the rennie landscape - Fall 2021

rennie landscape fall 2021

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Dear Reader, Welcome to the Fall 2021 edition of the rennie landscape. Much has changed since we last published a rennie landscape (back in Spring 2021), and we dare say most of it is for the better. However, with new Covid cases rising from already-elevated levels, and segments of our population still not vaccinated, challenges do remain. But how about that vaccination rate? Across Canada among eligible people, more than 80% are fully vaccinated—one of the highest such rates in the world. Certainly 100% is better than 80%, but collectively we have put ourselves in a position to realistically consider what our world will look like as we emerge from the pandemic. And emerging we are. More and more people are working (if not as much as they would like just yet), monetary and fiscal policies are becoming less expansionary, and business confidence is high. For those of us here in British Columbia, our labour market has been benefiting from demographic tailwinds blowing in from other parts of the country, and there are signs that international migration is beginning to return to typical levels. As we unpack the factors that are directly and indirectly impacting our housing market here in Metro Vancouver as part of this edition of the rennie landscape you will see ongoing challenges mixed with green shoots. With much to look forward to, we hope you enjoy reading this report. Please continue to be safe, positive, and kind.

Ryan Berlin DIRECTOR OF 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 While still elevated, unemployment rates across the country are receding from their peak-Covid levels, bringing us closer to re-achieving pre-pandemic labour market conditions.

THE TIGHTENING LABOUR MARKET VICE

Over the past year-and-a-half, the pandemic has manifested itself most directly in changes in labour market conditions, both here in British Columbia and throughout all of Canada (and beyond). At the beginning of 2020, the labour market seas were calm: in Metro Vancouver, the regional unemployment rate sat at 4.5%, employment was growing by 3% per year, and incomes were rising. Such as it is with unexpected events, Covid really threw us for a loop, leading us to an economic suppression that saw almost 20% of jobs disappear. Alongside this, the region’s unemployment rate spiked to 14.6%—easily the highest in our history, though slightly below the apex realized by each of Greater Toronto (15.5%) and Greater Montreal (15.1%).

Fast forward to the end of summer 2021, and Metro Vancouver’s unemployment rate has achieved a new pandemic-low of 7.3%. During more typical economic times, an unemployment rate this high would raise alarm bells. But of course, these times are still not typical. Interestingly, and as shown on the next page, the number of jobs in Metro Vancouver now exceeds the pre-pandemic high. So why the relatively high unemployment rate, when we have more jobs than we did at a time when the unemployment rate was 4.5%? Well, because our labour force has continued to grow (by 4%, as the labour participation rate now exceeds its pre-pandemic level).

We’re headed in the right direction, but we’re clearly still in the recovery phase of our economic journey.

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economy

STUBBORNLY ELEVATED UNEMPLOYMENT RATES

16%

15.5%

15.1%

14.6%

14%

13.7%

13.4%

12%

10%

9.5%

7.5%

7.3%

7.1%

6.8%

6.6%

6.5%

6.4%

5.7%

5.5%

5.4%5.1%

5.0% 4.5%

4.9%

CANADA

BRITISH COLUMBIA

VANCOUVER

TORONTO

MONTREAL

YEAR PREPANDEMIC AVG

PREPANDEMIC FEB

PANDEMIC PEAK

MOST RECENT JUL

DATA: SEASONALLY-ADJUSTED UNEMPLOYMENT RATES SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

MOVING CLOSER TO A NEW PHASE OF GROWTH Metro Vancouver’s jobs market has proved to be resilient in the face of Covid. The question now is how long until we transition from recovery to growth mode.

British Columbia is the only province (or territory) in Canada that has fully “recovered” its employment base to its pre-pandemic high. Furthermore, BC has registered total employment counts in excess of February 2020 levels in each of the past three months. The same goes for Metro Vancouver, where employment is 1% higher than it was 1.5 years ago, prior to Covid. This region compares favourably to its large-metro peers in Canada,

with Montreal just now getting back to its employment level of February 2020, and Toronto still 2% below its pre-pandemic peak. Call it good fortune or good pandemic management, but the BC and Metro Vancouver labour markets remain the best-performing ones in the country. While employment remains significantly off-trend, we can finally begin to look forward to a period of transition to a more stable cadence of job additions here in the region.

A STALLED JOBS RECOVERY

1.04

1.9% MONTHLY JOB GROWTH

0.1% MONTHLY JOB GROWTH

0.90 0.92 0.98 1.00 1.02 0.96 0.94 0.82 0.84 0.88 0.86

1.01 1.00 0.98

0.80

1 2 3 4 5 6

8 9 10 11 12 13 14 15 16 17

MONTHS SINCE THE PANDEMIC BEGAN FEB

VANCOUVER

TORONTO

MONTREAL

DATA: SEASONALLY-ADJUSTED TOTAL EMPLOYMENT INDEXED TO THE BEGINNING OF THE GREAT SUPPRESSION (FEBRUARY 2020, WHERE EMPLOYMENT=1.00)

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

SURPRISE! CANADIAN GDP’S Q2 HICCUP Despite the recent interruption in the re-expansion of economic activity, Canada is positioned to establish a solid year of GDP growth in 2021.

