Bank of Canada Announcement – July 14, 2021

by Fergal McAlinden, Mortgage Broker News

The Bank of Canada has announced in its July statement that it will hold its target for the overnight rate at the effective lower bound of 0.25%, staying the course on its projection that interest rates are likely to begin rising in the second half of 2022.

In a statement accompanied by the release of its quarterly Monetary Policy Report, the Bank rate remained steady at 0.5% with the deposit rate also left unchanged at 0.25%.

The Bank also announced a further tapering of its bond program, reducing its weekly purchases of government bonds to $2 billion – a decrease of one-third.

That emergency stimulus has been scaled back as a result of continuing optimism about Canada’s recovery from the pandemic, with the Bank referring to its “increased confidence in the strength of the Canadian economic outlook.”

In its statement, the Bank noted that while the global economy is recovering strongly from the COVID-19 pandemic, that recovery is still “highly uneven, and remains dependent on the course of the virus.”

It also described the emergence of new variants as a growing concern “especially for regions where vaccinations rates remain low.”

Housing market activity is expected to ease back from historical highs, while the pace of recovery in the labour market is predicted to vary between industries.

The Bank’s Monetary Policy Report indicated that growth should rebound strongly as the economy reopens after COVID-19’s third wave. Growth of around 6% is forecast this year, slowing to around 4.5% in 2022 and 3.25% in 2023.

Read next: The key questions on the Canadian housing market’s current trajectory

The announcement on the overnight rate was as low-key as expected, with Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal having told Canadian Mortgage Professional in the days prior that he expected a “very muted” report.

The Bank had indicated in its April statement that rate increases could be set to come into play in late 2022, a revision of its previous forecast that those hikes would not occur until some point in 2023.

The next announcement on interest rates from the Bank will take place on September 08

Record December Canadian Housing Market Caps Record Year.

2020 Was a Blockbuster Year for Housing

Despite the fears leading into the pandemic last Spring, 2020 marked a record number of home resales as new listings lagged and prices climbed. December housing data released by the Canadian Real Estate Association (CREA) today shows national home sales surged 7.2% month-over-month (m-o-m) at a time of the year when housing is normally slow. The chart below shows that resales were impressively above their 10-year average. The seasonally adjusted activity was running at an annualized 714,516-unit pace in December 2020 – the first time on record that monthly sales (at seasonally adjusted annual rates) have ever topped the 700,000 mark.  It was a new record for December by a margin of more than 12,000 transactions. For the sixth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019.

The increase in national sales activity from November to December was driven by gains of more than 20% in the Greater Toronto Area (GTA) and Greater Vancouver.

On a year-over-year basis (y-o-y), activity rocketed upward by 47.2% as interest rates hit record lows, housing needs changed owing to the pandemic, and supply was insufficient to meet demand. The housing boom occurred despite the fall in population growth, reflecting the dearth of new immigration. The yearly change in population growth in Canada nosedived in 2020 after climbing powerfully in the prior four years. Despite this headwind, for 2020 as a whole, 551,392 homes traded hands over Canadian MLS® Systems – a new annual record. This is an increase of 12.6% from 2019 and stood 2.3% above the previous record set in 2016.

New Listings

“The stat to watch in 2021 will be new listings, particularly in the spring – how many existing owners will put their homes up for sale?” said Shaun Cathcart, CREA’s Senior Economist. “We already have record-setting sales, but we know demand is much stronger than those numbers suggest because we see can see it impacting prices. On New Year’s Day, there were fewer than 100,000 residential listings on all Canadian MLS® Systems, the lowest ever based on records going back three decades. Compare that to five years ago, when there was a quarter of a million listings available for sale. So we have record-high demand and record-low supply to start the year. How that plays out in the sales and price data will depend on how many homes become available to buy in the months ahead. Ideally, we’d like for households to be able to find and acquire the homes that best suit their needs and for housing to remain affordable, but the fact is we’re facing a major supply problem in 2021.”

The number of newly listed homes climbed by 3.4% in December, led by more new listings in the GTA and B.C. Lower Mainland, the same parts of Canada that saw the biggest sales gains in December.

With sales up by more than new supply in December, the national sales-to-new listings ratio tightened to 77.4% – among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.2%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 30% of all local markets were in balanced market territory in December, measured as being within one standard deviation of their long-term average. The other 70% of markets were above long-term norms, in many cases well above.

There were just 2.1 months of inventory on a national basis at the end of December 2020 – the lowest reading on record for this measure. At the local market level, 29 Ontario markets were under one month of inventory at the end of December.

Summer Business Outlook Survey shows business sentiment is strongly negative in all regions and sectors due to pandemic.

Canadian Business Sentiment Is Negative  The Bank of Canada released its Summer Business Outlook Survey (BOS)* this morning, covering an interview period from mid-May to early June. In all provinces and all sectors, the sentiment was hugely negative owing to the impact of the pandemic and falling oil prices.  Since the previous survey, conducted before concerns about COVID-19 has intensified, but as oil prices had already started to fall, business confidence plunged. Surprisingly, however, the business sentiment was not as negative as during the 2007-09 global financial crisis (see Chart 1 below). This was mainly due to the government support offered to cushion the blow of the pandemic. Also, many firms expect a reasonably quick rebound in operations after a temporary decline in sales, unlike the 2007–09 crisis when businesses anticipated persistent weakness in demand. Highlights of the BOS: Forward-looking sales indicators have collapsed. Many businesses referred to elevated uncertainty. Still, roughly half of firms anticipate that their sales will recover to pre-pandemic levels within the next year. Businesses in most regions and sectors intend to cut their investment spending significantly. Hiring plans are muted, although a quarter of firms plan to refill some positions after recent layoffs. Reports of capacity pressures and labour shortages have fallen significantly. This suggests a substantial widening in economic slack. Expectations for input and output price growth, as well as for overall inflation, are all down considerably. Credit conditions have tightened significantly, but government measures are a helpful offset. _______________________________ *The Business Outlook Survey summarizes interviews conducted by the Bank’s regional offices with the senior management of about 100 firms selected in accordance with the composition of the gross domestic product of Canada’s business sector. This survey was conducted by phone and video conference from May 12 to June 5, 2020.

BoC Consumer Expectations Survey–Q2 2020 This survey was conducted from May 11 to June 1, in the throws of the ongoing pandemic. Of most concern to consumers was the prospect of losing their jobs. Many believed finding another job would be difficult. As well, consumer expectations for wage growth declined significantly. According to the survey, consumer expectations for interest rates have fallen sharply, although they expect rates to rise over the 1-year to 5-year horizon, albeit moderately. At the same time, expectations for average house price growth have dropped to zero for Canada as a whole. For Ontario, respondents expect the average home price to rise by 1% over the next year. In BC, people see home prices falling a moderate -0.30%, with Albertan respondents suggesting a price decline of -4.3% (see the chart below). It is important to note that oil prices have risen considerably since the completion of this survey. All of these forecasts are well below the figures in the Q1 study. It is noteworthy that all of these expectations are well below the CMHC forecast for the national average home price to fall 9%-to-18% over the coming year.   By Dr. Sherry Cooper-Chief Economist at Dominion Lending Centres