Canadian inflation falls within Bank of Canada’s target range, but food and shelter costs remain high

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

The Canadian Real Estate Association says home sales in May rose 5.1% month-over-month (m/m), adding to the 11.1% gain in April. This brought the year-over-year sales gain to 1.4%, The first y/y sales increase in almost two years. While spring home sales started booming (compared to the past year), the surprising 25 bps uptick in the Bank of Canada’s policy rate has no doubt dampened enthusiasm in June. Indeed, the strength in housing may have been the deciding factor in the Bank’s decision.

Sales were up in about 70% of all local markets, including Canada’s largest markets: the Greater Toronto Area (GTA), Montreal, Greater Vancouver, Calgary, Edmonton, and Ottawa.

New Listings

The number of newly listed homes was up 6.8% month-over-month in May, although the bigger picture is that new supply is still running at historically low levels.

With sales and new listings up by similar magnitudes in May, the sales-to-new listings ratio was 67.9%, little changed from 69% in April. The long-term average for this measure is 55.1%.

There were 3.1 months of inventory on a national basis at the end of May 2023, down from 3.3 months at the end of April and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

The dearth of sellers could reflect the reluctance of existing homeowners to give up their low-rate mortgages.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2.1% on a month-over-month basis in May 2023 – a significant increase for a single month and on the heels of a similar gain in April. Once again, it was also very broad-based, with a monthly price increase between April and May observed in most local markets.

The Aggregate Composite MLS® HPI now sits 8.6% below year-ago levels, a smaller decline than in the first four months of this year. The second chart below shows that year-over-year price gains are posted at the national level and in BC, Alberta, and Nova Scotia. With the strength in the GTA, y/y prices are fast approaching positive territory.

Bottom Line

The rate hike by the BoC has spooked the housing market. Anecdotal evidence suggests that activity has slowed, and the demand for fixed-rate mortgages has surged. Many households now face higher monthly payments in the next two years. The Bank of Canada knows that and wants to see household spending slow from the rapid Q1 pace. Consumer confidence has risen sharply since March. But with household debt-to-income levels at near-record highs, the sensitivity to interest rates is extreme.

Ironically, just as the BoC raised rates again after months of no action, the Federal Reserve decided to pause rate hikes for the first time this cycle. US inflation peaked at over 9.1% and fell to 4.0% in May. While Canadian inflation topped at 8.1%, its most recent posting was 4.4% in April. May data for Canada will be released on June 27.

Traders are currently expecting one more rate hike in Canada this year. The idea that the Bank would cut rates any time this year has vanished. Most are betting the first rate cut is more likely to be in mid-2024. We have learned that uncertainty prevails, but I’d bet that we will not return to pre-Covid interest rates for a very long time.

Weakening Housing Markets Pose A Risk For The Canadian Economy

On April 18, Canada’s national banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), released its second Annual Risk Outlook (ARO), outlining what it believes are the most significant headwinds facing the Canadian financial system – and what the regulator plans on doing about it.

According to the report, the severe downturn in real estate prices and demand following their significant rise during the pandemic was the most pressing issue. OSFI acknowledges that the housing market changed significantly over the past year, and house prices fell substantially in 2022. The regulator is preparing for the possibility that the housing market will experience continued weakness throughout 2023.

The report also highlights how the Bank of Canada’s rate hiking cycle has impacted borrowers’ ability to pay down mortgage debt, with the central bank increasing its benchmark cost of borrowing eight times between March 2022 and January 2023, bringing its Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today.

Mortgage holders may be unable to afford continued increases in monthly payments or may experience a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities. Given the considerable impact of real estate-secured lending (RESL) activities in the Canadian financial system, a housing market downturn remains a critical risk.

OSFI also highlights the dangers posed by more borrowers hitting their trigger rates; according to a National Bank study, eight in ten variable fixed-payment borrowers who took their mortgages out between 2020-2022 are impacted. Lenders have addressed this by extending the amortization period for affected borrowers, but OSFI says this is just a temporary solution.

Borrowers and lenders alike will need to pay the price in due course, as OSFI points out. The growth in highly leveraged borrowers increases the risk of weaker credit performance, potentially leading to more borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility.

These recent comments strengthen expectations that stricter mortgage rules could be in the cards before the year ends. Back in January, OSFI announced it was considering making tweaks to its Guideline B-20, which outlines borrowing and risk requirements for banks underwriting residential mortgages and qualification rules for borrowers, including the mortgage stress test.

