17 Nov

Inflation Surge Is No Need For Hysteria

General

Posted by: Gemma Riley-Laurin

 
StatsCanada today reported that consumer price inflation rose to 4.7% from year-ago levels in October, compared to 4.4% in September. This is in line with market expectations and is well below the US’s 6.2% pace reported for the same period. Inflation is rising all over the world, the direct result of extreme weather events and supply chain chaos generated the creaky reopening of economies around the world. With pent-up demand surging, delays in production and transportation have led to price hikes in many sectors. Extreme weather conditions have exacerbated these price pressures, driving up food, energy and other commodity prices. The pandemic and climate change are unprecedented exogenous forces and should not be compared to the inflation surge in the 1970s. Nor should we assume that traditional monetary tightening would ease these pressures unless we are willing to run the risk of recession.
Last month, prices rose in all eight major components on a year-over-year basis, primarily driven by the surge in gasoline prices, which spiked 47.1% from year-ago levels. Extreme drought, especially in China, led to a dearth of hydroelectric power and shortages in other energy sources such as coal and natural gas. The shift to oil for power generation boosts the cost of oil and gasoline. It also caused a domino effect in shortages of other essential materials that require intensive energy use in their production, such as fertilizer and aluminum. These feed into shortages of food and metal components that raise the price of many consumer goods. Combine this with disruptions at the ports, in trucking and on the rail lines. It is no wonder that increasing costs and excess demand are driving up consumer prices worldwide.

The question is, would central bank tightening reduce this kind of inflation. I doubt it. Instead, we are likely to see these pressures ease over time (see chart below). The problem is we have repeatedly underestimated the time it would take to work this all out, leading some to call for a quicker response by the Bank of Canada and the Fed, among other central banks, for fear that the inflation will become embedded.

Embedded inflation, caused by rising wages and inflation expectations, led to wage-price spiralling in the 1970s and early 1980s. In Canada, inflation remained high well into the early 1990s because of substantial federal and provincial budgetary spending. I do not believe we are anywhere near that reality today. To be sure, fiscal policy in response to the pandemic has generated extraordinary budgetary red ink, but price pressures today are not the result of budgetary actions.

Bottom Line

Market-driven interest rates have already surged and are reflected in the rise in fixed mortgage rates. Maintaining a steady overnight rate at its effective lower bound has kept the prime rate and variable mortgage rates stable at extremely low levels. Undoubtedly, these rates will rise in time. The Bank of Canada has been clear that it will occur soon than they initially thought. They are nervous about inflation and are now saying a return to the 2% target will not happen until the end of next year.

Just this week, senior leadership at the Bank has taken to the news waves to suggest we are getting closer to full employment. Traders are now betting that the overnight rate target will rise 1.5 percentage points in 2022, beginning in April. Rates will increase, but we are not on the precipice of runaway inflation.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca
15 Nov

Home Sales Surge in October

General

Posted by: Gemma Riley-Laurin

 
Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose a whopping 8.6% in October, its most robust month-over-month pace since July 2020, when the first lockdown eased briefly. This was on the heels of a modest uptick in September–the first gain since March of this year.Sales were up month-over-month in about three-quarters of all local markets and in all major cities.

The actual (not seasonally adjusted) number of transactions in October 2021 was down 11.5% on a year-over-year basis from the record for that month set last year. That said, it was still the second-highest ever October sales figure by a sizeable margin.

On a year-to-date basis, some 581,275 residential properties traded hands via Canadian MLS® Systems from January to October 2021, surpassing the annual record of 552,423 sales for all of 2020.

“2021 continues to surprise. Sales beat last year’s annual record by about Thanksgiving weekend, so that was always a lock, but I don’t think too many observers would have guessed the monthly trend would be moving up again heading into 2022,” said Shaun Cathcart, CREA’s Senior Economist. “A month with more new listings is what allows for more sales because those listings are mostly all still getting gobbled up; however, with demand that strong, the supply of homes for sale at any given point in time continues to shrink. It is at its lowest point on record right now, which is why it’s not surprising prices are also re-accelerating. We need to build more housing.”

