27 Nov

Economic Update

Mortgage Market Update

Posted by: Adriaan Driessen

October Inflation Rose to 2.0% As Gasoline Price Declines Were More Muted
The Consumer Price Index (CPI) rose 2.0% year-over-year in October, up from a 1.6% increase in September. Gasoline prices fell to a lesser extent in October (-4.0%) compared with September (-10.7%). The all-items CPI, excluding gasoline, rose 2.2% in October, the same growth rate as in August and September.

The smaller decline is partly attributed to a base-year effect, as prices fell 6.4% month over month in October 2023, stemming from lower refining margins and weaker global oil consumption.

On a monthly basis, prices for gasoline were up 0.7% in October, following a 7.1% decline in September.

Slower rise in shelter prices

Shelter price growth continued to ease in October, rising 4.8% year over year, compared with a 5.0% increase in September. Slower price growth in the mortgage interest cost index in October (+14.7%) compared with September (+16.7%) applied downward pressure on the shelter component. Mortgage interest costs have been decelerating year-over-year since September 2023, following a peak in August 2023 (+30.9%).

Similarly, rent prices grew at a slower pace in October, increasing 7.3% on a year-over-year basis, following an 8.2% gain in September. Nova Scotia (+5.2%) and Manitoba (+6.5%) decelerated the most. Although slowing, rent prices continue to increase and remain elevated. Compared with October 2021, rent prices increased 21.6%.
The central bank’s two preferred core inflation measures also quickened, averaging 2.55% yearly pace, faster than expectations and up from 2.35% a month earlier. According to Bloomberg calculations, a three-month moving average of those measures rose to an annualized pace of 2.8% from 2.1% in September.

After the release, overnight swaps traders trimmed their bets for a second consecutive large rate cut to about one in three, from a little less than a coin flip previously.
Bottom Line

The first acceleration of headline inflation in five months may bolster a case for the Bank of Canada to reduce borrowing costs gradually. After officials stepped up the pace of easing in October with a half-point cut, the next and this year’s final rate decision is on Dec. 11.

Still, Tuesday’s inflation print didn’t eliminate bets for another jumbo rate cut. That’s because the central bank had already expected a bump along the road, with consumer prices hovering around 2%, as policymakers keep cutting rates to boost economic growth.

When Governor Tiff Macklem and his officials delivered their outsize rate cut last month, they said they wanted to see a pickup in growth and demand. Preliminary industry-based data point to 1% annualized GDP growth in the third quarter, below the central bank’s 1.5% estimate. Final expenditure-based gross domestic product data is due at the end of this month.

The November employment report, released on December 6, is another critical data point for the central bank. The unemployment rate has been steady at 6.5% for the past two months. A meaningful rise in the jobless rate could encourage the Governing Council to go another 50 bps lower at their next meeting. That and GDP figures (released on November 29) will be watched closely to game the Bank of Canada’s next move. A 25 bps cut in the overnight policy rate is in the bag. A 50-bps cut is less likely.

Either way, the overnight policy rate, now at 3.75%, will be cut to roughly 2.5% by the middle of next year. This will continue to spur housing activity and could augur for a robust spring housing season.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
27 Nov

Canadian Housing Market Shows Signs of Life

Real Estate Market Update

Posted by: Adriaan Driessen

The Canadian Housing Market Shows Signs of Life
Canadian home sales surged to their highest level in more than two years as the Bank of Canada cut interest rates, bringing buyers back into the market. Home sales rose 7.7% month-over-month (m/m) in October, reaching their highest level since April 2022.

Rising home sales were broadly based, with the Greater Toronto Area and British Columbia’s Lower Mainland recording double-digit increases in October. The buoyant housing demand was likely the result of the surge in new listings in recent months and the fall in mortgage rates arising from the BoC’s easing. The jumbo rate cut, however, was in the last week of October, likely having little bearing on the monthly data released by the Canadian Real Estate Association this morning. Actual monthly housing activity came in 30% stronger than year-ago levels.
New ListingsNew listings posted a 3.5% month-over-month decline in October, although that followed a 4.8% jump in September. Thus, new supply remains at some of the highest levels since mid-2022. The national pullback in October was led by a drop in new supply in the GTA.

With sales rising considerably in October and new listings falling, the national sales-to-new listings ratio tightened to 58%, up from 52% in September. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

At the end of October 2024,174,458 properties were listed for sale on all Canadian MLS® Systems, up 11.4% from a year earlier but still below historical averages for that time of year.

As of the end of October, there were 3.7 months of inventory nationwide, down from 4.1 months at the end of September and the lowest level in more than a year. The long-term average is 5.1 months of inventory, with a seller’s market below about 3.6 months and a buyer’s market above 6.5 months.
Home Prices

The National Composite MLS® Home Price Index (HPI) inched up 0.1% from August to September; however, small ups and downs aside, the bigger picture is that prices at the national level have remained mostly flat since the beginning of the year.

The non-seasonally adjusted National Composite MLS® HPI stood 3.3% below September 2023, a smaller decline than the 3.9% declines recorded in July and August. Given the price weakness seen towards the end of 2023, negative year-over-year comparisons will likely continue to shrink.
Bottom Line

The strength in home sales in October likely contributes to the expectation that the central bank will cut interest rates by only 25 bps when it meets again on December 11. Of course, their decision will be data-dependent; next week, we will see the October inflation data on Tuesday and retail sales on Friday. The November Labour Force Survey will be released on December 6. The unemployment rate has held steady at 6.5%, and wage inflation remains high. It would take a significant disappointment in these data to trigger another 50 bps cut.

In the meantime, bond yields continue to rise, triggered by the strong Trump victory and the fear that tax cuts and spending increases will boost government debt and deficits. While US long-term yields have risen nearly 80 basis points, Canadian 10-year yields are up less than half that amount. There is an unprecedented gap between economic activity in the US and Canada. The US dollar continues to strengthen, putting downward pressure on the loonie.

Pent-up demand for housing continues to be strong, and the combination of lower short-term interest rates and rising inventories of unsold homes will spur activity as we move into the all-important spring season. By then, the overnight rate, currently 3.75%, could be at least a full percentage point lower.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres