rennie landscape Fall 2023

Thank you for taking the time to read the Fall 2023 edition of the rennie landscape. Here in British Columbia—and everywhere—it's been a real roller-coaster ride for the past three-plus years. Now, many of us are wondering when the ride will be over. In answering this, one would overlook the Bank of Canada at their own peril. Of primary interest (pun intended) is when the Bank will halt its rate-hiking programme; following that, when will they begin to cut? Of course, any "positive" action by the Bank will be predicated on first taming inflation—a task that is almost, but not quite, complete. Despite annual inflation remaining stubbornly above the Bank's 2% target, there are indications that the economy is feeling the weight of higher interest rates. Indeed, while elements of the slowdown have been masked by the recently rapid pace of population growth in Canada, a softening labour market combined and high debt loads means there could be some challenges on the horizon for Canadian households. To what extent and for how long remains to be seen. In this edition of the rennie landscape we explore these elements of economic change, and many others, with a view to better understanding how and why our housing markets here in British Columbia are evolving the way that they are—and what could lie ahead. As always, we hope you find this report informative and helpful in untangling some of the complexities in the world around us. Enjoy.

rennie landscape fall 2023

Ryan Wyse MARKET INTELLIGENCE MANAGER & LEAD ANALYST rwyse@rennie.com

Ryan Berlin VP INTELLIGENCE & SENIOR ECONOMIST rberlin@rennie.com

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contents

ECONOMY

RATES

CREDIT & DEBT

DEMOGRAPHICS

HOUSING

POLICY

KEY INSIGHTS

GET THE DATA

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economy

01. economy Canada's unemployment rate remains historically low—though plenty of indicators are pointing to a labour market that is beginning to buckle under the weight of the current interest rate regime.

SIGNS OF TURBULENCE AHEAD

The Canadian labour market has been performing remarkably well over the past year and a half. In the face of an unprecedented rate tightening cycle from the Bank of Canada, the unemployment rate nationally, at 5.5%, remains near its all-time low (of 4.9%). And while the labour market continues to be robust by most metrics, there are some signs that it has begun to sag as high interest rates work their way through the economy. Over the past four months, most labour market metrics have softened nationally, and particularly when compared with the four months prior. Growth in the number of employed persons has slowed, even as population growth continues at an historic pace, with August alone adding 100,000 people aged 15+. The number of unemployed persons has been increasing at a greater rate of late, while the unemployment rate has risen in three of the past four months.

Further, the job-changing rate has been declining at a quicker pace of late (which we’ll explore in greater detail later in this report), as have job vacancies. Meanwhile, the number of people collecting EI payments has been increasing in the past four months. Wage growth, on the other hand, has increased in the most recent month, though time will tell if this is a fluctuation or a reversal of trend (or a composition effect discussed later on). The Bank of Canada is monitoring wage growth closely, as this is a potential headwind to getting inflation back to target. These changing labour market dynamics are something that we, and the Bank of Canada, will be watching closely. Needless to say, a weakening labour market is something to be concerned about. That being said, with the zeitgeist being dominated by inflation and high interest rates, a little job market softness is exactly what the Bank of Canada is hoping for.

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economy

THE LABOUR(-ING) MARKET

15%

11.2%

9.6%

10%

4.5%

2.2%

1.4%

1.2%

0.4%

0.2%

0.0%

-5%

-5.5%

-10%

-10.0%

-15%

-16.2%

-20%

-25%

-30%

-30.0%

-35%

EMPLOYED

UNEMPLOYED

UNEMPL. RATE

JOB CHANGE RATE

WEEKLY EARNINGS

EI BENEFITS

JOB VACANCIES

PREVIOUS MONTHS DEC APR

PAST MONTHS APR AUG

DATA: MONTHLY, SEASONALLY-ADJUSTED, LABOUR MARKET STATISTICS, CANADA SOURCE: LABOUR FORCE SURVEY & TABLE 14-10-0432-01, 14-10-0223-01, 14-10-0011-01, STATISTICS CANADA

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economy

STAYING PUT IN ANTICIPATION OF TOUGHER TIMES? Canada’s job-changing rate provides a window into a labour market where workers are choosing to stay in their current jobs—which is a significant shift from last year.

Much ink has been spilled of late on the “Great Resignation”—that is the notion that Canadians were choosing to quit their jobs in favour of new (and often higher-paying) positions in greater numbers than they had historically. To get a sense for how much job switching has actually been occurring, and whether it’s been declining more recently, we turn to the job-changing rate. This represents the proportion of working people in a new job who’d also been working in the month prior (so it does not include those who quit to take a few months off before re-entering the workforce).

From the beginning of 2016 to February 2020, the job-changing rate averaged 0.70% per month, which is much higher than it’s been in the months since. In fact, only a short period—from August 2021 to January 2022— saw more job changing than the historical norm. This suggests that the notion of mass job-switching was likely overstated. More recently, however, there has been a clear trend of declining job-changing. That this follows a softening labour market makes sense, in tougher times people are more likely to hang on to the jobs they have, rather than seek out new ones and we expect the rate to stay low for the time being.