In some ways the path into and out of Covid, insofar as changes in Gross Domestic Product (GDP) are concerned, was and has been predictable: there was going to be an initial and dramatic stepback in economic activity as sectors of our economy shut down, and then this would be followed by a rapid re-animation of our economy as we began to re-open, followed by slower incremental gains as we made our way back to trend. This “square-root”-shaped path of growth has

characterized job growth across the country, as have quarterly changes in GDP. It was a bit of a shocker, then, to see that Q2 2021 GDP actually declined, by 0.3%. More than anything, this reflected a slowdown in housing markets from peak levels, as well as a reduction in exports. Because we expect these factors to play less of a role in shaping GDP growth in Q3, next quarter's reading should be much more positive, both literally and figuratively.

CANADIAN GDP UNEXPECTEDLY DIPS

15%

10%

9.1%

2.2% 1.4%

1.1%

0.5%

0.1%

-0.3%

-2.0%

-5%

-10%

-11.3%

-15%

DATA: CHANGE IN GROSS DOMESTIC PRODUCT, EXPENDITURE-BASED, CANADA, QUARTERLY SOURCE: STATISTICS CANADA. TABLE 36-10-0104-01

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economy

WORKERS ABOUND, BUT SOME CAN’T BE FOUND Despite a still-elevated unemployment rate, employers are finding it increasingly challenging to attract the employees they need.

One could be excused for thinking that labour market slack goes hand-in-glove with low job vacancy rates (that is, the proportion of all jobs and would-be jobs that employers cannot fill). It seems obvious enough: if there is a higher-than-average number of people actively looking for work then surely employers could have their pick, right? Well, in the current environment, that would be wrong. Across Canada, as well as here in British Columbia and the Lower Mainland, the job vacancy rate rose in Q1 2021 (the latest period in which we have data). In the Lower Mainland specifically, the job vacancy rate hit 4.3% in Q1 2021, up from 4.0% in Q4 2020. Though off of its all-time high of 5.1% in Q3 2018, the current vacancy rate reflects mismatches in labour supply and demand that currently exist.

More specifically, the biggest increases in the number of job vacancies here in the Lower Mainland over the two most recent quarters are in education (a 17% increase), management occupations (18%), and manufacturing and utilities (20%); each of these compares to an overall average increase in job vacancies of 6% over the same period. Because the sector-specific labour challenges that currently exist are a reflection of the uneven way in which our economic recovery is transpiring, our expectation is that the overall job vacancy rate will begin to level out through the balance of 2021. When this happens, we can feel more confident that the worst of our economic woes, at least as far as Covid is concerned, is behind us.

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economy

THAT EMPTY FEELING: AN INCREASING SHARE OF JOBS GOING UNFILLED

5.1%

4.3% 4.5%

NO DATA

3.6%

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4 Q1

CANADA

BRITISH COLUMBIA

LOWER MAINLAND

SOURCE: STATISTICS CANADA. TABLE 14-10-0325-01 DATA: JOB VACANCY RATE, QUARTERLY, UNADJUSTED FOR SEASONALITY

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economy

ALWAYS LOOK ON THE BRIGHT SIDE OF STRIFE There’s a saying that it’s always darkest before the dawn (it’s a favourite refrain of mine, especially when sung by Florence Welch). I suppose in some ways this could be classified as a truism, but even so, it can provide some grounding and guidance during difficult times. Covid has been one such difficult time, especially during the early days when significant uncertainty prevailed. Questions we were asking at the time included: how long will we be working from home? Will we ever be able to travel again? How depressed will our economy ultimately become, and can we ever bounce back? Things certainly seemed dire in those early months, and while we are clearly not out of the woods yet—with many challenges still ahead of us—today we have a better sense for how far we have come and, in some ways, how far we have to go to get back to some semblance of a pre-Covid world. In this context, it’s not entirely surprising (and I think it’s fair to say) that optimism

abounds more so now than at any time since February 2020. Certainly this is the case for Canadian businesses, who were recently polled by Statistics Canada on their views of the next 12 months. Overall, and as of Q3 2021, more than three- quarters of businesses surveyed (75.7%) indicated a sense of optimism about business conditions over the next year. This group of optimists included 52.0% who said they were somewhat optimistic, while 23.7% indicated they were very optimistic. This is interesting and all, sure, but why do we really care about how businesses “feel” about the future? Quite simply, because the more optimistic they are about our society and economic conditions, the more likely they are to invest in their businesses and expand their workforces. For now, then, the rest of us can feel optimistically about this leading economic indicator.

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economy

With the darkest days of Covid hopefully (and likely) behind us, optimism abounds among Canadian businesses as they prepare for future growth.