OSFI may increase borrowers’ debt servicing ratio requirements, making it more challenging for those with larger debt loads to qualify for a mortgage. It is also considering limiting how many of these higher-leveraged borrowers banks can have in their portfolios, potentially leading to fewer borrowers making the cut at A-lenders and turning to the B-side and alternative mortgage market.

Finally, OSFI may change the threshold criteria for the mortgage stress test. Currently, borrowers must prove they can carry their mortgage at a rate of 5.25%, or 2% above the one they’ll receive from their lender, whichever is higher. However, following last year’s rapid rate increases, the 5.25% threshold has become obsolete, with all current market rates above 3.25%.

OSFI wrapped up consultations on these potential changes late last week and will release a report on its recommendations. Borrowers should keep an eye out for changes in the months to come.

Federal Budget 2023…  Press the Snooze Button

As promised, there would be nothing much in this year’s budget for fear of stimulating inflation. The federal government faces a challenging fiscal environment and a weakening economy. Ottawa promised it would err on the side of restraint. Instead, Finance Minister Chrystia Freeland announced a $43 billion increase in net new government spending over six years. The new expenditures focus on bolstering the rickety healthcare system, keeping up with the US on new clean-technology incentives, and helping low-income Canadians to deal with rising prices and a slower economy.

Tax revenues are expected to slow with the weaker economy. The result is a much higher deficit each year through 2028 and no prospect of a balanced budget over the five-year horizon.

The budget outlines significant increases to healthcare spending, including more cash for provincial governments announced earlier this year and a $13-billion dental-care plan that Trudeau’s Liberals promised in exchange for support in parliament from the New Democratic Party.

Freeland is also announcing substantial new green incentive programs to compete with the Inflation Reduction Act signed into US law last year by President Joe Biden. The most significant new subsidy in the budget is an investment tax credit for clean electricity producers. Still, it also includes credits for carbon capture systems, hydrogen production, and clean-energy manufacturing.

The budget promises $31.3 billion in new healthcare spending and $20.9 billion in new green incentive spending by 2028. On top of that is $4.5 billion in affordability measures, half of which is for an extension of a sales tax credit for low-income Canadians.

The spending is partially offset by tax increases on financial institutions and wealthy Canadians and a pledge to reduce government spending on travel and outside consultants. Freeland is planning to raise billions of dollars from banks and insurance companies by changing the tax rules for dividends they get from Canadian firms. The new tax will apply to shares held as mark-to-market assets, not dividends paid from one subsidiary to another.

Wealthy Canadians pay the alternative minimum or regular tax, whichever is higher. The government announced in the budget that it is increasing the alternative minimum rate to 20.5 percent from 15 percent starting in 2024. Ottawa is also imposing new limits on many exemptions, deductions and credits that apply under the system beginning in 2024.

“We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle-class families,” Finance Minister Chrystia Freeland said in the prepared text of her remarks.

Canada’s debt-to-GDP ratio will worsen next year, despite the government’s reliance on this measure as a fiscal anchor. Debt-to-GDP will rise from 42.4% to 43.5% next year and is projected to decline very slowly over the next five years.

Not Much for Affordable Housing

The budget included a laundry list of measures the federal government has taken to make housing more affordable for Canadians.

Budget 2023 announces the government’s intention to support the reallocation of funding from the National Housing Co-Investment Fund’s repair stream to its new construction stream, as needed, to boost the construction of new affordable homes for the Canadians who need them most.

But there was one initiative tucked away in a Backgrounder entitled “An Affordable Place to Call Home.” I am quoting this directly from the budget:

A code of conduct to protect Canadians with existing mortgages

“Elevated interest rates have made it harder for some Canadians to make their mortgage payments, particularly for those with variable rate mortgages.

That is why the federal government, through the Financial Consumer Agency of Canada, is publishing a guideline to protect Canadians with mortgages who are facing exceptional circumstances. Specifically, the government is taking steps to ensure that federally regulated financial institutions provide Canadians with fair and equitable access to relief measures that are appropriate for the circumstances they are facing, including by extending amortizations, adjusting payment schedules, or authorizing lump-sum payments. Existing mortgage regulations may also allow lenders to provide a temporary mortgage amortization extension—even past 25 years.

This guideline will ensure that Canadians are treated fairly and have equitable access to relief, without facing unnecessary penalties, internal bank fees, or interest charges, which will help more Canadians afford the impact of elevated interest rates.”