THE GREAT HUNKERING

0.90%

pre-pandemic average 0.70%

0.80%

0.70%

0.60%

0.50%

0.40%

0.30%

0.20%

0.10%

0.00%

2016

2017

2018

2019

2020

2021

2022

2023

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA. DATA: PROPORTION OF PERSONS EMPLOYED IN THE CURRENT MONTH WITH A JOB TENURE OF ONE MONTH OR LESS WHO WERE ALSO EMPLOYED IN THE PREVIOUS MONTH, MONTHLY, SEASONALLY ADJUSTED, CANADA

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economy

AN ONGOING MISMATCH BETWEEN JOBS & WORKERS Though the job vacancy rate continues to fall nationwide as labour market tightness eases, it remains elevated relative to history and is stubbornly high in a few key sectors.

The job vacancy rate has been consistently declining for more than a year in Canada, to 4.2% from its peak in the spring of 2022 of 5.7%. And while this is a positive step towards a more balanced labour market, it is, however, well above the pre-pandemic rate of 3.4%. When Statistics Canada resumed tracking job vacancies in the Fall of 2020, the rate was 3.7%. Of the 20 employment sectors, unsurprisingly half were above 3.4% and half were below. When the job vacancy rate was at its peak last May nearly all sectors,

18 to be precise, were above that 3.4% level. So it’s a substantial improvement that today, only 13 of the sectors remain above 3.4%. Of those 13, however, a few remain significantly elevated and pose substantial challenges to those sectors. Accommodation and food service (6.6%), health care (6.1%), and construction (5.1%) are all facing ongoing labour shortages that are impacting activity in those sectors, with the latter hampering our ability to add enough new supply to housing markets across the country.

AS THE JOB MARKET LISTS, VACANCIES PERSIST

6.0%

5.0%

4.2%

4.0%

3.0%

2.0%

1.0%

0.0%

2021

2022

2023

NUMBER OF SECTORS ABOVE PREPANDEMIC RATE LEFT AXIS

JOB VACANCY RATE RIGHT AXIS

DATA: JOB VACANCY RATE & NUMBER OF SECTORS ABOVE PRE-PANDEMIC RATE, MONTHLY, SEASONALLY-ADJUSTED, CANADA SOURCE: STATISTICS CANADA. TABLE 14-10-0406-01

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economy

EVERYBODY’S WORKING FOR THE WEAKENED (WAGES) After accounting for inflation, wages are once again on the rise, having lost ground for the better part of the past 2 years.

Average weekly earnings are a useful, though imperfect, measure of how wages are changing over time. All measures of wages can be a tricky thing as they depend on the earnings of those who are working at a given time. So as employment, and unemployment, changes, that can impact average earnings even if an individual's wages remain unchanged. To wit, in 2020 average wages, both nominal and real, were rapidly increasing even though employers weren’t necessarily paying more. This was due mainly to lower- wage workers losing their jobs during lockdowns, thereby increasing the average through subtraction. Similarly, the decline in wages, resulting in negative real wage growth that was observed in early 2021 was due, in large part, to sizable gains in employment, particularly in lower-wage employment. This meant that the average was decreasing, even though individual’s incomes weren’t.

Since then, however, employment has been steadier and nominal weekly earnings have seen robust growth. Real weekly earnings, on the other hand, have been negative during that time period, as inflation has outpaced average earnings growth. This has resulted in a loss of purchasing power for the average person as costs have been rising faster than paychecks. With inflation easing so far in 2023 (discussed in greater detail later on), real wage growth has been increasing both nationally and here in British Columbia, and tipped back into positive territory in each of the past two months. Canadians, on average, have a long way to go to recoup the purchasing power they enjoyed in 2020 but they are once again seeing gains in their incomes, even relative to inflation.

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economy

PURCHASING POWER TO THE PEOPLE

15%

10%

0.4% 0.9%

-5%

-10%

2020

2021

2022

2023

CANADA BRITISH COLUMBIA

SOURCE: STATISTICS CANADA. TABLE 14-10-0203-01 & 18-10-0004-01 DATA: YEAR-OVER-YEAR REAL WAGE GROWTH, MONTHLY, CANADA & BRITISH COLUMBIA

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economy

INVERTED EXPECTATIONS Recession discussion is a funny thing, we’re always either in one or talking about the next one. And speculation about the next recession had been particularly intense last year, as we’ve been navigating first a high inflation, then a high interest rate environment. And while we noted in the last edition of the rennie landscape that GDP is not the best measure of the health of the economy (for that we once again recommend starting with the labour market discussed earlier), it’s still worthy of discussion given where we are today. One gauge for whether an upcoming recession is likely is the yield curve, and whether or not it is inverted. The yield curve is the difference between long-term and short-term lending rates and when it inverts, that means short term lending rates earn higher yields than longer term rates. It comes from investors moving money from short-term to long-term debt (which drives long term yields down).

Today’s yield curve isn’t just negative in Canada, it’s now at its lowest point since 1990, a sign that bond markets expect a recession in the near-term. We should note here that not every inverted yield curve is followed by a recession, though every recession is preceded by an inverted yield curve. Comparatively, the discourse around a potential recession has subsided of late. Google searches of the term recession peaked in July 2022, one month before the yield curve inverted, before declining sharply. There was an increase again in October and November of last year, before decreasing once more. Whether this ultimately leads to a recession or not is still guesswork, let alone the duration or severity if we do end up with one, but given that GDP growth in the second quarter was negative, we may already be in the midst of a technical recession.

