MNI ANALYSIS:More Signs of Cdn Housing Cooling, Not Collapsing

By Yali N'Diaye

     OTTAWA (MNI) - It will take "more than a few data points" for the Bank of

Canada to be able to get clarity on the underlying reasons for the current

housing slowdown as part of its efforts to gauge the economy's response to

higher interest rates and so far, data indicate that monetary policy tightening

can continue without triggering a housing collapse.

     "We will see over the summer and by September, we will have new data and we

will be able to see what the effect has been" of new macro prudential measures

in the housing sector and higher interest rates, Senior Deputy Governor Carolyn

Wilkins told lawmakers on April 30.

     With progress on the inflation and wage front already acknowledged by the

BOC, its focus is particularly on the two other key aspects of its data

monitoring, namely economic capacity and the economy's sensitivity to interest

rates.

     The BOC has increased rates three times since July 2017, by a cumulative 75

basis points, bringing the overnight rate target to 1.25%.

     In January, tighter mortgage underwriting rules came into effect, notably

requiring more stringent stress testing. At the provincial level, British

Columbia also tightened further housing rules last February, almost a year after

Ontario introduced its own measures in April 2017.

     --SALES WEAKEN FURTHER

     The Canadian Real Estate Association reported Tuesday that existing home

sales fell a further 2.9% in April to their lowest level in more than five

years, with lower sales in 60% of markets.

     "The stress-test that came into effect this year for homebuyers with more

than a 20% down payment continued to cast its shadow over sales activity," said

CREA President Barb Sukkau.

     Listings fell 4.8%, although that left the sales-to-new listings ratio at

53.7%, still within the 40% to 60% range consistent with a balanced market.

     The number of months of inventory increased to 5.6 in April from 5.4 in

March, the highest level since September 2015.

     --SLOWER CONSTRUCTION 

     On the supply side, the value of permits issued by Canadian municipalities,

an indicator of construction activity in the coming months, recovered 3.1% to

C$8.4 billion in March, the highest level since June 2017, following a 2.8%

decline in February.

     However, single-family construction intentions contracted 7.9%, led by a

13.7% drop in Ontario.

     In addition, while they remain firm, housing starts fell to a seasonally

adjusted annual rate of 214,379 units in April, down from 225,459 in March.

     The six-month trend was little changed at 225,696 units from 226,942 in

March, as starts for single-detached homes declined in April while they

increased for multi-unit dwellings. 

     According to Statistics Canada's Labor Force Survey, employment in

construction was down 18,300 in April, the largest drop since June 2016, another

sign of slower construction activity.

     --COOLING PRICES

     On the price side, there have also been signs of a cool down, but no

collapse or crash as defined by 20% or so price drops.

     Canada new housing price growth downward trend extended into March, when

prices rose 2.4% year-over-year, the smallest increase since April 2016,

according to Statistics Canada. Price appreciation has been slowing since the

summer of 2017.

     The more comprehensive Teranet-National Bank National Composite House Price

Index rose 5.6% year-over-year in April, the smallest gain since April 2015.

     Going forward, CREA projects national sales activity to decline by 7.1% in

2018, with the national average price down 2.3% from 2017.

     --RESILENT LABOR MARKET

     On the demand side, the labor market remains resilient despite a

disappointing headline number for the month of April.

     While the economy shed 1,100 in April, full-time employment increased a

further 28,800 on the month after a 68,300 gain in March.

     The unemployment rate remained steady at 5.8%. 

     The average hourly wage growth for permanent workers rose 3.3%

year-over-year, after dipping to 3.1% in March and February, indicating

households' revenues remain a support for the housing market.

     So overall, the housing picture does show signs of a cool down, which has

been called for by the BOC. Yet, price drops and the weaker sales activity so

far are not indicating a market crash is on the way.

     Should data continue on that trend, it should not prevent the BOC from

hiking rates, most likely in July, when the housing picture is clearer.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]