We will see what OSFI has to say about this, as the details are always of paramount importance. OSFI is scheduled to announce potential changes to banking regulation to reduce bank risk. We’ve heard a lot about banking risks in recent weeks.

The budget also reduced the legal limit on interest rates. The government intends to lower the criminal rate of interest from 47% (annual percentage rate) to 35%. According to the law firm Cassels, “’Interest’ is defined broadly under the Code and includes all charges and expenses in any form, including fees, fines, penalties, and commissions.”

Bottom Line

While this was not one of the more exciting budgets, it is important that our debt-to-GDP ratio is low in comparison to other G-7 countries. It is good news that Ottawa recognizes the financial burdens facing homeowners with VRMs. If the banks can extend remaining amortizations when borrowers renew, the pressure on their pocketbooks will be markedly lower.

Further decline in inflation in February will keep the Bank of Canada on hold in April

All eyes will be on the Federal Reserve tomorrow when they decide whether to hold rates steady because of the banking crisis or raise the overnight rate by 25 basis points (bps). Before the run on Silicon Valley Bank, markets were betting the Fed would go a full 50 bps tomorrow, as Chairman Powell intimated to the House and Senate.

Since then, three bank failures in the US as well as the UBS absorption of troubled Credit Suisse, have caused interest rates to plummet, bank stocks to plunge, and credit conditions to tighten. Many worry that rate increases will exacerbate a volatile situation, but others believe the Fed should continue the inflation fight and use Fed lending to provide liquidity to financial institutions.

Relative calm has been restored thanks to the provision of huge sums of emergency cash by lenders of last resort–the central banks–and some of the US industry’s strongest players.

While Canadian bank stocks have also been hit, the banks themselves are in far better shape than the weaker institutions in the US. Our banks are more tightly regulated, have much more plentiful Tier 1 capital, and their outstanding loans and depositors are far more diversified.

This morning, Statistics Canada released the February Consumer Price Index (CPI). Headline inflation fell more than expected to 5.2% from 5.9% in January. This was the largest deceleration in the headline CPI since the beginning of the pandemic in April 2020.

The year-over-year deceleration in February 2023 was due to a base-year effect for the second consecutive month, which is attributable to a steep monthly increase in prices in February 2022 (+1.0%).

Excluding food and energy, prices were up 4.8% year over year in February 2023, following a 4.9% gain in January, while the all-items excluding mortgage interest cost rose 4.7% after increasing 5.4% in January.

On a monthly basis, the CPI was up 0.4% in February, following a 0.5% gain in January. Compared with January, Canadians paid more in mortgage interest costs in February, partially offset by a decline in energy prices. On a seasonally adjusted monthly basis, the CPI rose 0.1%.

While inflation has slowed in recent months, having increased by 1.2% compared with 6 months ago, prices remain elevated. Compared with 18 months ago, for example, inflation has increased by 8.3%.

Food prices continued to rise sharply–up 10.6% y/y, marking the seventh consecutive month of double-digit increases. Supply constraints amid unfavourable weather in growing regions and higher input costs such as animal feed, energy and packaging materials continue to put upward pressure on grocery prices.
Price growth for some food items such as cereal products (+14.8%), sugar and confectionary (+6.0%) and fish, seafood and other marine products (+7.4%) accelerated on a year-over-year basis in February. Prices for fruit juices were up 15.7% year over year in February, following a 5.2% gain in January. The increase was led by higher prices for orange juice, as the supply of oranges has been impacted by citrus greening disease and climate-related events, such as Hurricane Ian.

In February, energy prices fell 0.6% year over year, following a 5.4% increase in January. Gasoline prices (-4.7%) led the drop, the first yearly decline since January 2021. The year-over-year decrease in gasoline prices is partly the result of a base-year effect, as prices began to rise rapidly in the early months of 2022 during the Russian invasion of Ukraine.

Shelter costs rose at a slower pace year-over-year for the third consecutive month, rising 6.1% in February after an increase of 6.6% in January. The homeowners’ replacement cost index, related to the price of new homes, slowed on a year-over-year basis in February (+3.3%) compared with January (+4.3%). Other owned accommodation expenses (+0.2%), which include commissions on the sale of real estate, also decelerated in February. These movements reflect a general cooling of the housing market.

Conversely, the mortgage interest cost index increased at a faster rate year over year in February (+23.9%) compared with January (+21.2%), the fastest pace since July 1982. The increase occurred amid a higher interest rate environment.