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economy

The possibility of Canada heading for a recession was oft-discussed in 2022; that conversation has been more muted of late, though some indicators suggest that an upcoming recession is now more likely.

RECESSION DISCUSSIONS EBBS AS RECESSION INDICATORS FLOW

1.00

0.80

0.60

0.40

0.20

0.16

0.00

-0.20

-0.40

-0.60

-0.80

-0.84

-1.00

2018

2019

2020

2021

2022

2023

FREQUENCY OF “RECESSION” GOOGLE SEARCH

YIELD CURVE

DATA: DIFFERENCE BETWEEN 10-YR AND 2-YR BOND YIELDS & FREQUENCY OF "RECESSION" GOOGLE SEARCHES, CANADA

SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01 & GOOGLE

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economy

A PER-PERSON PURCHASING PULLBACK Total retail spending has been steadily increasing in Canada since the early months of the pandemic—though a different narrative emerges when adjusting for record population growth.

Retail spending is, yet another, metric that the Bank of Canada is watching. As they’ve raised interest rates, their intended goal is to disincentivize spending and borrowing (the latter of which we’ll explore later on) and incentivize saving. So it makes sense then, that they would be actively monitoring retail spending as one of the gauges on how well their rate hikes to date have been working. While some retail spending will continue on regardless, like a lot of grocery store purchases, other more discretionary types of spending will pull back like dinners at restaurants or the amount of new clothing purchases. And if you just observe the top line retail spending numbers, it looks like they haven’t been working well at all. Seasonally-adjusted retail sales nationally were just shy of $198 billion in the second quarter of 2023, a 0.8% increase over the same period last year.

But as we pointed out in the last edition of the rennie landscape, Canada’s population has been growing like never before, adding a million people last year alone (including 150,000 here in British Columbia). So when we account for population, per capita retail spending has indeed been declining of late, with Q2 registering just over $6,104 in retail sales per working-age person in Canada. That translates into a 1% decrease over Q2 2022, a small decline to be sure, but a decline nonetheless. The trend here in British Columbia is following a similar path. Retail sales in the second quarter were just over $27 billion, a 1% increase over last year, while per capita retail sales, at $6,000 per working-age person were down 1% from last year. While declining retail sales would normally be viewed as bad news, this is one indicator of an economy that is cooling off, and in our current economic environment that is welcome news to the Bank of Canada.

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economy

SPENDING LESS AT THE SHOP: PER CAP SALES START TO DROP

$2,500

$2,031 $1,980 $1,810

$2,000

$1,500

$1,000

$500

2017

2018

2019

2020

2021

2022

2023

CANADA BRITISH COLUMBIA VANCOUVER

SOURCE: STATISTICS CANADA. TABLE 20-10-0056-01 & LABOUR FORCE SURVEY DATA: PER CAPITA RETAIL SALES, MONTHLY, CANADA & BRITISH COLUMBIA

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economy

TURBULENCE ON TAKE-OFF As with virtually all interest rates, bond yields have been on the rise over the past 2 years—but that's not their most interesting feature.

Government of Canada five-year bonds are considered as risk-free of an investment as you can find, and the yields achieved on those bonds are therefore the risk-free return for an investor. And we care about bond yields in real estate because that’s the basis for fixed mortgage rates. Banks base their rates off of those bond yields, with the spread between them being the perceived risk of their mortgages. Bond yields bottomed out in 2020 and early 2021, and have been on a steady march upward ever since and are now currently hovering around 4%, the highest they’ve

been since 2008. What’s more, they’ve been increasingly volatile, the yields have been fluctuating at greater rates than is typical since the start of 2022 and that’s a function of the increased uncertainty around inflation, the path forward for the Bank of Canada, and the broader economy. To-date in 2023, there have been more days where the yield increased or decreased by more than 0.1 percentage points in a single day than any of the last 15 years. Once we have more clarity on inflation and in turn the Bank of Canada policy rate, expect bond yield volatility to subside and yields to come back toward more typical levels.

UNCERTAINTY BREEDS VOLATILITY

0.3

0.2

0.1

-0.1

-0.2

-0.3

34 36

-0.4

16 16

-0.5

6 7

2 1 1

-0.6

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2007 2008

2022

2023 (YTD Sep)

DAILY CHANGE IN YR BOND YIELD LEFT AXIS

DAYS PER YEAR WITH EXTREME RESULT

DATA: DAILY PERCENTAGE CHANGE IN GOVERNMENT OF CANADA 5-YEAR BOND YIELDS SOURCE: STATISTICS CANADA. TABLE 10-10-1039-01

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economy

YIELDING RECORD RESULTS So far in 2023, Government of Canada bond yields have been more volatile than each of the past 15 years, including the period of the Great Recession. ›

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rates

02. rates Interest rates are now higher than inflation, which has been a relatively rare phenomenon over the past decade. The big question now is when the Bank of Canada will make money cheaper again.

IS THE ROLLER COASTER RIDE ALMOST OVER?

