political uncertainty in the U.S. has put considerable downward pressure on U.S. bond yields, while in Canada, interest rates are rising.

The Canadian economy is on a tear, dramatically outperforming the U.S., and the battering by both Hurricanes Harvey and Irma will only widen the disparity. The growth in Canada is becoming “more broadly based and self-sustaining,” according to the Bank’s press release. Last week’s Q2 GDP release showed that consumption is robust, supported by “solid employment and income growth”. Business investment and export growth have also picked up. The central bank does, however, expect a more moderate pace of economic growth in the second half of this year.

The housing sector has slowed in some markets–particularly around the GTA–in response to recent changes in tax and housing regulations in Ontario. But this is a change welcomed by the Bank and government authorities concerned about the continued rise in household debt. Tighter monetary policy portends further increases in mortgage and other lending rates. The Bank suggests that “given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.” You can’t get more transparent than that. The Bank of Canada welcomes a slowdown in housing and borrowing activity.

Questions remain regarding the potential growth of the economy, which was earlier estimated by the Bank’s economists to be about 1.7%. While the economy is closer to full employment than earlier forecasted, the Bank believes there remains excess capacity in the jobs market. This statement possibly suggests that the economy can grow at a faster pace than the Bank initially thought without triggering inflation.

Inflation does not currently appear to be of primary concern. While inflation remains below the target rate of 2% and wage pressures are subdued, there has been a slight increase in the consumer price index and the Bank’s core measures of inflation, which is “consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack.”

Once again the Bank of Canada reminds us the path of further policy decisions is not predetermined but will be dependent on incoming economic and financial data. This cautionary note is consistent with the “significant geopolitical risks and uncertainties around international trade and fiscal policies.”

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.

For the first time in seven years, the Bank of Canada announced today that it was hiking its key overnight rate by a quarter percentage point (25 basis points) bringing it to 0.75 percent as the economy has staged a broadly based economic expansion this year. In a break from tradition, the Bank has taken this action even though inflation remains well below its target rate of 2 percent. Indeed, inflation has hit its lowest level since 1999. The consumer price index (CPI), released in late June, rose only 1.3 percent in May from a year ago, down from an annual pace of 1.6 percent in April. Both Governor Poloz and Senior Deputy Governor Wilkins have emphasized that the Bank must begin to hike rates pre-emptively due to the lagged effect of monetary tightening.

Measures of annual core inflation, a key indicator tracked by the Bank of Canada, which excludes volatile components such as food and energy, fell to its lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 percent, its lowest level since March 1999. The Bank has recently played down sluggish inflation numbers, suggesting they reflect the lagged effects of past excess capacity. Incoming inflation figures have been well below the Bank’s forecasts and will likely remain low for some time as oil prices are wobbling downward and wage inflation is a mere 1.3 percent–just keeping up with core inflation.

Last Friday’s continued strong employment report for June cinched the rate-hike. Employment rose a hefty 45,300, lifting the 12-month gain to a whopping 350,000 and trimming the jobless rate to match the cycle low of 6.5%. What’s more, total hours worked surged in the second quarter at the fastest rate since 2003. GDP climbed an impressive 3.3% year-over-year in April, while record levels of exports and imports suggest activity stayed on track in May, and further record highs for auto sales suggest consumers kept right on spending in June. Spending strength is yet another sign that after two years of lagging behind, Canada’s overall growth rate has come bouncing back in the past year to surpass the U.S. pace. The Bank now expects the output gap to close around year end.

Markets have been expecting this move for some time, as monetary policymakers have publicly stated that the 2015 interest-rate cuts appear to have done their job. Governor Stephen Poloz has said that the Canadian economy enjoyed “surprisingly” strong growth in the first three months of this year and that he expects the growth pace to remain above potential (estimated at 1-3/4 percent), setting the stage for this rate hike. In response, Canadian bond yields have moved higher, the Canadian dollar has surged anew, and the big Canadian banks raised mortgage rates by roughly 20 basis points last week in anticipation of this move. The 5-year Government of Canada bond yield has surged nearly 50 basis points in the past month. Indeed, 10-year government yields are up to roughly 1.9 percent, their highest yield in more than two years. The Canadian dollar surged to above 77.5 cents, the strongest level in 10 months, up more than 6 percent from the lows in early May. Stalling oil prices may reverse some of the loonie’s recent gain.

