12 Aug

Pandemic Triggers Red-Hot Summer Housing Market

General

Posted by: Gemma Riley-Laurin

We will get the full story on July housing in Canada when the Canadian Real Estate Association releases its July data in the next few days, but local real estate boards have reported a robust July market. Even in Calgary, year-over-year sales have jumped by double digits. Sales in Montreal were up more than 45% y-o-y, while Ottawa and the GTA were also very strong. Out west, Vancouver and other hot spots in BC saw the results of pent up activity, from both homebuyers and sellers, that had been accumulating over the past year.

Remember, had it not been for the pandemic, a record spring sales season was in the cards. The lockdown postponed that strength, with sales jumping sharply in May, June and July. Supply continues to remain limited relative to demand, and the Bank of Canada is looking towards housing as a leading sector in the recovery.

Record-low interest rates have boosted affordability everywhere. The Bank of Canada has made it clear that interest rates will remain low for an extended period. Mortgage rates have fallen, as have interest rates on home equity lines of credit. Even five of the Big Six banks have cut their advertised 5-year fixed mortgage rates (posted rates) by about 15 basis points to 4.79%.

These rates have been very sticky on the downside, as banks are reluctant to cut posted rates, which are is used to calculate the penalty for breaking a mortgage. Indeed, the gap between the posted rate and the 5-year government of Canada bond yield is historically wide. So is the gap between posted rates and actual contract mortgage rates at the very same banks.

The Bank of Canada posted rate is the qualifying rate for the mortgage stress test for insured and uninsured mortgages at the federally-regulated lenders–the so-called B-20 rule. That qualifying rate is set to fall from its current level of 4.94% to 4.79% later today when the central bank is due to update its figure. 

Last February, following months of pressure from the real estate industry, the Department of Finance and the federal banking regulator announced they would rejig the “floor” of stress tests that borrowers must pass to qualify for insured and uninsured home loans. Then came COVID-19, and a sweeping government rescue that included regulatory relief for lenders. As part of the response, the change to the stress test, which was planned for April, was suspended indefinitely.

Last month, the Office of the Superintendent of Financial Institutions announced it would “gradually restart” policy work in the fall. Still, it made no mention of resuming consultations on the change to its stress test for uninsured mortgages, a vital component of the regulator’s B-20 guideline. If the new rules had been implemented, it is estimated that the qualifying rate floor would be roughly 4.09% rather than the new rate of 4.79%.

Several factors, in addition to low interest rates, have contributed to the housing market surge. Having spent so many months working from home, many people are looking for more space. With a significant number of businesses announcing that telecommuting will be the new normal, at least most of the time, buyers are moving to more remote suburban locations where their dollars buy more space. This has been reflected in the slowdown in the condo market. This is not just a Canadian phenomenon but is evident in the US and parts of Europe as well.

Despite the surprising strength in homebuying during COVID, CMHC continues to blast warnings.

CMHC Wants To Expose The “Dark Economic Underbelly”

Yesterday, Evan Siddall, the CEO at the Canada Mortgage and Housing Corp, published an August 10 letter to the financial industry imploring lenders to “reconsider” offering mortgages to highly leveraged households, saying excessive borrowing will worsen the pain of the coming economic adjustment. Evan Siddall said the Crown corporation had lost market share due to restrictions it imposed on high-risk borrowers earlier this summer. Private mortgage insurers have picked up that business, weakening CMHC’s position and threatening the agency’s ability to protect the mortgage market in the event of a crisis, he said.

CMHC continues to project that house prices will fall later this year, and next, “once government income supports unwind, bankruptcies increase and unemployment starts to bite.” A highlighted sentence in the letter says, “We don’t think our national mortgage insurance regime should be used to help people buy homes with negative equity. But by offering 95 percent loan-to-value mortgages subject to a 4 percent capitalized insurance fee in the midst of an economic calamity, that’s what insurance providers are doing.” Siddall, who steps down from his position at the end of the year, goes on to say that we risk exposing too many people to foreclosure. 

CMHC announced in June it would narrow eligibility criteria to require higher credit scores and lower debt burdens to qualify for a mortgage. The move, which took effect on July 1, was intended to protect new home buyers from falling prices and reduce taxpayer risk to any market correction.

We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit,” Siddall said in the letter. “However, we are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis. We require your support to prevent further erosion of our market presence.”

CMHC’s private-sector competitors, Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., opted not to follow along with the rule changes and have increased their market share, as a result, said Siddall.

Siddall concluded with two requests for lenders: “We would hope you would reconsider highly leveraged household lending. Please put our country’s long-term outlook ahead of short-term profitability. Second, please don’t aggravate the impact by undermining CMHC’s market presence unnecessarily.”

CMHC’s ability to respond effectively in a crisis will be weakened if its market share deteriorates significantly further, he said. “If you want us in wartime, please support us in peacetime.”

French translation of this email will be available by 5pm ET August 17.