Headline inflation has, for the most part, been declining for a year now. After peaking in June 2022 at 8.1%, inflation came all the way back to the Bank of Canada’s target range in June 2023, before increasing back out and is sitting at 4.0% most recently for August. The unparalleled rate tightening cycle from the Bank of Canada since last March has had its effect on slowing spending (including in real estate) and reducing demand-side price pressures. Along with that, supply chains have improved, global energy prices have declined, and Ukraine is exporting once again which has eased commodity prices, particularly in grain. Bond yields, meanwhile, have been increasing in 2023 and (as we discussed earlier) have been increasingly volatile. This has led to higher fixed mortgage rates, as they’re based on those increasing bond yields. Further, the

spread between the risk-free Government of Canada bond yield and fixed mortgage rates has grown as the perceived risk to lenders mortgage books has also grown. So where do we go from here? Well, the path all the way back to 2% inflation is tricky in the short-term, (and we’ll explore in greater detail in the next section). The Bank of Canada continues to warn Canadians that it will raise rates further if needed, though it’s the opinion of your authors that they ultimately won’t go beyond the current 5% policy rate, which is at its highest level in more than two decades. Instead, they will likely hold for the time being, and let the effects of past increases continue to work their way through the economy. Look for the first rate cut to come from the Bank of Canada sometime in early 2024.

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rates

PEAKING OUR INTEREST IN RATES

9.0%

8.0%

7.0%

6.0%

5.24% 4.02% 5.00% 4.00%

5.0%

4.0%

3.0%

2.0%

1.0%

-1.0%

2019

2020

2021

2022

2023

BOC POLICY INTEREST RATE

YR GOC BOND YIELD

AVG DISCOUNTED YR FIXED MORTGAGE RATE

ANNUAL CONSUMER PRICE INFLATION

SOURCE: STATISTICS CANADA, RATEHUB DATA: SELECTED INTEREST RATES AND CANADA’S ANNUAL RATE OF CPI CHANGE, MONTHLY

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rates

CHARTING A COURSE FOR INFLATION The Bank of Canada bases its targets on seasonally-unadjusted metrics of inflation, including headline and core measures. It turns out, however, that inflation is quite seasonal.

When it comes to inflation, it’s important to remember that it is expressed as a percentage, year-over-year calculation. So the headline inflation rate is influenced not just by what prices are doing today, but also what was happening at the same time last year. This is, in large part, why inflation has been falling in 2023: prices have been increasing but at a slower pace than they were last year. This is also why the path forward for inflation is less clear: not only did prices not increase very much in the second half of 2022, they didn’t increase at all from July to December. This means that for inflation to fall in the coming months, we would need to see actual price decreases—in other words, deflation—in Canada. Looking back historically at the rate of inflation between the first and second halves

of the year, it turns out inflation is quite seasonal. To put it simply, annual inflation is like your washing machine: front-loaded. Since 2001, the rate of inflation has been higher in the first-half of the year than in the second 86% of the time. Further, 41% of the time, the second half of the year has actually been characterized by deflation —most recently in 2018. All told, on average, 91% of the contribution to annual inflation occurs in the first half of the year. So as we move through the balance of 2023 and into 2024, it’s worth keeping seasonality in mind in discussing where inflation is headed. While deflation in the coming months is by no means a given, particularly when considering what gas prices have been doing of late, it wouldn’t be without historical precedent.

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rates

THE TREND IS CLEAR FOR THE BISECTED YEAR

4.0

inflation H1=H2

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

H JANJUN CPI CHANGE

SOURCE: STATISTICS CANADA, TABLE 18-10-0004-01 & RENNIE INTELLIGENCE DATA: TOTAL PERCENTAGE-POINT CHANGE IN THE CPI, H1 & H2 (2001-2022)

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rates

High inflation has been a global phenomenon these past few years, though central banks’ responses have been notably different on each side of the Atlantic—as have their impacts.

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rates

NORTH AMERICAN HAWKS & EUROPEAN DOVES High inflation has affected nations across the globe, though to varying degrees. A mix of demand-side factors, including covid-era ultra-low interest rates, and supply-side factors including global supply chain issues were among the reasons that inflation was so ubiquitous around the world. And while all

differing rates, along with the respective decisions on when to start hiking likely had some impact on the runup in inflation in 2021 and 2022. Canada and the US both started to increase in March 2022 and the EU waited until July and the UK December. Canada and the US's inflation rates peaked in June at 8.1% and 9.1% respectively, while the EU and UK peaked later in October at 10.6% and 11.1% respectively. Canada and the US now both have higher interest rates than inflation rates, while the EU lags behind at a 3.50% interest rate and inflation of 5.3% and UK at 5.00% interest rate and 6.9% inflation rate. As we will explore later on, however, these high rates have consequences for borrowers.

central banks have had to first stimulate their economies in the face of covid, then grapple with high inflation, their methods for each vary. While Canada went to a near-zero deposit rate in 2020 at 0.25%, the US actually went to 0.00%, the UK went to 0.10%, and the EU, meanwhile, went negative to -0.50%. These

THE FIGHT AGAINST INFLATION DIFFERS BY NATION

1.8

1.65 1.45

1.6

1.4

1.2

1.0

0.8

0.66 0.73

0.6

0.4

0.2

0.0

-0.2

Jan

Feb Mar Apr May Jun

Sep Oct Nov Jul Aug Dec

Feb Mar Apr May Jun Jul Jan

CANADA

UNITED STATES

EUROPEAN UNION UNITED KINGDOM

SOURCE: BANK OF CANADA, US FEDERAL RESERVE, EUROPEAN CENTRAL BANK DATA: RATIO OF CENTRAL BANK DEPOSIT RATES TO ANNUAL INFLATION, SELECT ECONOMIES

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rates

PRIME RATE IS AT AN ELEVATED STATE Those with variable rate loans have seen their interest costs increase ten times since last March—and the cumulative effects are adding up.