BUSINESSES LOOK FORWARD TO GOOD TIMES AHEAD

very optimistic 23.7%

very pessimistic 2.5%

somewhat pessimistic 8.4%

surveyed in Q 3 indicated they were optimistic about the next 12 months 75.7% OF BUSINESSES

uncertain 13.4%

somewhat optimistic 52.0%

SOURCE: STATISTICS CANADA, CANADIAN SURVEY ON BUSINESS CONDITIONS DATA: PERCENTAGE OF POLLED BUSINESSES INDICATING AN OPTIMISTIC, NEUTRAL, OR PESSIMISTIC OUTLOOK

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economy

MORE CONSUMER SPENDING IN STORE Confidence among consumers, especially in Metro Vancouver, is driving accelerated retail sales activity. Expect this trend to continue.

The extent to which everyday consumers (that would be you and me) are spending their money on everyday things like leggings, lemons, lattes, and lavender oil provides a pretty clear window into the mood of said consumers. If they—er, we—are spending more, then we probably feel pretty good about our financial situation, including our job, our income, and our savings and investments—even if the subjectivity of this feeling is detached from the objective measures of such things. Conversely, when consumers pull back on spending, then look out: that’s usually a sign that an economic slowdown is in the works, if not fully underway. With this in mind, the latest data on retail sales in Canada, British Columbia, and Metro Vancouver are encouraging. Before considering the more recent numbers though, let’s start with some (surprising) context: between June 2019 and June 2020, total monthly retail spending in Canada rose—yes, rose—by 3.4%. This despite our

economy being 4 months deep into the Great Suppression at the midway point of last year. In comparison, national monthly retail spending rose by 6.2% year-over-year in June 2021. More locally, the increases in spending are more dramatic. For example, in BC as a whole, the 2.6% growth in spending between June 2019 and June 2020 was trounced by the 12.6% growth over the most recent 12 months. Here in Metro Vancouver, the past two years have been like night and day for retailers: compared to a paltry 1.1% increase in spending from June 2019 to June 2020, retail spending in this region surged by 18.9% between June 2020 and June 2021. Is this growth sustainable? In short, no. But for now it’s contributing to an improving economy, and it hints that the huge build- up in household savings over the past year (discussed in the next section) could continue to drive spending in the coming years.

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economy

RETAIL SALES CONTINUE TO SURGE

25%

20%

18.9%

15%

12.6%

10%

6.2%

3.4%

2.6%

1.1%

CANADA

BRITISH COLUMBIA

METRO VANCOUVER

JUNE

SOURCE: STATISTICS CANADA, MONTHLY RETAIL TRADE SURVEY DATA: YEAR-OVER-YEAR CHANGE IN RETAIL TRADE VOLUME

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economy

PUTTING HOME PRICE GAINS IN PERSPECTIVE The declining and low interest rate environment established over the past year-and-a-half has certainly boosted home values— but, as always and with most things, context is important.

House prices have been rising unsustainably. Not to be flippant, but...what else is new? For many years nowMetro Vancouver has posted out-sized growth in home values. The reasons why have been, and continue to be, debated, but due to word count contraints, we will not be exploring this further at this time. The fact remains, though, that home prices in Metro Vancouver rose considerably in the past 12 months: in the Fraser Valley board area in particular, the median sold price rose 10.3%. Notably, however, this was both in line with

the past 5-year average annual increase of 10.2%, and much more modest than the 31.2% increase in the S&P 500, the 72.2% increase in crude oil prices, the 112.2% increase in bond yields, and the—oh my—342.1% increase in the value of Bitcoin. The bottom line is that loose monetary policy including ultra-low interest rates, combined with generous fiscal supports, have fuelled asset values. Enjoy it, or loathe it, while it lasts, because these extraordinary conditions won’t be around forever.

SHOULD’VE INVESTED SOONER

400%

350%

342.1%

300%

250%

200%

150%

136.1%

112.2%

100%

72.2%

50%

31.3%

16.4%

8.3%

10.3%

10.2%

7.9%

6.5%

5.7%

2.4%

4.1%

0.6%

-6.4%

-50%

GOLD WTI CRUDE BITCOIN CADUSD EX. RATE

S&P YR GOC BOND YIELD

MEDIAN SOLD HOME REBGV

MEDIAN SOLD HOME FVREB

AVG ANNUAL CHANGE, PAST YEARS

PAST YEAR CHANGE

DATA: RECENT CHANGES IN ASSET/COMMODITY VALUES SOURCE: VARIOUS

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economy

APPRECIATING VALUES Asset prices have risen over the past year by significant and unsustainable amounts. In this context, home price changes look almost reasonable. ›

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rates

02. rates

On the topic of interest rate increases, it’s not a question of if, but of when and by how much. The answers are most likely many months from now, and not a lot.

THE GREAT RATE DEBATE

One of the favourite past-times of market- watchers, economists, and housing analysts is to try to predict where interest rates are going to go next, and when it will happen. Quite honestly, most of us get it wrong most of the time. But the exercise of forecasting does seemingly take on more importance when the expectation for interest rate changes is one of upward movement. Our current interest rate environment strongly suggests that we should collectively anticipate rising interest rates. While interest rates heading into the pandemic were low— having followed a generally-downward trend for a period of 40 years, for a multitude of reasons—the overnight target rate set by the Bank of Canada, as an example, was only at 1.75%. Since the pandemic began, however, it has remained suppressed at 0.25%, where the Bank expects to keep it until the second half of 2022.