The big banks will also raise their prime rates, driving up the cost of variable rate mortgages, other loans and lines of credit tied to the benchmark rate. While the banks shaved their response to the interest rate cuts to less than the 25 basis points decline when monetary policy was easing, it is likely now that banks will adjust lending rates to close to the full 25 basis point increase. This asymmetric response is consistent with the desire of regulators to slow the growth in household debt.

Housing is one crucial component of the Canadian economy, and it has slowed meaningfully at the national level, in line with the central bank’s expectations. Prices and sales have declined in the Greater Toronto Area and surrounding municipalities since the Ontario Fair Housing Plan announcement in late April. However, housing activity has gained momentum in Montreal and Ottawa, while Alberta stabilizes and Vancouver posted a modest bounceback from the swoon following its August 2016 imposition of a foreign buyers’ tax. The underlying strength in many housing markets is the reason why policymakers are proposing new rules to tighten mortgage lending. This time OSFI–the regulator of financial institutions–is proposing that banks stress test non-insured borrowers at two percentage points above the contract rate. This despite the fact that non-insured borrowers are putting at least 20 percent down on their home purchase. A small BoC rate hike would reinforce the multi-faceted steps to calm the broader housing market.

The Bank has repeatedly stated that “macroprudential and other policy measures have contributed to more sustainable debt profiles,” even though household debt-to-income levels have hit a record high (see chart).

Uncertainties, of course, persist–particularly on the trade side as NAFTA is renegotiated in fewer than 90 days. The U.S. has already imposed duties on softwood lumber, and President Trump’s rhetoric remains hostile, threatening U.S. import duties on steel and other products. These uncertainties notwithstanding, I expect another Bank of Canada rate hike in the fourth quarter. The Federal Reserve will also likely increase rates in Q4. Look for a slow crawl upward in interest rates from both central banks in 2018.

The June jobs data blew past expectations, all but insuring that the Bank of Canada will hike interest rates by a quarter point next week–the first rate hike in seven years. Market rates have already risen in expectation and the Royal Bank has boosted interest rates on its two-year, three-year and five-year fixed-term mortgage rates up by 20 basis points each. The Canadian economy has been performing well with 3.7% growth in GDP in the first quarter and the second quarter gain is now likely to be roughly 2-3/4%. The Bank of Canada has been signalling a rate hike for a few weeks, despite continued low inflation, as incoming economic data have been surprisingly strong. This has boosted the Canadian dollar, now trading at about 77.4 cents US even as oil prices have weakened to under $44.00 a barrel (WTI).

Higher mortgage rates will come on the heels of a marked slowdown in the housing market in the Greater Toronto Area and surrounding region. According to data released this week by the Toronto Real Estate Board, June resales activity continued its abrupt slowdown, which began with the April 21 imposition of a foreign buyer’s tax in the Greater Golden Horseshoe. Over the same period, sellers have increased sharply as new listings and active listings have surged, putting downward pressure on average home prices. Year-over-year gains in house prices have more than halved from a 30% y/y gain in March to less than 15% most recently. The Ontario government actions to slow housing have clearly had a marked psychological impact as both buyers and sellers perceive that housing has peaked. Moreover, recent proposals by the bank regulator, to stress test mortgage applicants for non-insured loans (where downpayments are 20% or more) on the same basis as for insured loans will also dampen housing activity.

Employment rose by 45,400 in June, mostly in part-time work. The jobless rate fell by 0.1 percentage point to 6.5% nationwide. Compared to twelve months earlier, there were 351,000 (1.9%) more people working, where most of the growth was in full-time employment. The total number of hours worked increased 1.4% over this period.