As we’re all now acutely aware, the Bank of Canada has raised interest rates to a level not seen in decades from a near-zero policy rate. We’ll explore later on what that means at a macro level for borrowers, but for now let’s look at how an individual with a variable rate loan equal to the prime rate has fared thus far. Prior to the first increase in March 2022, prime was at an all-time low in Canada at 2.45% and monthly interest on $100,000 at prime was just $204. Each quarter point hike represents an increase in interest of $21,

per $100,000 outstanding. The relative change in interest gets smaller over time, for example the first 25 basis-point hike equates to a 10% increase in interest per $100,000, whereas the most recent 25 basis-point hike equates to just a 4% increase. The issue of course for most variable-rate borrowers, however, is the cumulative increase. With each successive increase, more is required to service the debt, and with the prime rate now sitting at 7.20%, interest on each $100,000 borrowed is up to $600 per month, which is almost three times the original cost.

EVERYTHING COSTS MORE—ESPECIALLY MONEY

$90

30%

$80

25%

$70

$60

20%

$50

15%

$40

10%

$30

6.70% 6.95% 7.20%

6.45%

5.95%

5.45%

$20

4.70%

3.20% 3.70%

2.70%

$10

Mar

Apr

Jun

Jul

Sep

Nov

Dec

Jan

Jun

Jul

CUMULATIVE INCREASE

$21

$63

$104

$188

$250

$292

$333

$354

$375

$396

ADDITIONAL MONTHLY CHARGE RIGHT AXIS

% CHANGE IN MONTHLY CHARGE LEFT AXIS

PRIME RATE

SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01 & RENNIE INTELLIGENCE DATA: MONTHLY COST OF SERVICING $100K OF VARIABLE-RATE DEBT

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rates

TRIPLING INTEREST Since the first rate increase in March 2022, total monthly interest owed on prime rate loans have increased threefold. ›

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credit and debt

03. credit & debt New credit has been on the decline of late as high interest rates are having their intended effect: keeping borrowers on the sidelines.

NOT GIVING CREDIT WHERE IT'S DUE

As we previously discussed, one of the Bank of Canada’s goals of raising interest rates is to disincentivize borrowing as a way of reducing spending, in turn slowing economic activity and ultimately bringing inflation back to its 2% target. And when it comes to the first part of that equation, they have successfully disincentivized borrowing of late. In the second quarter total credit extended was $37 billion, which was 49% less than in the same period last year. This is up from Q1, however, borrowing, like real estate, is quite seasonal, so the second quarter typically sees the most credit extended in a year. In fact, the first quarter had the lowest total credit extended since Q1 1993 and the lowest new mortgage total since Q1 2013. Overall, the first six months of 2023 saw $39 billion in new credit, a 64% decline from the same period last year.

Mortgages, which typically make up the largest share of borrowing, have seen the largest decline. To-date in 2023 there has been $29 billion in new mortgages extended, a 69% decrease compared with the first six months in 2022. As a result, mortgages were only 74% of new credit so far in 2023 as opposed to 87% in the first half of 2022. Consumer credit, on the other hand, increased notably in Q2 with almost $12 billion being extended in the second quarter. That comes after a more than $1 billion reduction in the first quarter as Canadians on the whole were paying down their consumer credit. Given this reversal, it will be something worth keeping an eye on going forward. We’ll discuss later on why Canadians are having a hard enough time managing their existing debt loads, so it goes without saying that it’s a positive development that borrowers have been taking on less new debt this year.

rennie.com

credit and debt

LIVING ON (PREVIOUSLY) BORROWED FUNDS

$80

$70

$60

$50

$40

$30

$20

$10

-$10

-$20

-$30

Q1 Q2 Q3 Q4

Q1 Q2

MORTGAGES

NONMORTGAGE LOANS

CONSUMER CREDIT

SOURCE: STATISTICS CANADA. TABLE 36-10-0579-01 DATA: NEWLY-ISSUED HOUSEHOLD DEBT BY TYPE, QUARTERLY, CANADA

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credit and debt

UP, UP, AND AWAY As rates have risen at an unprecedented pace and scale, Canadians' mortgage interest obligations have predictably followed suit, having increased by a staggering amount for some.

We noted in the last edition of the rennie landscape that variable-rate mortgages represent a growing share of the Canadian market (up to one in three mortgage dollars specifically). So given that backdrop it’s hardly surprising that Canadian’s mortgage interest obligations have been rising quickly alongside rising rates, even as new credit declines. In fact, in the last year alone, the total annual interest owed on mortgages in Canada increased by 61%, even though the total outstanding debt increased by only 5%. Of course those interest rate increases aren’t felt evenly across mortgage holders,

as variable-rate borrowers are subject to every rate increase from the Bank of Canada, while fixed-rate borrowers are only exposed upon renewal. So it makes sense then, that interest obligations on variable-rate mortgages in Canada are up a whopping 105% in the last year, and are now five times higher than they were just two years ago. Meanwhile on fixed- rate mortgages, borrowers with terms of less than three years are paying an additional 182% in interest, while those with terms of less than five years are paying 61% more. Lastly, those with terms of five years or more are paying just 1% more in interest, as most of those borrowers simply haven’t renewed yet.