Five-year Government of Canada bond yields (addressed more directly in a few pages from here), plummeted in the early days of the pandemic thanks to both the Bank’s Quantitative Easing program (whereby the Bank was initially purchasing $4B of government debt each week) and the lack of appetite that private investors had for risk at the time. After a period when bond yields rose—flirting with the 1% threshold—they have since backed-off, currently hovering at around 0.87%. With inflation rising (explored in the next couple of pages) and the economy getting back on track, interest rates will undoubtedly move back up. Our expectation is for interest rates (from the overnight rate, to government bond yields, to mortgage rates) to move back to where they were prior to the pandemic within the next couple of years.

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rates

DESPITE FEARS, INTEREST RATES RELUCTANT TO RISE

the great suppression MARCH

3.20% 3.72%

0.25% 0.87%

-1%

BOC POLICY INTEREST RATE

CMHC BENCHMARK MORTGAGE RATE

YR GOC BOND YIELD

ANNUAL CONSUMER PRICE INFLATION

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

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rates

THE CPI, SERVED 4 WAYS In an evermore-complex price environment, simplistic and narrowly-focused assessments of inflation are not sufficient to unpack the true price change narrative.

How many of us, at some point in 2021, have remarked at how much something costs? A few obvious examples come to mind, including the soaring price of lumber (which quadrupled in price and now sits at or below its pre-pandemic level), the cost of restaurant meals, how much it costs to fly...to Calgary of all places!... and the list goes on. These are all valid examples of goods or services whose prices have changed dramatically during this year and last, but when considering what inflation looks like for the economy as a whole, it’s simply too much of a narrow focus to hone in on the prices of singular commodities or, for that matter, singular measures of consumer price inflation. A quick primer: “inflation” as one will commonly hear it referred to as, is the change in the Consumer Price Index, or CPI. The CPI is a number that is produced each month that reflects the cost of an underlying basket of goods and services. As the prices of things go

up, the CPI will go up as well, and vice versa. The calculation of annual inflation, then, is made by comparing the CPI in one month to the CPI in the same month of the previous year. The most recent reading on inflation indicates that prices are rising at 3.7% on an annualized basis, which is outside of the Bank of Canada’s stated goal of maintaining inflation in the 1-3% range. But because this headline inflation number includes numerous volatile items (like gasoline and food), additional measures of CPI change have been developed (including “trim”, “median”, and “common”). These measures of inflation show prices running less hot than the headline number, complicating the narrative around actual price changes. While prices are indeed rising faster than they have in years, there’s no need to get bent out of shape about inflation—yet.

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rates

INFLATION RUNNING WARM BY SOME MEASURES

4.0%

3.7%

3.5%

3.1%

Bank of Canada TARGET INFLATION RANGE

3.0%

2.6%

2.5%

2.0%

1.7%

1.5%

1.0%

0.5%

0.0%

CPI ALL ITEMS

CPI TRIM

CPI MEDIUM

CPI COMMON

DATA: ANNUAL CHANGE IN VARIOUS MEASURES OF INFLATION; JUNE 2021

SOURCE: STATISTICS CANADA. TABLE 18-10-0256-01

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rates

The Consumer Price Index has been rising rapidly, it’s true—but not all measures are singing the same tune.

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rates

AN UNEVEN LANDSCAPE OF PRICE SURGES Building on the commentary from the previous page on inflation, it’s pretty clear that the inflation story is a complicated one, not only because of base-year and supply-chain effects, but also because of how the individual components of the CPI are conspiring to generate the headline inflation number. For example, the most recent 3.7% overall increase in Canada’s CPI reflects energy prices (which includes gasoline) that rose by

19.7% over the past year, by far the biggest outlier among the components of the CPI. But other goods and services have seen above-average surges in prices as well, including transportation (6.6%) and shelter (4.9%). That said, not everything costs a lot more, including clothing (1.0%), household furnishings (1.1%), and food (1.7%). As with most things, the devil is in the details, and the inflation story is no different.

A MIXED SHOPPING BAG OF CONSUMER PRICE INCREASES

3.7%

ALL ITEMS

ALCOHOL, TOBACCO, MARIJUANA

1.7%

1.0%

CLOTHING

19.7%

ENERGY

1.7%

FOOD

5.0%

GOODS

HEALTH PERSONAL CARE

3.6%

1.1%

HOUSEHOLD OPS

RECREATION EDUCATION

2.9%

2.6%

SERVICES

4.9%

SHELTER

6.6%

TRANSPORTATION

10%

15%

20%

DATA: ANNUAL CHANGES IN CONSUMER PRICE INDEX CATEGORIES, MONTHLY, NOT SEASONALLY ADJUSTED; JULY 2021

SOURCE: STATISTICS CANADA. TABLE 18-10-0004-01

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rates

MAKING SENSE OF THE LACK OF CONSENSUS Most economists and analysts would tell you that bond yields will rise (they have to!) in the coming months and years, but they can’t seem to agree on how much.

