May 19, 2023
Weekly Market Update
Lately, the news has been focused on political debt ceiling wranglings south of the border. But there’s been quite a bit of economic news up here in Canada this week. More new residential construction projects began in April than economists expected. Benchmark home prices also increased, rising by 1.6% in April compared to March. It could be a sign the real estate sector may heat up over the summer months.
- Housing starts increased by 22% to 261,600 in April according to the Canada Mortgage and Housing Corporation. Multi-unit starts drove the increase, jumping by 33%, while single-unit starts declined slightly.
- Record-high population growth in 2022 and beyond could sustain demand. Canada welcomed over 437,000 new permanent residents last year. However, housing supply remains low. Higher housing starts could help alleviate the underlying housing shortage.
- Existing home sales increased by 11.3% in April, as reported by the Canadian Real Estate Association. Sales rose in both Toronto and Vancouver.
The Bank of Canada (BoC)’s pause in interest-rate increases seems to have steadied the market and encouraged potential buyers to re-emerge from the sidelines in search of deals. However, supply is still not expanding quickly enough to meet demand.
Canada’s headline and core inflation, which excludes more volatile items like food and energy, was higher than expected in April on both a monthly and annual basis. Although Canada has had some success restoring price stability compared to other countries, closing the gap from 4% to 2% could be tough.
- Inflation exceeds economists’ forecast. According to Statistics Canada, annual inflation in Canada was 4.4% in April, above the 4.1% expected.
- Consumer prices gained in April. The consumer price index rose 0.7% compared to March, exceeding the 0.4% market forecast.
- The mortgage component was notably high. Mortgage costs were 28% higher, and rents were 6.1% higher than in April 2022.
- Transportation costs accelerated. Gasoline prices rose 6.3% in April compared to March. A surprise announcement from the Organization of the Petroleum Exporting Countries (OPEC+) to cut oil production affected the supply-demand balance. Lower gasoline costs previously helped slow inflation.
- There’s a risk of a rate hike by the BoC. According to CIBC economist Avery Shenfield, the first uptick in inflation in ten months indicates that a rate hike at the next Bank of Canada (BoC) meeting on June 7th is not out of the question.
Since the BoC started tightening monetary policy more than a year ago, higher mortgage costs became and now remain a key component of the inflationary pressure facing Canadians. However, benchmark home prices are lower than this time last year, which could provide opportunities for savvy investors in the housing market.
The Bank of Canada (BoC) released its annual financial system review yesterday. BoC Governor Tiff Macklem highlighted concerns about the ability of households to adapt to higher borrowing costs. Financial stress indicators for Canadian households are still low but rising.
- High debt service ratios are in the spotlight. The percentage of households contributing more than a quarter of income to make mortgage payments doubled in 2022 to 29%.
- Mortgage renewals are coming with added pressure. Many households will face higher interest rates when renewing their mortgage in 2023 and beyond, illustrating the lag effect of monetary policy .
- Average credit card debt for recent home buyers is higher. Borrowers who took out a mortgage from 2020 to 2022 have 17% more debt than those who bought from 2017 to 2019.
- Payments will increase for nearly all mortgage holders by 2026. The BoC anticipates average payments in 2023 to 2026 could rise by roughly 20%.
In addition to household debt, the review looked at cyber attacks more common in the Financials sector and risks from the transition to a low-carbon economy. Although recent stress in the US banking segment did not spread to Canadian banks, the BoC noted that financial regulators should be vigilant and cautioned that higher funding costs could limit the banking segment’s capacity to provide liquidity.
Looking at international markets, Japan’s gross domestic product (GDP) rose by 1.6% annualized in the first quarter of 2023, according to the Cabinet Office, more than doubling consensus expectations of a 0.7% rise. In the last quarter of 2022, GDP declined by 0.1%.
- Private consumption rose 0.6% in the first quarter of 2023 versus the previous quarter. It accounted for over half the economy and was boosted by additional spending on services as the economy reopened from pandemic-related restrictions.
- Tourist arrivals supported spending. Visitors to Japan helped stimulate activity to support the strongest GDP growth since the second quarter of 2022.
- Strong domestic demand offset weak exports. In the first quarter, exports fell by 4.2%, but local demand was robust enough to make up for the decline.
- BoJ policy remains accommodative. The Bank of Japan (BoJ) maintained ultra-low interest rates last month. It is unclear when the central bank under new Governor Kazuo Ueda will consider reducing its stimulus package.
Consumption seems to be one of the pillars supporting business activity in Japan. However, weaker overseas demand is expected to keep the economic recovery in check as Japan’s major trading partners, including Canada, the US and Europe face the prospect of a slowdown.
As always, give us a call if you have any questions, or if you’d like to book a portfolio review.
Source: CIBC Morning Market Brief