The basic story hasn’t changed, even with the rise in fixed mortgage rates: Housing demand remains well more than supply. Inventories of unsold properties are at historic lows. While the Trudeau government promised to address the massive supply shortage, in reality, housing construction is under the auspices of provincial and local government planning and zoning bodies. Moreover, the resurgence of immigration will widen the excess demand gap for homes to buy or rent. 

New ListingsThe number of newly listed homes rose by 3.2% in October compared to September, driven by gains in about 70% of local markets. With so many markets starved for supply, it’s not surprising to see sales go up when new listings rise.

As of October, about two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean. The sales-to-new listings ratio tightened again last month to 79.5% compared to 75.5% in September and 73.5% in August. The long-term average for the national sales-to-new listings ratio is 54.8% (see chart below).

There were just 1.9 months of inventory on a national basis at the end of October 2021, down almost half a month from three months earlier and back in line with the all-time lows recorded in February and March of this year. The long-term average for this measure is more than five months.

Home PricesIn line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) accelerated to 2.7% on a month-over-month basis in October 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 23.4% on a year-over-year basis in October, a more significant gain than in the three previous months.

Year-over-year price growth in B.C. has crept back above 20%, though it is lower in Vancouver, on par with the 20% provincial gain in Victoria, and higher in other parts of the province.

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while they are currently at about 10% in Manitoba.

Ontario saw year-over-year price growth closing in on 30% in October, with GTA surging forward. Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 13%.

Price growth is running a little above 30% in New Brunswick (a little higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (a bit lower in St. John’s).

Bottom Line

Canada continues to contend with one of the developed world’s most severe housing shortages. As our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal level. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US just posted a year-over-year inflation rate for October at 6.2%–higher than expected. This Wednesday, Canada’s CPI data will be released. We saw a y/y inflation rate of 4.4% in September. Undoubtedly, the October data will surpass that level. Maybe that is why Tiff Macklem wrote an op-ed in the Financial Times today reiterating that the Bank of Canada is getting closer to raising interest rates as slack in the economy dissipates. This is in line with the hawkish BoC policy statement last month.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem wrote. “We are not there yet, but we are getting closer.”

According to Bloomberg News, Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged that a high level of uncertainty remains. “Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates,” he wrote.

“While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand,” Macklem said. “What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust.”

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca
12 Nov

Renewing Your Mortgage.

General

Posted by: Gemma Riley-Laurin

 

Did you know? Close to 70 percent of mortgages never make it to the end of their term! This means that, for a variety of reasons, homeowners are ending their mortgages early. However, that still leaves a solid 30 percent of home buyers who keep their mortgage until the term is up and it is time to renew!

If you are not planning to move in the near future and are happy with your current mortgage, you are likely one of the 30 percent who will renew once the term ends. So what does this process look like?

When it comes time to renew your mortgage, most lenders will send you a renewal letter when there is around 3 months remaining on your term. While nearly 60 percent of borrowers simply sign and send back their renewal without ever shopping around for a more favourable interest rate, this is actually the best time to check out your options.

Most standard terms are 5-year terms and, with that much time having passed since signing, the market rates could be very different once the term is up! Despite this, lenders tend to provide higher rates on renewals versus new clients as they are hoping that the ease of renewal will prevent you from seeking out new rates. However, shopping around for a better rate is not as difficult as it sounds – especially with the help of a mortgage broker – and it could end up saving you a couple hundred dollars a month (depending on your situation)! Ideally, you should be keeping track of your own mortgage term end date as shopping for a new rate between four and six months before your expiry will ensure you are able to find the most affordable option for you.

After shopping around, you may find that your bank is actually offering a great rate – in which case you can simply submit the renewal! But if you are able to seek out a lower rate, we promise you will thank yourself for putting in the effort to find out! As another point of interest, renewal time is also a great time to make an extra payment on your mortgage, if you are able!