Canada’s big banks employ large and impressively capable teams of market analysts to help them, and others, better understand the complex dynamics governing our economy (and those of other countries). Noting this, one might think that there would be some consensus, if not relative unanimity, in the outlook for certain variables, among them interest rates generally and five-year government bond yields more specifically.

Well, one would be wrong. Though TD, RBC, and BMO all see the five-year GOC bond yield rising through the remainder of 2021 and through to the end of 2022, the outlooks diverge in the magnitude of the expected increase. There still remains much uncertainty in our economic recovery and the potential impacts of Covid variants. That aside, we should all prepare for money to cost a little bit more a year from now.

MODEST RISE IN INTEREST RATES EXPECTED

5 -year GOC bond yield increase forecast by Q 4 2022 35-95 BASIS POINTS

BANK

BMO

0.99

0.97

0.85

0.95

1.00

1.10

1.20

1.30

0.99

0.97

1.00

1.35

1.55

1.70

1.80

1.90

RBC

0.97

1.05

1.20

1.35

1.45

1.55

1.65

0.99

SOURCE: RBC, BMO, TD DATA: RECENT AND PROJECTED YIELD ON 5-YEAR GOVERNMENT OF CANADA BONDS, QUARTERLY

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rates

THE GREAT RATE REFLATE While interest rates will undoubtedly rise from their current levels over the next couple of years, don’t expect rapid and significant changes. ›

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credit and debt

03. credit & debt Throwing fiscal orthodoxy to the wind, the Canadian government has racked up debt at a pace unimaginable only 1.5 years ago. Should we be worried?

DON’T FRET THE MOUNTING DEBT

The latest deficit numbers for Canada’s federal government are not for the faint of heart. Since March 2020, the federal government’s monthly spending has outpaced its revenue by an average of more than $24 billion; at its peak (or trough, depending on how you want to look at it), the deficit reached $44 billion (in May 2020). Not sure how to feel about this? Context will assist in comprehending how large this number is: over the 132 months preceding the onset of Covid, the average monthly federal government budget deficit was $1.6 billion. We all know why we’re in this situation: Covid required extraordinary fiscal measures, at a time when economic activity reduced

government revenues, to keep Canadian individuals, households, and businesses solvent. Shock value of the Covid-era deficit numbers aside, the most meaningful question as it relates to government deficits is whether or not we are dooming ourselves to a future where we are encumbered by an out-sized public debt. To this point, historically- low interest rates, facilitated by Bank of Canada actions (they are purchasing much of the federal government’s debt), mean that servicing our mounting debt is affordable. And even as rates rise, the rise is likely to be modest, meaning the rate of economic growth will outpace our debt-service costs. In such a future, we will avoid the dreaded debt-spiral.

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credit and debt

PUBLIC DEBT ACCUMULATION CONTINUES UNABATED

$10

-$10

previous 132 - month average -$1.55 BILLION

-$20

-$30

monthly average April 2020 -May 2021 -$24.13 BILLION

-$40

-$50

SOURCE: STATISTICS CANADA. TABLE 10-10-0133-01 DATA: MONTHLY BUDGETARY BALANCE (BILLIONS $), CANADA

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credit and debt

A MORE AFFORDABLE DEBT ENVIRONMENT The run-up in Canadian household debt has no precedent. But with interest rates still near historical lows, it’s costing us less now than before the pandemic to pay for what we owe.

Just like public debt, household debt has risen dramatically over the past year (a recent estimate from BMO indicated Canadians now have more than $2 trillion in debt tied to their homes). This is a product of low interest rates and Canadian’s active participation in our housing markets, which in turn has resulted in rising prices and ever-larger mortgages. Some context can help us better understand why Canadians are in fact objectively less burdened by debt today than they were before the pandemic.

Specifically, Canada’s Total Debt-Service Ratio (DSR) currently sits at 13.5% (representing the proportion of gross income allocated to servicing debt), which is up from the recent floor of 12.1% but is 10% lower than its pre- pandemic level of 15.0%. Both the mortgage and non-mortgage DSR are below levels from 2 years ago, indicating that Canadians— perhaps improbably—have a little additional financial buffer to work with these days.

DEBT IS UP, BUT THE COST OF SERVICING IT IS DOWN

16%

15.03%

14.87%

14%

13.45%

12%

12.14%

10%

10.59%

8.75%

8.21%

6.82%

6.88% 6.56%

5.74%

5.07%

4.34%

1.75%

0.25%

NONMORTGAGE DEBT

MORTGAGE DEBT

TOTAL DEBT

BOC TARGET RATE

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

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credit and debt

CANADA’S BLOATING BANK ACCOUNTS Canadian household saving—or rather, non-spending—has reached new levels in the past year. The question is when and on what things the accumulated funds will be spent.

I still find it peculiar to be talking about Canadians’ record rate of saving, given ongoing discussion of inflation, housing affordability (or lack thereof ), and the frequent surveys that indicate many Canadians are one paycheque away from being insolvent. While many Canadians continue to struggle financially (and some even more so due to reasons related to the pandemic), in aggregate Canadian households are saving more than ever before. And we're not talking about asset

appreciation here; we’re talking about money that has been earned but not spent. Over the past 4 quarters, for example, Canadian households have amassed $241 billion in savings (in a more typical year we would stash away approximately $15 billion). While some of this has already been deployed into housing market, new vehicles, and restaurants, the remaining savings will provide fuel for future spending and, by extension, economic activity.