FEELING THE SQUEEZE TO GREATER DEGREES

$70

pre-pandemic

pandemic recovery

rate tightening cycle

$60

JUN : $30 Billion variable rate interest

$50

$40

JAN : $5 Billion variable rate interest

$30

$20

$10

2017

2018

2019

2020

2021

2022

2023

VARIABLE RATE

FIXED YEARS

SOURCE: STATISTICS CANADA. TABLE 10-10-0006-01 DATA: AGGREGATE INTEREST COSTS ON MORTGAGE FUNDS OUTSTANDING BY TYPE, MONTHLY, CANADA

rennie.com

credit and debt

SPENDING MORE AT HOME MEANS SPENDING LESS OUT The proportion of disposable income required to service debt continues to march upward, reaching its highest level in 4 years.

Since we just detailed how much interest costs for Canadian households have ballooned of late, it’s important to measure not just the total amount, but also Canadians’ ability to afford what they owe via the debt service ratio (DSR), which is the proportion of disposable income that is spent paying back loans. After falling dramatically in 2020 when interest rates were cut, DSR’s have been steadily increasing over the past three years, as Canadians took on more debt, followed by interest rate increases.

The current total DSR of 14.79% is up substantially from 13.76% a year earlier and while down marginally from Q1 is at its second- highest level since Q4 2019. What’s kept the overall DSR level relatively in check, however, is the non-mortgage DSR, which, at 6.66%, is up marginally over the past two years, but still quite low from a historical perspective. The mortgage DSR, on the other hand, at 8.14% is at its highest level ever (going back to 1990) and means that Canadians will be spending more of their incomes on their mortgages and less elsewhere (like the retail sales we looked at earlier).

STARTING TO SWEAT ABOUT SERVICING OUR DEBT

16%

14.79%

14%

12%

10%

8.14%

6.66%

4.75%

2017

2018

2019

2020

2021

2022

2023

NONMORTGAGE DSR MORTGAGE DSR

TOTAL DSR

BOC POLICY INTEREST RATE

SOURCE: STATISTICS CANADA. TABLE 11-10-0065-01 DATA: PROPORTION OF DISPOSABLE INCOME GOING TO DEBT SERVICE, QUARTERLY, CANADA

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credit and debt

INDEBTED TO OUR MOST POPULAR CITIES

Mortgage debt has grown substantially over the past few years alongside rising home prices—and unsurprisingly markets that have the most debt are ones where prices are highest.

Much of the discussion around mortgage debt and affordability in real estate has centred around Canada’s two most expensive markets: Vancouver and Toronto. And while the story on mortgage debt and home equity line of credit extends beyond those two markets, it doesn’t stray that far geographically speaking. Canada’s two most expensive provinces account for the highest per capita mortgage and HELOC debt for owned households with a mortgage. And while British Columbia leads the way, with three of the top five most indebted markets, Ontario is right behind.

In fact, those two provinces account for the 11 highest per capita debt loads in the nation. Here in Metro Vancouver, unsurprisingly we have the most debt per owned household with a mortgage, with an average of $566,000, a full 12% more than the next highest market, Toronto. We’ll discuss later on the amount of mortgage-free equity that’s held in respective markets, but for those first-time or move-up buyers getting into the market, a significant amount of debt is needed to participate in this market.

PROPORTIONALLY, DEBTS ARE THE MOST ON THE WEST COAST

$600,000

$565,755

$500,000

$400,000

$300,000

$200,000

$100,000

DATA: OUTSTANDING MORTGAGE & HELOC DEBT PER OWNER HOUSEHOLD WITH A MORTGAGE, LARGE METRO AREAS IN CANADA

SOURCE: EQUIFAX, STATISTICS CANADA (2021 CENSUS)

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credit and debt

BORROWING MORE TO PAY MORE On a per-capita basis, mortgage & HELOC debt are highest in cities where housing is most expensive. ›

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demographics

04. demographics

As Canada adds more and more permanent residents each year due to expanding immigration targets, it's the country's municipalities that are adapting to the growth.

WELCOMING EVERYONE EVERYWHERE

Canada has embarked on an ambitious immigration strategy, as we’ve discussed in the past, and as a result is experiencing record population growth. New permanent resident additions are just one piece of that immigration (along with temporary permits which we will explore next) but are the centrepiece of the strategy and the sole permit type with explicit targets. The target for 2023 is 465,000 new permanent resident additions increasing to 500,000 in 2025. So far this year we are on pace to easily surpass that number and British Columbia is once again attracting more than its share, accounting for 15% of the permits issued to-date. Where those permanent residents are settling within British Columbia has been changing over time. Here in Metro Vancouver, we still attract the overwhelming majority of new permanent

residents, though that proportion has declined slightly over time, with 77% of British Columbia’s share, versus 80% pre-pandemic. What’s more, the distribution of where immigrants are moving within Metro Vancouver has changed more dramatically. Vancouver proper still attracts the largest share of immigrants, though that share has declined from 49% pre-pandemic to 37% so far in 2023. Most of the other urban municipalities in Metro Vancouver have seen their shares of new immigrants grow, particularly Surrey increasing from 21% to 29% and Burnaby increasing from 9% to 11%. With this change in the flow of immigration it makes sense, then, that cities like Surrey and Burnaby have been growing faster than Vancouver of late, though—notably—those cities have been adding housing, too.