Job growth in Canada in the second quarter posted the fourth consecutive quarter of stronger-than-anticipated gains and the strongest quarterly growth since 2010. Job gains have accelerated this year from its 2016 pace.
Average hourly wages of permanent employees rose 1.0% in June from a year earlier, matching the pace for May. For all workers, wages rose 1.3% over that period. The pace of wage gains, a closely watched indicator of the health of the labour market, had slowed to a record low in April, and the recent acceleration will reinforce speculation the time has come for higher interest rates.

Quebec and British Columbia led the way in job gains. The Quebec unemployment rate held steady at a record-low 6.0%. In BC, employment rose by 20,000 and the jobless rate declined 0.5 percentage points to 5.1%, the lowest provincial unemployment rate in Canada. In Ontario, there was little change in the number of people working, and the unemployment rate was also little changed at 6.4%. On a year-over-year basis, employment in the province grew by 75,000 (+1.1%). Employment in Ontario was virtually unchanged in the first half of 2017, following an upward trend in the second half of 2016.

More people were employed in professional, scientific and technical services, as well as in agriculture. At the same time, employment declined in business, building and other support services.

U.S. Hiring Accelerates While Wage Growth Remains Flat
Payrolls increased by 222,000 in June in the US, stronger than expected, but the jobless rate increased to 4.4% from a 16-year low of 4.3% as the robust labour market pulled discouraged workers off the sidelines. The labour force participation rate–the share of working-age people in the labour force–which had fallen to record lows in the wake of the financial crisis and recession, has now increased to 62.8%, but it is still near its lowest level in more than 30 years. The U-6 measure of underemployment, which includes discouraged workers and those who are involuntarily working less than full-time, rose to 8.6% from 8.4%, the first increase since January.

The report marks a relatively strong finish for the labour market in the second quarter that should support continued gains in consumer spending in coming months. Federal Reserve policy makers raised interest rates last month and reiterated plans to start reducing their balance sheet and increase borrowing costs once more this year.
Wages showed declines in nondurable-goods manufacturing, professional and business services; small gains in retail, transportation and warehousing; overall wages in the US are rising at 2% three-month annualized pace. Inflation remains below the 2% Fed target, but Fed rate hikes at a measured pace will continue.

This morning’s release of the Canadian Real Estate Association (CREA) data for May confirmed earlier data from the Toronto Real Estate Board (TREB) pointing to a marked slowdown in housing activity in the Greater Toronto Area (GTA) since the late April announcement of the 15% foreign tax credit and the sixteen point program to enhance housing affordability in the Ontario provincial budget. Clearly, psychology has shifted in the Greater Golden Horseshoe (GGH, see map below), which is Canada’s largest urbanized area centred on the City of Toronto, where house prices have risen consistently over the past decade and spiked in 2016 until they apparently peaked in March of this year.

CREA’s national data showed that the number of homes sold on the Canadian MLS Systems fell by 6.2% in May 2017 compared to April. This was the largest month-over-month (m-o-m) decline since August 2012. This drop largely reflects the 25.3% m-o-m drop in the GTA. Activity was also down significantly from the previous month in other housing markets across the GGH region, including Oakville-Milton, Hamilton-Burlington and Barrie. By contrast, activity rose to multi-year highs in Montreal and Quebec City. According to Realosophy, a realty brokerage company, preliminary data for June suggest that sales of freehold properties continued to fall in the GTA this month, marking the 8th straight week of falling sales with the York region leading the decline (see chart). Research by Realosophy suggests that York was the region where potentially speculative investor activity has been strongest in the GTA.

Not seasonally adjusted sales were down 1.6% year-over-year (y-o-y) in May, with y-o-y gains in about 60% of all local housing markets offset by the sharp drop in the GTA -20.8% y-o-y). Calgary , Edmonton, Ottawa and Montreal were among the urban centres where May sales were up y-o-y.

“Recent changes to housing policy in Ontario have quickly caused sales and listings to become more balanced in the GTA,” said CREA President Andrew Peck. “Meanwhile, the balance between supply and demand in Vancouver is tightening up, while many places elsewhere in Canada remain amply supplied.”