La traduction de ce courriel sera disponible d’ici 17 heures, le 17 août.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca
11 Aug

Better-Than-Expected Canadian Jobs Report in July Shows Economy’s Resilience

General

Posted by: Gemma Riley-Laurin

The July Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions as of the week of July 12 to 18. Although public health restrictions had been substantially eased in most parts of the country—with the exception of some regions of Ontario, including Toronto—some measures remained in place, including physical distancing requirements and restrictions on large gatherings.

From February to April, 5.5 million Canadian workers–30% of the workforce–were affected by the COVID-19 economic shutdown. This included a drop in employment of 3.0 million and a COVID-related increase in absences from work of 2.5 million. Today’s jobs report showed that total employment rose by 418,500 (+2.4%). This is on the heels of a 953,000 (5.8%) gain in June and 290,000 in May. Altogether, this brought employment to within 1.3 million (-7.0%) of its pre-COVID February level.

The number of Canadians who were employed but worked less than half their usual hours for reasons likely virus-related dropped by 412,000 (-18.8%) in July. Combined with declines recorded in May and June, this left COVID-related absences from work at just under 1 million (+972,000; +120.3%) above February levels.

By the week of July 12 to July 18, the total number of affected workers stood at 2.3 million, a reduction since April of 58.0%.

Most employment gains in July were in part-time work

Most of the employment gains in July were in part-time work, which increased by 345,000 (+11.3%), compared with a much smaller increase of 73,000 (+0.5%) in full-time work.

The COVID-19 labour market shock was felt particularly hard in part-time work. From February to April, losses in part-time work (-29.6%) were significantly heavier than in full-time employment (-12.5%). This was due to a number of factors, including part-time work being more prevalent in industries that were most affected by the COVID-19 economic shutdown, namely retail trade and accommodation and food services.

Growth in part-time employment has outpaced full-time growth in each of the past three months. With July gains, part-time work is now closer to its pre-COVID level (-5.0%) than full-time employment (-7.5%).

The relatively flat growth in full-time work in recent months is reflected in an increase in the proportion of part-time workers doing so involuntarily. In July 2019, 22.2% of those working less than 30 hours per week would have preferred full-time work. One year later, this proportion had increased 7.6 percentage points to 29.7%, an indication that the COVID-19 economic shutdown and subsequent re-opening has resulted in a reduction, at least temporarily, in the number of hours being offered by employers.

Stronger employment gains for women in July, but men continue to be closer to pre-shutdown levels

In July, employment rose faster among women (+3.4% or +275,000) than men (+1.5% or +144,000). Due to heavier employment losses among women in March, however, employment in July was closer to its pre-shutdown level for men than for women.

Employment was little changed in July among both male and female core-aged workers with children under 18.  As in June, employment in July was furthest away from pre-shutdown levels among mothers whose youngest child was aged 6 to 17.

The number of Canadians working from home continued to fall in July

Among those who were employed and not absent from work, the number working from home dropped by 400,000, compared with an increase of 300,000 in the number working at locations other than home. Despite this decline, the number of Canadians who worked from home in July (4.6 million) remained significantly higher than the number who usually do so (1.6 million).

The pace of improvement from July on is likely to continue to slow. 

Compared to February, there were still 274,000 fewer people working in goods production jobs in July. There were still 309,000 fewer workers in accommodation and food services, 109,000 fewer in information, culture, and recreation, over that period – and those services jobs will probably be slower to return with households still sticking closer to home. The recovery in the goods-producing side of the economy will be limited at some point by ongoing weakness in the oil & gas sector.

Unemployment Rate Continues to Drop From May’s Record High

The unemployment rate was 10.9% in July, falling 1.4 percentage points for the second consecutive month and down from a record high of 13.7% in May. The unemployment rate was 5.6% in February.

The number of unemployed people fell for the second consecutive month in July, down 269,000 (-11.0%). Despite this decrease, almost 2.2 million Canadians were unemployed in July, nearly twice as many (+92.6%) as in February (1.1 million).

In July, temporary layoffs declined sharply for a second consecutive month, down 384,000 (-45.5%). Among those on temporary layoff in June, approximately half became employed in July, either returning to their old job or starting a new one (not seasonally adjusted). Despite the sharp declines in June and July, the number of people on temporary layoff (460,000) was more than four times higher than it was in February.

In July, the number of people searching for work increased 115,000 (+7.1%), mainly the result of people entering the labour force to look for work.

Employment Increases in Most Provinces in July–Led by Ontario and Quebec

In Ontario, employment rose by 151,000 (+2.2%) in July, building on an increase of 378,000 in June and bringing jobs to 91.7% of its pre-pandemic February level. The initial easing of COVID-19 restrictions occurred later in Ontario than in most other provinces. Additional easing was introduced in most regions of the province on July 17, at the end of the survey week.

Employment in the census metropolitan area of Toronto increased by 2.2% in July. This was the same rate of increase as the province, despite the loosening of the COVID-19 restrictions occurring later in the provincial capital than in most other regions. Employment in Toronto reached 89.9% of its February level.

Employment in Quebec increased by 98,000 (+2.4%) in July, adding to gains in the previous two months and bringing employment to 94.4% of its pre-COVID level. The increase in employment in July was all in part-time work. The unemployment rate decreased 1.2 percentage points to 9.5%, the third consecutive monthly decrease.