CANADIAN HOUSEHOLDS SAVING AT A HISTORIC CLIP

$100

$80

total household savings Q 2 2020- Q 1 2021 $241.9 BILLION

$60

$40

$20

-$20

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

SOURCE: STATISTICS CANADA DATA: MONTHLY HOUSEHOLD NET SAVING (BILLIONS $), CANADA

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credit and debt

PRUDENCE IN A PANDEMIC

Thanks to generous government fiscal supports, supportive monetary policy, and the introduction of a mortgage deferral program, mortgage arrears rates across the country have been plunging.

After a period of uncertainty for homeowners at the beginning of the pandemic, Canada’s mortgage markets settled in the second half of 2020. When social-distancing restrictions were put into place in March 2020, leading to the closure of workplaces everywhere and the total shutdown of entire sectors, concerns on the part of homeowners abounded: would they still be able to afford their monthly payments?

Well, thanks to rapidly-implemented and significant fiscal supports and an unprecedented mortgage deferral program (and, quite frankly, the fact that the pandemic did not negatively impact the sectors homeowners worked in as much as those of young people and renters), mortgage arrears rates actually began to fall. In Metro Vancouver, the arrears rate currently sits at 0.13%, below that of Montreal and Canada as a whole, though slightly above Toronto’s 0.09%. For the foreseeable future, rising arrears rates are unlikely.

HEALTHIER MORTGAGE MARKETS ARE HERE

0.4%

0.3%

0.22%

0.2%

0.13% 0.16%

0.1%

0.09%

0.0%

Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4 Q1 Q2

VANCOUVER

TORONTO

MONTREAL

CANADA

DATA: PROPORTION OF MORTGAGE HOLDERS WHO ARE THREE OR MORE MONTHS IN ARREARS

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION; EQUIFAX

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credit and debt

WE CAN AFFORD ACROSS THE BOARD Lower interest rates, rising employment, and generous government financial supports have made it easier for owners to make their mortgage payments. ›

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demographics

04. demographics

Pandemic—what pandemic? Movement to British Columbia in Q 1 2021 continued a trend that started midway through 2020, with Canada’s westernmost province attracting big numbers of international and domestic migrants.

PUTTING THE “POP” IN POPULATION GROWTH

British Columbia has fared comparatively well—or gotten lucky, or both—in managing a path through the pandemic. Relative to the experience of other provinces in the country, and in comparing Metro Vancouver to other regions, our per-capita case counts have been generally lower, our labour market has mostly bounced back, and our population has continued to grow. On the latter observation, our growth has been more than modest, too: in Q1 2021 (the latest period for which we have data) British Columbia added 21,685 people, almost precisely double the 10,829 we added in Q1 2020. So what has been driving this surge in population growth in the west? Migration, of course. In fact, natural increase (the difference between the number of births and deaths in a given period) was actually negative

in Q1 2021, with there having been 324 more deaths than births (interestingly, natural increase may have been slightly positive if it had not been for Covid). This means that migration to BC was actually the sole driver to provincial population growth most recently. As discussed on the following page, net interprovincial migration to BC has been strong for the past year, and this was also certainly the case in Q1, with the 9,013 net movers from other parts of the country to BC representing a more-than-doubling of the number of movers who came in the same quarter one year ago. With migrants from international origins coming to the tune of almost 13,000 movers, this could be the thin edge of the migration wedge as we more fully open our borders and welcome the world back in.

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demographics

BC’S A PLACE WHERE PEOPLE WANT TO BE

25,000

21,685

20,000

15,000

12,996

10,829

10,000

9,013

7,311

5,000

3,500

-324

-5,000

POPULATION CHANGE NATURAL INCREASE

NET INTERPROVINCIAL MIGRATION

NET INTERNATIONAL MIGRATION

SOURCE: QUARTERLY DEMOGRAPHIC STATISTICS, STATISTICS CANADA DATA: TOTAL POPULATION AND COMPONENTS OF POPULATION CHANGE, QUARTERLY

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demographics

BC AND THE EVER-BLOWING WESTERLY

BC’s net interprovincial migration flow over the past 12 months has no parallel in the country, with Canadians being drawn to the province’s strong labour market.