Bottom Line

The Bank of Canada is no doubt delighted that inflation continues to cool. Canada’s inflation rate is low compared to the US at 6.0% last month, the UK at 10.1%, the Euro Area at 8.5%, and Australia at 7.2%.

The Bank was already in pause mode and will likely stay there when they meet again in April.

Residential Market Commentary – Housing market optimism

Instability persists in the Canadian housing market, but analysts say there are signs things may start to normalize in the coming months.

The Canadian Real Estate Association reports that February home sales fell 40% compared to their peak in February of last year, just before the Bank of Canada started raising its trend-setting Policy Rate.  Prices, compared to a year earlier, dropped nearly 19%.

The national average home price now stands at a little more than $662,000.  With the busiest and most expensive markets – Toronto and Vancouver – calculated out of the equation the average price falls by almost $135,000 to about $527,000.

While that might seem gloomy, market watchers are taking encouragement from the month-over-month figures in the CREA report.

“The similarities between 2023 and the recovery year of 2019 continued to emerge in February, with sales up, the market tightening, and month-over-month price declines getting smaller,” said Shaun Cathcart, CREA’s Senior Economist.

Between January and February home sales rose by 2.3%.  Sales for the month are now, roughly, comparable to the period in the pre-pandemic years, 2018 and 2019.

The average price popped up by $50,000 between January and February, the first monthly increase in half a year.  Much of that was driven by activity in the Toronto and Vancouver areas.

The market tightening is evidenced by a nearly 8% decline in new listings for the period.

This post was published by the First National marketing team: https://www.firstnational.ca/mortgage-brokers/resources-for-mortgage-brokers/article/residential-market-commentary—housing-market-optimism

Canadian Housing Appears To Be Close To Bottoming.
Housing Market Could Be Poised For a Spring Rebound

The Canadian Real Estate Association says home sales in February bounced 2.3% from the previous month. Homeowners and buyers were comforted by the guidance from the Bank of Canada that it would likely pause rate hikes for the first time in a year.

The Canadian aggregate benchmark home price dropped 1.1% in February, the smallest month-to-month decline of rapid interest rate increases in the past year. The unprecedented surge in the overnight policy rate,  from a mere 25 bps to 450 bps, has not only slowed housing–the most interest-sensitive of all spending–but has now destabilized global financial markets.

In the past week, three significant US regional financial institutions have failed, causing the Fed, the Federal Deposit Insurance Corporation and the Treasury to take dramatic action to assure customers that all money in both insured and uninsured deposits would be refunded and the Fed would provide a financial backstop to all financial institutions.

Stocks plunged on Monday as the flight to the safe haven of Treasuries and other government bonds drove shorter-term interest rates down by unprecedented amounts. With the US government’s reassurance that the failures would be ring-fenced, markets moderately reversed some of Monday’s movements.

But today, another bogeyman, Credit Suisse, rocked markets again, taking bank stocks and interest rates down even further. All it took was a few stern words from Credit Suisse Group AG’s biggest shareholder on Wednesday to spark a selloff that spread like wildfire across global markets.

Credit Suisse’s shares plummeted 24% in the biggest one-day selloff on record. Its bonds fell to levels that signal deep financial distress, with securities due in 2026 dropping 20 cents to 67.5 cents on the dollar in New York. That puts their yield over 20 percentage points above US Treasuries.

For global investors still, on edge after the rapid-fire collapse of three regional US banks, the growing Credit Suisse crisis provided a new reason to sell risky assets and pile into the safety of government bonds. This kind of volatility unearths all the investors’ and institutions’ missteps. Panic selling is never a good thing, and traders are scrambling to safety, which means government bond yields plunge, gold prices surge, and households typically freeze all discretionary spending and significant investments. This, alone, can trigger a recession, even when labour markets are exceptionally tight and job vacancies are unusually high.

Canadian bank stocks have been sideswiped despite their much tighter regulatory supervision. Fears of contagion and recession persist. Job #1 for the central banks is to calm markets, putting inflation fighting on the back burner until fears have ceased.

Larry Fink, CEO of Blackrock, reminded us yesterday that previous cycles of rapid interest rate tightening “led to spectacular financial flameouts” like the bankruptcy of Orange County, Calif., in 1994, he wrote, and the savings and loan crisis of the 1980s and ’90s. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S.&L. crisis) with more seizures and shutdowns coming,” he said.

So it is against that backdrop that we discuss Canadian housing. The past year’s surge in borrowing costs triggered one of the record’s fastest declines in Canadian home prices. Sales were up in February, the markets tightened, and the month-over-month price decline slowed.