Employment rose more slowly in Montréal  (+28,000; +1.3%) than in the rest of Quebec and reached 94.4% of its February level.

The number of employed British Columbians increased by 70,000 (+3.0%) in July, reaching 93.5% of the February employment level. The unemployment rate fell by 1.9 percentage points to 11.1%.

In Vancouver, employment increased by 48,000 (+3.8%) to reach 89.9% of the February level, a degree of recovery lower than the province as a whole.

In Alberta, employment increased by 67,000 (+3.2%) in July, including gains in both full-time and part-time work. The unemployment rate for the province fell by 2.7 percentage points in July to 12.8%, the first decline since the COVID-19 economic shutdown.

In Saskatchewan, employment rose by 13,000 (+2.5%), while the unemployment rate fell 2.8 percentage points to 8.8%.

Employment in Manitoba increased (+12,000) for the third consecutive month, and the unemployment rate declined by 1.9 percentage points to 8.2%.

Employment in Newfoundland and Labrador increased by 4,300 (+2.1%) in July, and the unemployment rate dropped 0.9 percentage points to 15.6%.

In Nova Scotia, employment rose by 3,400 (+0.8%) in July, reaching 92.7% of its February level. The unemployment rate in the province declined by 2.2 percentage points to 10.8%.

Employment in Prince Edward Island rose by 1,100 in July (+1.5%), adding to the gains in the previous two months. The unemployment rate declined by 3.5 percentage points to 11.7%.

In New Brunswick, employment was little changed in July after recording employment gains of 39,000 from April to June. Employment in the province—which was among the first to begin easing COVID-19 restrictions—was at 96.6% of its pre-COVID February level, the most complete employment recovery of all provinces to date.

Bottom Line 

This was a strong jobs report, but the low-hanging fruit has already been picked. Undoubtedly, Canada’s economy is still digging itself out of a deep hole, and some jobs are gone for good. Accommodation and food services are still hard hit, as is leisure and entertainment.

Many small and some large businesses will not survive. But new sectors are proliferating as the pandemic accelerated the technological forces that were already in train. I expect to see strong job growth in the following new and burgeoning areas: telemedicine, big data, artificial intelligence, cloud services, cybersecurity, 5G, driverless transportation and clean energy. Online shopping will also continue to proliferate as Canadians have learned to use delivery services and online retail.

Unfortunately, those who can afford it least were hardest hit in the pandemic-shutdown. Many of the lost jobs will not return.

Canada has done an excellent job of flattening the pandemic curve, but as evidenced by what is happening in the US, we cannot let our guard down. As many students return to the classroom, the risk of disease spread will undoubtedly rise. Also, we have no idea what colder weather will bring or when a vaccine will be widely available. We must continue to prepare for the worst but hope for the best. In the meantime, our economy is proving its underlying resilience, and our government policies are cushioning the blow to those that are suffering the most.

South of the Border–US COVID Situation Is A Disaster 

Nearly every country has struggled with the pandemic and made mistakes along the way. But the US stands alone among affluent countries in the failure of its pandemic response. In the past month, about 1.9 million Americans have tested positive for the virus. That’s more than five times as many as in all of Europe, Canada, Japan, South Korea and Australia, combined.

“Even though some of these countries saw worrying new outbreaks over the past month, including 50,000 new cases in Spain … the outbreaks still pale in comparison to those in the United States. Florida, with a population less than half of Spain, has reported nearly 300,000 cases in the same period,” wrote David Leonhardt of the New York Times yesterday.

Moreover, the end of July saw the expiration of the $600/week federal top-up of unemployment benefits, which to-date has been successful at providing a floor for household income, and subsequently helps boost household spending. As well, the prohibition of eviction has ended as Congress continues to wrangle on a new relief package.

Larry Kudlow, the administration’s chief economist, declared last week that a “V-shaped recovery” was still on track. There is no way that will be possible given the suspension or reduction in federal assistance, the rapidly depleting funds of the state and local governments who are, by law, not allowed to run budget deficits, and the continued surge in the disease.

Today’s July jobs report in the US showed the economic rebound was still making headway as payrolls increased by 1.76 million in July, beating economists estimates. The unemployment rate fell to 10.2%, while a broader gauge of joblessness also declined to 16.5%.

The path forward for the US will remain quite difficult as businesses use up the last of their federal loans and reduced unemployment benefits pressure consumer spending. The rebound in the US economy is fragile, as high-frequency data continue to indicate. For the week of July 31st, new COVID cases continue to worsen. Some states have had to halt or even backpedal reopening plans; same-store sales are falling, as are restaurant bookings, electricity demand, airline tickets and public transit ridership.

At the time of this writing, the latest headlines are screaming that “US Virus Aid Talks Are On the Brink of Collapse,” as Trump mulls over an executive order on some jobless aid. American consumer confidence can’t help but be badly battered by such incompetence, as the world looks on in utter disbelief.

Dr. Sherry Cooper

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.