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demographics

SURREY & BURNABY GROW THEIR SHARE OF THE PIE

Vancouver 13,500

Vancouver 19,765

Other 4,395

Other 4,600

Coquitlam 1,290

Coquitlam 1,375

Richmond 2,540

year-to-date (July) 2023

Richmond 2,540

2019

Burnaby 3,560

Burnaby 3,855

Surrey 8,385

Surrey 10,385

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: PERMANENT RESIDENT PERMITS ISSUED, BY CITY

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demographics

ONE MILLION MORE...OR MORE?

Study and work permits played a major role in Canada's record-setting population growth of 2022. In 2023, it's (even) more of the same.

Temporary immigration permits—that is temporary foreign workers, international students, and the international mobility program—account for a significant proportion of the inflow of people into Canada. And while many ultimately leave the country, others end up staying on permanent resident permits (which we will explore in the next section). Additionally, they account for a significant share of Canada’s population at any given time. Though the specific number of temporary permit holders currently in Canada is being debated at the moment, we’ll leave that for now, and instead focus on the flow of temporary residents into Canada and its current trajectory. Last year, Canada issued a record high number of temporary permits at 1.19 million. That’s a whopping 34% increase over the prior year, which was previously the all-time high. So far in 2023 Canada is on pace to issue even more, with 994,000 permits recorded through the first seven months.

Historically, around half of all temporary permits are for international students. So far this year, that hasn’t been the case, with just one-third of all temporary permits going to students to-date. That doesn't indicate a change in the distribution of permits, but rather follows typical seasonality. The bulk of study permits get issued in August and September, when school starts. This suggests that the pace of temporary permits is going to actually accelerate over the next two months, as more students arrive in time for the next school year. Permits for temporary foreign workers and the international mobility program, on the other hand, are closing in on their 2022 totals just past the midway point of the year. Combine this with the increasing number of new permanent residents and it looks like Canada’s net international migration in 2023 is on pace to exceed its pace of one million additions from 2022.

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demographics

PERMANENTLY BREAKING TEMPORARY RECORDS

1,400,000

1,200,000

1,188,680

1,000,000

994,060

800,000

600,000

400,000

200,000

Jan

Feb Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: CUMULATIVE TEMPORARY PERMITS (STUDY, TFWP, IMP) ISSUED, CANADA

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demographics

CHARTING A NEW COURSE

Increasingly, Canada’s new permanent resident additions are people who are already living in the country on a temporary basis— but that doesn’t mean fewer immigrants are entering the country.

The path that most new permanent residents to Canada take has been changing in recent years. Pre-pandemic, on average, just 27% of new permanent residents were already living in Canada on a temporary permit while almost three-quarters of new immigrants were new to Canada. The typical path at that time was for permanent residents to apply for a permit from overseas and enter the country, PR card in hand. Temporary permit holders were more likely to come and go for the duration of their permits or longer if they extended. That path has changed now with the majority of new permanent residents coming from within Canada. Now, the typical path for

immigrants is one where they come to Canada first on a temporary permit, then apply for permanent residency while already in the country. While the number of permanent residents that already live in Canada is increasing, this hasn’t slowed population growth—quite the opposite, as we explored the growth in temporary permits in the last section. This is also why the number of total permits is higher than actual net international migration, even when accounting for emigration, because so many immigrants to Canada now end up getting more than one permit as they move from being temporary residents to permanent ones.

CANADA’S TOP SOURCE OF IMMIGRANTS IS…CANADA

100%

90%

31%

80%

45%

59%

70%

62%

70%

72%

79%

60%

50%

40%

69%

30%

55%

20%

41%

38%

30%

28%

21%

10%

2016

2017

2018

2019

2020

2021

2022

2023 (YTD Jul)

233,155 63,215

205,215 81,320

255,475 95,580

238,400 102,775

114,140 70,455

126,205 279,840

259,875 177,735

138,210 165,745

NET NEW ALREADY IN CANADA

ALREADY IN CANADA

IMPLIED NET NEW

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA & RENNIE INTELLIGENCE DATA: PERMANENT RESIDENT PERMITS ISSUED BY ORIGIN, ANNUAL, CANADA

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demographics

FINDING IMMIGRANTS AT HOME & ABROAD As Canada continues to welcome new permanent residents in greater numbers, more than half of them this year are already in Canada with a student visa or work permit. ›

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housing

05. housing

As regions grow, so too should the number of homes that are for sale and sell. To the extent this is true, British Columbia's regions are building quite the war chest of would-be buyers.

POISED FOR A SALES SUPERNOVA?