Beyond renewing your mortgage, home owners also have the option to transfer or switch the mortgage. This can be done any time during the term of the mortgage but may have penalties associated with breaking the mortgage before the term is up. Transfering to another lender is generally done to get a better rate, but you will need to go through the entire mortgage process again – including the ‘stress test’ – which makes shopping around at renewal time an even smarter option.

If your mortgage is coming up for renewal and you want to find out what lower rates may await you, contact your local mortgage professional! They can help you find the best option for where you are at in your life now and help you to ensure future financial success.

 


5 Nov

A More Normal Jobs Report In October

General

Posted by: Gemma Riley-Laurin

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Statistics Canada released the October Labour Force Survey this morning, reporting a slowdown in employment growth from the blockbuster pace of recent months. While some commentators were disappointed in the results, I have a more positive take. Canada returned its pre-pandemic level of employment in September ahead of the US and other G-7 countries. The resumption of a more normal pace of job gains was inevitable as we get closer to full employment.

Employment rose by 31,200 (+0.2%) in October, following a jump of 157,000 the month before. Indeed, job growth surged at an average monthly rate of 143,000 from June through September. That is not a sustainable pace of job gains but rather a reflection of the spike in hiring in the immediate aftermath of the lockdown. For example, hiring averaged 23,000 per month in the two years before the outbreak of COVID.

Employment increases in several industries, including retail trade, were offset by declines elsewhere, including accommodation and food services. Employment rose in Ontario and New Brunswick, while it fell in Manitoba and Saskatchewan. Declines in self-employment offset Gains among paid employees.The number of employed people working less than half their usual hours fell 9.7% (-100,000) in October and remained 117,000 higher (+14.5%) than in February 2020. Total hours worked were up 1.0% in October and were 0.6% below their pre-pandemic level.

Among people of core working age (25 to 54 years), employment rose by 53,000 (+0.4%) in October, with all the gains in full-time work.

Unemployment rate declines for the fifth consecutive monthThe unemployment rate fell 0.2 percentage points to 6.7% in October, a 20-month low and within 1.0 percentage points of the rate (5.7%) in February 2020 (see chart below).

Long-term unemployment—the number of people continuously unemployed for 27 weeks or more—was little changed in October, at 378,000, but down from its most recent peak of 486,000 in April 2021. Among people who were in long-term unemployment in September, 15.2% had found employment in October, slightly higher than the average of 11.6% observed from 2017 to 2019.

The labour force participation rate—the share of the population working or searching for work—fell by 0.2 percentage points to 65.3% in October, as fewer youth aged 15 to 24 searching for work. The size of the October decrease is consistent with typical monthly variations observed prior to the COVID-19 pandemic. The overall participation rate in October was virtually the same as the pre-pandemic rate of 65.5% observed in February 2020.

This rebound in Canada’s labour force participation rate contrasts with trends observed in the United States, where participation has recovered less quickly. When Canadian data are adjusted to US concepts, Canada’s participation rate was 65.1% in September 2021, 0.3 percentage points below its February 2020 level. In the United States, the September labour force participation rate was 1.7 percentage points below its pre-pandemic level.

Bottom Line 

Today’s employment data confirm that the Canadian economy is moving closer to full employment and may well hit the zero-output-gap threshold in the middle quarters of 2022, as the Bank of Canada suggested at their most recent policy meeting. The bulk of the gains in hiring were in the hard-hit retail sector, which returned to pre-pandemic levels last month. All of the gains were in full-time employment and average wages for permanent workers were 2.1% y/y. Wages gains are still relatively modest, supporting the Bank of Canada’s view that inflation pressures will dissipate by the end of next year.

Employment is now a bit above levels in February 2020. This is a historically rapid rebound from the massive job losses in the immediate wake of the first pandemic lockdowns.

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