The current wave of economic uncertainty does not seem to be drowning Canadians’ optimism about the housing market.

The annual Canadian Real Estate Industry Trends Report from Re/Max suggests nearly one-third (32%) of Canadian home buyers and sellers have a positive sense that the market could become more balanced this year.

There are, of course, concerns.  Inflation and the cost of living weigh on the minds of 34% of Canadians.  Closely related to that, 25% are worried about housing affordability, according to the report.

Affordability has become a persistent source of anxiety even though the analysts continue to predict ongoing home price declines.  The latest report from Fitch, the global credit rating agency, is forecasting a further 5% to 7% drop in Canada.  Despite that, Fitch says prices remain 20% above pre-pandemic levels and are likely to remain elevated because of high demand and low supply.  Separately, higher interest rates have been a key factor in lower affordability.

There have been suggestions that the affordability problem may be exacerbating itself.  Canada Mortgage and Housing Corporation recently reported a 13% decline in housing starts between December 2022 and January 2023.  At least some of that is thought to be the result of developers putting projects on hold until market conditions improve.

The Re/Max report indicates two-thirds of Canadians believe governments should take action to address affordability and supply issues.  It also suggests 22% of Canadians would like to see new building that fills in the, so-called, “missing middle” in the country’s housing market.

The latest piece of hard economic data has market watchers looking to see how the Bank of Canada will react.

The January employment numbers show the economy added a stunning 150,000 jobs.  That is 10-times what was forecast and is the second out-sized reading in a row.  December saw a downwardly revised total of 69,000 new jobs.  The unemployment rate remains at a near record low of 5%.

The job numbers indicate Canada’s economy remains strong and continues to face inflationary pressures.

Markets and investors reacted almost immediately, reversing their expectations of a probable rate cut this year, to forecasting another rate hike in the coming months.  But many analysts say that may be pre-mature.

The BoC has put a “conditional” pause on further increases, giving itself some “wiggle room” so it does not have to respond to any, single, data point, regardless of how strong it is.  And there are indications the Bank’s rate hikes over the last year are starting to catch up to the broader economy.

The central bank’s recent Business Outlook Survey indicates that hiring plans have been reduced and wage growth is slowing.  While job postings are still 50% above pre-pandemic levels, wage increases have come down in recent months, slipping to 4.5% in January from 4.7% in December.

In general, analysts say the hikes are still gradually flowing through to household and business debt payments.  They expect demand will erode, pushing unemployment higher through the end of the year.

As expected the Bank of Canada increased its benchmark policy rate for an 8th straight setting.  It now stands at 4.50%.  The 25 basis-point boost was the smallest in this vigorous cycle which started pushing up rates back in March 2022.  This is being taken as a sign that the central bank is satisfied with its effort to fight inflation.

During his news conference after the rate announcement Bank of Canada Governor Tiff Macklem said there will be a “pause” in rate hikes while the Bank assesses its strategy so far.  But he cautioned it is a “conditional pause”.

“…  it is conditional on economic developments evolving broadly in line with our … outlook.” “If we need to do more to get inflation to the two-percent target, we will,” he said.

The interest rate increases have met with some success.  Inflation, as measured by the Consumer Price Index, has been dropping and now sits at 6.3%, down from the peak of 8.1% back in June.

In its Monetary Policy Report the Bank now says it expects to see inflation at 3.0% by the end of this year, and dropping to 2.0% in 2024.

That led to repeated questions about possible rate cuts.  But Macklem pushed back on the idea every time.

“Let’s keep in mind that inflation’s still over six-percent,” he said. “Inflation’s coming down, but we do have to be humble; there are a number of risks out there…. So, it’s really far too early to be talking about cuts.”

The latest cost of living and employment numbers make it clear the Bank of Canada still has work to do in its fight against inflation.

The Consumer Price Index (headline inflation) did slow to 6.3% in December, from 6.8% in November, but it is still well above the Bank’s target rate of 2.0%.  Food and fuel continue to be the two biggest influencers.  Gasoline was down 13% compared to a month earlier but grocery store prices continued to rise at an annualized rate of 11%.

The Bank of Canada prefers to measure Core inflation when making its rate decisions.  Core inflation excludes, so-called, volatile items like food and fuel and is divided into three different types: CPI-common, CPI-median and CPI-trim.  Encouragingly, the average of those three measures slowed to 5.3% in December, down from 5.4% in November.  Higher shelter costs, including rising mortgage rates and increasing rents, were key components in the Core inflation calculations.

The Canadian economy added a stunning 104,000 jobs in December.  That was more than 20 times the 5,000 that had been forecast.  The unemployment rate fell to 5.0%.  The job growth and the inflation numbers suggest the economy is still quite strong.

It is all but certain there will be another increase to the BoC Policy Rate on Wednesday.  Most market watchers expect a quarter-point hike to 4.50%.

And on a hopeful note, the economic think-tank The Conference Board of Canada is forecasting that inflation will be back inside the BoC’s target range of 1% to 3% by the end of this year.

Canada’s big cities are getting bigger and more expensive even as tens-of-thousands of people leave them, for more affordable lifestyles elsewhere.  A key factor in the expense and the migration is the cost of housing.

According to Statistics Canada nearly 100,000 people left the Toronto area in the 12-month period from July 1, 2021 to July 1, 2022.  Most of those people, 78%, stayed in Ontario.  The Montreal area saw an exodus of 35,000 people and 14,000 peopled exited Vancouver.

It is probably no surprise that Canada’s biggest cities come with the highest housing (or accommodation) costs.  As people are leaving they are more than being replaced by new arrivals from outside the country.  The data show that newcomers prefer large urban centers over rural areas.  The country’s biggest areas of population gained 600,000 people through international migration with nearly 220,000 going to Toronto alone.  By contrast, just 21,000 chose to settle in smaller centers.

Numbers crunched by the real estate web service Point2 show that, apart from Toronto itself, eight of the country’s highest priced cities are in the Greater Toronto/Hamilton Area.  Oakville tops the list with average costs of nearly $2,400 a month for homeowners and almost $2,150 a month for renters.

With the exception of Montreal, cities in Quebec dominated the list of lowest priced housing and rental accommodation in Canada.  Trois-Rivières came in as most economical with average monthly homeowner costs of less than $960, and less than $680 for renters.

Published by First National Financial LP