Within Canada, domestic migration flows ebb and, well, flow largely based on relative economic performance: if the economy in one part of the country is performing well and providing opportunities for those engaged in the labour market, then it often follows that people from other parts of the country are willing to move to capitalize on those opportunities. This is certainly the case for British Columbia, especially when it comes to the swapping of migrants with its next door neighbour, Alberta: for the past 40-odd years, net migration to each respective province has moved in a distinctly counter-cyclical way to one another. More recently, however, BC has been attracting people from everywhere in Canada—not just its nearest neighbour. For example, while almost half of the 9,013 net domestic migrants who came to BC in Q1 2021 were from Alberta (4,383 of them), an additional 2,730 were from Ontario,

904 were fromManitoba, and 864 were from Saskatchewan. The western-centric migration flows we saw in Q1 were also not unique over the past year, as BC has attracted more than 30,000 net interprovincial migrants over the past four quarters. How dramatically large is that number? The second-highest net interprovincial migrant count over the past year was in Nova Scotia, though that province only attracted 6,000 net migrants (one-fifth of BC’s tally). On a per-capita basis, Alberta continues to feed BC’s labour market, with its ratio of 998 net migrants to BC per 1 million population representing the largest such ratio in the country. This cannot continue in perpetuity, but while it lasts, BC’s labour market—and the provincial economy—will continue to greatly benefit.

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demographics

ALBERTA FUELING BC’S POPULATION GROWTH

1,500

SASKATCHEWAN

1,000

NWT

ONTARIO

MANITOBA

PEI

500

ALBERTA

NUNAVUT

QUEBEC

NS NB

YUKON

-500

-1,000

-1,500

-2,000

-1,000

1,000

3,000

4,000

6,000

5,000

2,000

Q NET MIGRATION TOFROM BC

SIZE OF PROVINCIALTERRITORY POPULATON

SOURCE: QUARTERLY DEMOGRAPHIC STATISTICS, STATISTICS CANADA DATA: TOTAL POPULATION AND COMPONENTS OF POPULATION CHANGE, QUARTERLY

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demographics

A PERMANENT REBOUND IN PERMANENT (AND NON-PERMANENT) RESIDENTS?

While Canada has yet to throw open its borders to international migrants, the country’s elevated immigration targets signal its intentions—and the results are already being seen.

Much ado has been made over the federal government’s increased immigration targets, which—if achieved—would see more than 400,000 permanent residents welcomed to Canada in each of 2021, 2022, and 2023. To-date (through July), however, the 145,000 immigrants that have come to Canada this year only has us on pace for approximately 250,000 immigrants by year-end. A couple of comments on this are warranted. First, any difference that exists between targeted and realized immigration is sure to be compensated for in the following years via further enhanced targets.

Second, both permanent resident migration as well as non-permanent resident migration (those on study and work permits) have both rebounded significantly from last year’s lows here in BC. The latest monthly data for international students in BC, as one example, shows a 139% increase in June 2021 versus June 2020. We won’t be able to sustain these year-over- year increases over the longer-term, but we should expect permanently higher levels of international migration to our province for years to come.

THE STUDENTS ARE RETURNING TO BC (AND SO IS EVERYONE ELSE)

20k

year-over-year change 86% GROWTH year-over-year change 57% GROWTH

15k

year-over-year change 139% GROWTH

10k

year-over-year change 59% GROWTH

MARCH

JUNE

PERMANENT RESIDENTS

STUDY PERMIT

TEMPORARY FOREIGN WORKERS

WORK PERMIT

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: MONTHLY INTERNATIONAL IN-MIGRATION TO BRITISH COLUMBIA

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demographics

LEGENDS OF THE FALL As Canada re-opens its borders, expect international migration to really pick up— especially here in BC. ›

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housing

05. housing

Almost all housing markets across the country have been experiencing diminishing supply over the past year—even, in some cases, as sales counts rise.

EVALUATING THE SALES-INVENTORY CONTINUUM

In discussions and evaluations of our housing market, we operate almost as if housing demand (as measured by sales) and housing supply (as measured by inventory, or total listings) are mutually exclusive. In fact they are not mutually exclusive, either conceptually or mathematically. In simple terms and assuming all else being equal (a classic economist assumption), higher levels of sales counts are associated with lower inventory levels (because the sales draw inventory down), and vice versa. The lynchpin in the dynamic between housing supply and demand, then, is new listings activity: if sales are robust but new listing counts are even more so, then a market can certainly feature both rising sales counts and rising inventory. Alas, the recent scenario that has characterized our housing market here in Metro Vancouver,

and in many markets across the country, has been one of historically-high sales counts and completely depleted inventory. For the Vancouver Region as a whole (which combines the Greater Vancouver and Fraser Valley estate boards), there have been 72,360 MLS sales over the past 12 months (through August 2021)—the most in any 12-month period in our region’s history. The year-over-year change in sales counts in this region have begun to moderate in recent months, especially in the Fraser Valley, but inventory remains historically constrained: the 12,871 listings in August, for example, were the fewest in any August in the region’s history. For now, high sales activity does seem to be inhibiting available supply. Expect this dynamic to change (at the margin) through the fall, however, as rising new listings help to bring a modicum of balance to our market.

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housing

VANCOUVER REGION HOUSING INVENTORY EVAPORATING

80%

60%

40%

20%

GREATER VANCOUVER

-20%

-40%

FRASER VALLEY

-60%

-80%

-60%

-40%

-20%

20%

40%

60%

YEAROVERYEAR CHANGE IN SALES

DATA: YEAR-OVER-YEAR CHANGE IN TOTAL MLS LISTINGS AND SALES FOR ALL REAL ESTATE BOARDS IN CANADA; JULY 2021

SOURCE: CANADIAN REAL ESTATE ASSOCIATION

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housing

(RE)START YOUR ENGINES

Housing starts are up—way up in the case of the ownership market—as construction activity recovers from the depths of the early pandemic.