Given the current inflation and interest rate environment, it shouldn’t come as a surprise that housing market activity has been subdued of late across the country. Not only has buyers’ purchasing power been diminished by the highest interest rates we’ve seen in two decades, but prices have remained stubbornly high. Additionally, uncertainty around interest rates has kept participants on the sideline as they await for information and clarity. But even with the aforementioned conditions, there’s a certain number of real estate transactions you can expect in a given market. There will always be some people who need to buy or sell residential real estate, like those who moved cities, changed jobs, got married or divorced, or had a baby. In other words, people who need to move because their current home no longer fits their circumstances. And given our rapid population growth throughout the country, it’s reasonable to expect transactions to be increasing over time. So looking at monthly sales counts is useful in comparing

how active a local real estate market is relative to history, but it doesn’t tell us what we could reasonably expect to see for transaction counts if macroeconomic conditions were relatively stable, or how many transactions we can expect once those conditions return. For that we turn to per capita sales, which here in Metro Vancouver were below average in the two years leading up to the pandemic, followed by a period of above-average per capita sales as interest rates were historically low. Since mid-2022, however, as the Bank of Canada engaged in its rate tightening cycle and sales counts dropped off, per-capita sales have been well below the past 10-year average, suggesting that there are buyers waiting on the sidelines. Overall, since the start of 2018, there have been 34,000 fewer sales than one would otherwise expect given today’s population, suggesting that as interest rates start to decline, there will be many potential buyers waiting in the wings.

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housing

AS CITIES AND RATES EXPAND, HOUSING MARKETS ACCRUE UNMET DEMAND

4.00

3.50

3.00

10-year average 1.92

2.50

2.00

1.50

1.00

0.50

sales than expected 34,018 fewer

sales than expected 23,525 more

sales than expected 19,918 fewer

0.00

2018

2019

2020

2021

2022

2023

SOURCE: STATISTICS CANADA. TABLE 12-10-0380-01, REBGV, FVREB, AOIR, VREB DATA: PER-CAPITA MLS SALES, METRO VANCOUVER

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housing

UNEQUAL EQUITY ACCUMULATION

Mortgage-free equity is an important driver of Canadian housing markets, and is itself driven by much more than the size of regional populations.

It’s important to remember that the ownership housing market is driven by not just incomes, but also equity (and wealth). And while it’s difficult to measure the exact amount of equity within a housing market, we are able to measure the amount of mortgage-free equity (as we’ve discussed in past rennie landscapes). We noted in the last edition how much equity was being freed up in Metro Vancouver over the past decade to potentially be used in future transactions. This time, we look across markets to get a sense for how much mortgage-free equity there is in respective metro areas within Canada. Surprisingly, the size of the market isn’t the biggest determination of how much mortgage- free equity exists within that market. Sure, Toronto—Canada's largest metro area—has the most mortgage-free equity in Canada, per the 2021 census, at $648 billion. But second on the list is Metro Vancouver, Canada’s

third-largest metro. Montréal, meanwhile, has about half as much mortgage-free equity as Vancouver. The biggest difference, of course, is home values, where Vancouver’s average home is worth $1.4 million compared with Montréal’s $529,000. The share of households that are mortgage-free also play a part, as Vancouver’s 41% of mortgage-free households outpaces Montréal’s 35%. Even as Canada’s third-largest metro area, Metro Vancouver still punches well above its weight in terms of the amount of mortgage- free equity that exists in this market, and is put to use in real estate. Of all the census metropolitan areas in Canada, 19% of mortgage-free equity exists right here in Metro Vancouver, with another 1% next door in Abbotsford-Mission. That adds up to 1 in 5 mortgage-free dollars held within this region, a staggering amount that will be influencing our housing market for years to come.

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housing

THE CLEAR-TITLE CALCULATION VARIES BY LOCATION & VALUATION

$1,404,000

50% 45% 30% 35% 40% 25% 20% 15% 10%

$1,500,000

41%

$1,000,000

$500,000

5% 0%

AVERAGE VALUE OF MORTGAGEFREE HOME LEFT AXIS

OWNEROCCUPIED HOUSEHOLDS WITH NO MORTGAGE RIGHT AXIS

SOURCE: STATISTICS CANADA 2021 CENSUS DATA: PROPORTION OF MORTGAGE-FREE HOUSEHOLDS AND AVERAGE HOME VALUES BY CMA

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housing

Condo prices in British Columbia have been increasing for most of 2023 and are poised to return to their previous high—perhaps even before the first rate cut by the Bank of Canada.

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housing

A MARKET ON THE MEND The benchmark condo price—our preferred metric for how home prices are changing over time—peaked in British Columbia in May 2022, at $677,000, shortly after the Bank of Canada began its rate-hiking program. From there, it declined in each month through to the end of the year bottoming out at $612,500. Since then, and in spite of continued rising rates, condo prices have been on the rise, increasing in each month from January through July 2023 before declining marginally to $661,100 in August. That represents a return to 98% of the previous peak value—astonishing considering where interest rates are.

Looking at the path ahead for condo prices in this province, and with the effects of the June and July interest rate increases just starting to have their impact, we expect condo prices to soften a bit in the second half of the year. As a reflection of both the scale of BC's unmet housing demand and the recent rate hold by the Bank of Canada (might there be more of that to come?), our model charts a path for the province's benchmark condo price achieving its previous peak value by February 2024. Should that come to pass, expect townhome and detached home prices to follow the lead of the condo market.

CHARTING A COURSE BACK TO PEAK

1.04

to peak MONTHS

1.02

to peak MONTHS

1.00

0.98

0.96

0.94

0.92

0.90

0.86

0.87

0.84

2 4 6 8

12 14 16 MONTHS FROM PREVIOUS PEAK

18 20 22 24

26 28 30

32 34

MAY YTD

SOURCE: CREA DATA: BENCHMARK CONDO PRICES INDEXED TO CYCLE PEAK, MONTHLY, BRITISH COLUMBIA

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