New Listings

The number of newly listed homes dropped 7.9% month-over-month in February, led by double-digit declines in several large markets, particularly in Ontario.

With new listings falling considerably and sales increasing in February, the sales-to-new listings ratio jumped to 58.4%, the tightest since last April. The long-term average for this measure is 55.1%.

There were 4.1 months of inventory on a national basis at the end of February 2023, down from 4.2 months at the end of January. It was the first time the measure had shown any sign of tightening since the fall of 2021. It’s also a whole month below its long-term average.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) was down 1.1% month-over-month in February 2023, only about half the decline recorded the month before and the smallest month-over-month drop since last March.

The Aggregate Composite MLS® HPI sits 15.8% below its peak in February 2022.

Looking across the country, prices are down from peak levels by more than they are nationally in most parts of Ontario and a few parts of British Columbia and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks. Prices began to stabilize last fall in the Maritimes. Some markets in Ontario seem to be doing the same now.

The table below shows the decline in MLS-HPI benchmark home prices in Canada and selected cities since prices peaked a year ago when the Bank of Canada began hiking interest rates. More details follow in the second table below. The most significant price dips are in the GTA, Ottawa, and the GVA, where the price gains were spectacular during the Covid-shutdown.

Despite these significant declines, prices remain roughly 28% above pre-pandemic levels.

Bottom Line
Last month I wrote, “The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.”

Given the past week’s events, all bets are off regarding central bank policy until and unless market volatility abates and fears of a global financial crisis diminish dramatically. Although the overnight policy rates have not changed, market-driven interest rates have fallen precipitously, which implies the markets fear recession and uncontrolled mayhem. As I said earlier, job #1 for the Fed and other central banks now is to calm these fears. Until that happens, inflation-fighting is not even a close second. I hope it happens soon because what is happening now is not good for anyone.

Judging from experience, this could ultimately be a monumental buying opportunity for the stocks of all the well-managed financial institutions out there. But beware, markets are impossible to time, and being too early can be as painful as missing out.

December Housing Data Ended 2022 On A Weak Note

The Canadian Real Estate Association says home sales in January were the lowest for the month since 2009 and fell 37.1% from a year ago. The Canadian housing market has been sliding for eleven consecutive months as the unprecedented rise in interest rates–up from 25 basis points to 4.5% for the policy rate–has moved buyers to the sidelines. This is an abrupt reversal in the fevered pace of home sales during the pandemic.

The rapid rise in interest rates, designed to combat inflation, has driven many buyers to the sidelines. Higher borrowing costs have reduced affordability despite the sharp decline in prices in many regions.

On a regional basis, sales gains in Hamilton-Burlington and Quebec City were more than offset by declines in Greater Vancouver, Victoria and elsewhere on Vancouver Island, Calgary, Edmonton, and Montreal.

New Listings

Last month, the number of newly listed homes rose 3.3% on a month-over-month basis, led by increases across British Columbia. Despite the slight increase, new listings remain historically low nationally. New supply in January 2023 hit the lowest level for that month since 2000.

With new listings up and sales down in January, sales-to-new listings eased back to 50.7%. This is roughly where it had been over the entire second half of 2022. The long-term average for this measure is 55.1%. There were 4.3 months of inventory on a national basis at the end of January 2023. This is close to where this measure was in the months leading up to the initial COVID-19 pandemic lockdowns, considered historically slow.

Home Prices

Canadian home prices fell by the most on record in 2022 as rapidly rising interest rates forced a market adjustment that is still ongoing.

The Aggregate Composite MLS® HPI was 15% below its peak in February 2022. Looking across the country, prices are down from peak levels by more than they are nationally in many parts of Ontario and some parts of B.C. and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks at all.

In contrast, some East Coast markets have bottomed and appear to be trending higher.

Housing Construction Falls

In other news, CMHC reported that the annual pace of housing starts fell 13% in January. The national housing agency says the seasonally adjusted annual rate of housing starts for the year’s first month was 215,365 units compared with 248,296 in December.

This is very troubling as the population growth in Canada is slated to be very strong, and rental properties are in very short supply. The housing shortage will only rise. Rents have surged in many parts of the country for new inhabitants, straining household budgets even more.

With interest rates high and the cost of construction booming, many developers are moving to the sidelines.

Even with these large declines, prices remain roughly 33% above pre-pandemic levels.

Bottom Line
The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.