“This is the first full month of results since changes to Ontario housing policy made in late April. They provide clear evidence that the changes have resulted in more balanced housing markets throughout the Greater Golden Horseshoe region,” said Gregory Klump, CREA’s Chief Economist.

New Listings Shot Up in April And Rose Further in May

The number of newly listed homes edged up a further 0.3% in May following April’s jump of almost 10%. New listings in May remained high in and around the GTA; however, the York Region of the GTA posted the largest month-over-month decline in new supply. Similar percentage declines were also evident for new listings in Oakville-Milton and Barrie.

With sales down considerably in May, the national sales-to-new listings ratio moved out of sellers’ territory and back into balanced market territory for the first time since late 2015. The ratio stood at 56.3% in May 2017, down from 60.2% in April and the high-60% range over the first three months of this year. The ratio in the range of 40%-to-60% is considered generally consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market.

The sales-to-new-listings ratio was above the sellers’ market threshold in about half of all local housing markets, the majority of which continued to be in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario.

The ratio was above 60% in more than half of all local housing markets in May, the majority of which are located in British Columbia and southwestern Ontario. The ratio is above 70% for Greater Vancouver and the Fraser Valley and above 60% for Montreal. By contrast, the ratio softened sharply in the GTA, closing out the month at 41% (see charts).

Number of Months of Inventory

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents the number of months it would take to completely liquidate current inventories at the current rate of sales activity.
There were 4.7 months of inventory on a national basis at the end of May 2017, up from 4.3 months in April and 4.1 months in March. This returns the measure to where it was for much of 2016.

With new listings having surged and sales having declined in some markets within the Greater Golden Horseshoe, the number of months of inventory in the region is up from all-time lows. That said, housing markets in the region remain among the tightest in Canada, with most urban centres in the region still registering less than two months of inventory.

Prices Continue to Rise

The Aggregate Composite MLS House Price Index (HPI) rose 17.9% y-o-y last month compared to 19.8% in April. Price gains slowed sharply for single family homes.

This price index, unlike those provided by local real estate boards and other data sources, provides the best gauge of price trends because it corrects for changes in the mix of sales activity (between types and sizes of housing) from one month to the next.
Price gains accelerated for apartment units, which posted the largest y-o-y gains in May (+20.5%). Meanwhile, prices gains braked for benchmark low-rise homes (townhouse/row units: +19.3% y-o-y; two-storey single family homes: +18.4% y-o-y; one-storey single family homes: +14.5% y-o-y).

While benchmark home prices were up from year-ago levels in 11 of 13 housing markets tracked by the MLS® HPI, price trends continued to vary widely by location.

After having dipped in the second half of last year, home prices in the Lower Mainland of British Columbia have been recovering and have either reached new heights or are trending toward them (Greater Vancouver: +8.8% y-o-y; Fraser Valley: +14.7% y-o-y). Meanwhile, y-o-y benchmark home price increases remained in the 20% range in Victoria and elsewhere on Vancouver Island.

Prices in the GTA actually fell on a month-over-month basis in the GTA and the y-o-y gains, while still positive, were down from peak y-o-y levels posted in March (Greater Toronto: +29% y-o-y; Oakville-Milton: +23.9% y-o-y). Price growth remained in the mid-20% on a y-o-y basis in Guelph.

Calgary and Regina traded places in May, with Calgary prices having posted the first y-o-y gain (+0.2%) in almost two years and Regina prices having moved into negative territory (-1.7%) for the first time since January 2016. Saskatoon home prices remained down from year-ago levels (-2.8%) for the 22nd consecutive month.

Benchmark home prices rose by more than the rate of overall consumer price inflation in Ottawa (+4.4% overall, led by a 5.4% increase in two-storey single family home prices), Greater Montreal (+3.6% overall, led by a 4.6% increase in two-storey single family home prices) and Greater Moncton (+6.1% overall, led by a 13.1% increase in prices for townhouse/row units). (Table 1)

The actual (not seasonally adjusted) national average price for homes sold in May 2017 was $530,304, up 4.3% from where it stood one year earlier.

The national average price continues to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which are two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations trims more than $130,000 from the national average price ($398,546).

Another Sign Of A Economic Strength

Statistics Canada just released the Labour Force Survey for May, adding to the stream of positive economic indicators. While the jobless rate edged up 6.6% from a cycle-low 6.5%, it was the result of more optimism about job prospects as more people participated in the labour market. The jobless rate has been trending down in a see-saw pattern since February of last year (see chart). Adjusted to the way calculations are made in the U.S., Canada’s unemployment rate was 5.6% in May, compared with 4.3% in the U.S. The labour force participation rate in Canada (adjusted to U.S. concepts) was 65.7% in May compared with 62.7% in the United States. On a year-over-year basis, the participation rate increased by 0.2 percentage points in Canada, while it edged up by 0.1 percentage points in the United States.

Unemployment Rate in Canada (Chart)

Canada added 54,500 jobs last month, driven by a 77,000 increase in full-time jobs. This continues the upward trend in job growth that started in July 2016. May’s rise in employment was the third biggest one-month rise in the past five years–stronger than economists had expected.

There were notable employment gains in Ontario, British Columbia, Manitoba and Prince Edward Island. There was little change in the other provinces. Quebec’s unemployment rate fell to a record low of 6%. Manitoba has the lowest jobless rate in the country at 5.3%.
In May, employment increased in several industries, led by professional, scientific and technical services as well as manufacturing. The gain in manufacturing jobs at 25,300 is the most since 2002. There were smaller increases in transportation and warehousing; wholesale and retail trade; as well as health care and social assistance. In contrast, fewer people worked in finance, insurance, real estate, rental and leasing; information, culture and recreation; and public administration.

The number of private sector employees increased in May, while public sector employment and self-employment were little changed.

The stellar performance in job growth also finally came with a pick-up in wages. The pace of annual wage rate increases accelerated to 1.3% in May, after falling to a record low 0.7% in April. Another sign of potential tightness in the market is that wages for temporary workers are up 4.8% year-over-year.

The employment gains bode well for the continuation of the country’s expansion, which is the fastest among the G7 countries, as Canada emerges from the oil price collapse and benefits from a soaring real estate market.

It also could raise pressure on the Bank of Canada, which has recently sounded much more confident in the strength of the economy. Most economists anticipate a rate increase in the first half of next year. A separate report released Friday by Statistics Canada showed utilization of industrial capacity at the highest since 2007.

Over the past year, the economy created 316,800 new jobs, which was the most robust performance since February 2013, well before the oil price collapse. This pace of job growth has been rarely seen since the 2008-2009 recession.

The initial market reaction was a rise in the Canadian dollar.

In direct contrast, the U.S. posted disappointing job growth in May, just one of several signs indicating that the U.S. economy has hit a soft patch. The Federal Reserve may have reasons to be cautious and refrain from increasing interest rates when the Fed meets next week. However, most economists expect the Fed to hike rates once again next week and to signal its baseline expectations of another interest rate action later this year. The Fed will perhaps begin to outline its approach to slowly shrink its $4.5 trillion balance sheet. The Fed purchased Treasury bonds and mortgage-backed securities during the financial crisis and its aftermath, known as ‘quantitative easing.’ But the time is nearly ripe for the Fed to begin its reversal.

Provincial Unemployment Rates in April In Descending Order (percent)
(Previous months in brackets)

— Newfoundland and Labrador 14.0 (14.9)
— Prince Edward Island 10.3 (10.1)
— New Brunswick 8.7 (8.4)
— Nova Scotia 8.3 (8.6)
— Alberta 7.9 (8.4)
— Quebec 6.6 (6.4)
— Saskatchewan 6.2 (6.0)
— Ontario 5.8 (6.4)
— British Columbia 5.5 (5.4)
— Manitoba 5.4 (5.5)