The Great Suppression—that is, the state of our suppressed economy in response to the pandemic—had differential impacts on the various sectors of our economy based largely on the degree of in-person human interaction required. This is why our population-serving businesses—think retail shops, hotels, restaurants and cafes, and hair salons, to name a few—were hit the hardest by the implementation of social-distancing restrictions. Other sectors, including office- based roles that could leverage technology remotely, have clearly been less impacted by the pandemic insofar as maintaining “business as usual” is concerned. In addition to the sectors listed above that were hit hardest by the pandemic, and very unfortunately for the sake of housing market balance here in Metro Vancouver, residential construction activity was greatly subdued generally and in some places halted.

The reasons were twofold: one, the logistics of coordinating the multitude of people and trades on building sites while adhering to social-distancing protocols were extremely challenging; and two, the uncertainty around Covid and what it would ultimately mean for our economy and housing market meant that some developers decided to hit pause before embarking on new projects. That is now in the past. While owned housing starts between January and July 2020 were 38% below their 2019 year-to-date level, 2021 has seen the number of starts in the first seven months of the year surge by 51%, up to 13,401. A similar pattern can be seen in the rental segment of the market, with purpose- built rental starts year-to-date in 2021 up by 33% from last year (to 3,968). With the need to expand housing supply in this region sitting atop of many lists pertaining to making housing more affordable, the rebound in construction activity is both necessary and a relief.

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housing

HOUSING CONSTRUCTION REBOUNDS IN 2021

15,000

13,401

from 2020 51%

10,000

8,863

from 2020 33%

5,000

3,968

2,980

RENTAL

OWNER

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION, SURVEY OF STARTS AND COMPLETIONS DATA: YEAR-TO-DATE STARTS (THROUGH JULY 2021) BY INTENDED MARKET, METRO VANCOUVER

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housing

Much ado has been made of the once-exorbitant cost of lumber and its impact on the cost of building. Like most things of this nature, the concern was overblown.

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housing

CONSTRUCTING A NEW COST NARRATIVE As we discussed in earlier sections of this report, our world has become more expensive over the past year, from home purchase prices, to gasoline, to health care. Conspicuously missing from this list is, of course, lumber, the price of which has been on a real roller- coaster ride, recently having peaked at four times its pre-pandemic value but now having given up virtually all of those gains. When the cost of lumber was ascending to new heights, the term “rising construction costs” was commonly used in place of “rising lumber costs”. For many, the distinction seemed

pedantic, but of course not all building types use wood products as intensively as others. This explains why in comparison to the 11.4% year-over-year increases that were realized in Canada’s construction cost index for detached homes in Q2 2021 the cost of high-rise buildings only rose by 3.9%, while industrial saw a 5.3% increase. These are important distinctions to make, for they fundamentally challenge the rising construction cost narrative that has pervaded many conversations of the past year.

THE MYTH OF EXPLODING CONSTRUCTION COSTS

20%

11.4%

10%

3.9% 5.3%

-10%

-20%

THE GREAT RECESSION

-30%

HIGHRISE

INDUSTRIAL

DETACHED

SOURCE: STATISTICS CANADA, BUILDING CONSTRUCTION PRICE INDEX DATA: YEAR-OVER-YEAR CHANGE IN CONSTRUCTION COST INDEX BY BUILDING TYPE, CANADA

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housing

LET’S TALK ABOUT THE 1.2%

Foreign buyers of residential real estate are once again in the sights of Canadian political parties. It’s a red herring.

Issues of housing costs and supply dominated conversations leading up to the recent federal election. And within this area of focus, multiple parties presented positions on foreign buyers and owners of residential real estate in Canada. For the Liberals, who have been returned to power with a minority government, they have indicated that they will ban foreign buyers for a period of two years. Regardless of both who is in power and how much power they have, there appears to be a strong appetite on the part of these two parties to effectively ban foreign property purchasers in Canada for the next couple of years.

To be sure, this is low-hanging political fruit, but its effect is likely to be minimal to nil. In Metro Vancouver (and other parts of BC) and in Greater Toronto there already exists a foreign buyer tax. The fact that a ban would eliminate the hundreds of millions of dollars the respective provincial governments collect in foreign buyer taxes notwithstanding, the data for Metro Vancouver show that only 1.2% of purchases are foreign buyers. A ban on these few-hundred purchasers will not significantly impact the market from an affordability and availability perspective.

CONTEXT FOR A FOREIGN BUYER BAN

4.5%

4.0%

3.5%

2020 total 837 FB PURCHASES

3.0%

2.5%

year-to-date 560 FB PURCHASES

2.0%

1.5%

1.2% 1.1%

1.0%

2019 total 765 FB PURCHASES

0.5%

0.0%

COUNT OF RESIDENTIAL PURCHASES

VALUE OF RESIDENTIAL PURCHASES

DATA: MONTHLY SHARE OF COUNT AND VOLUME OF RESIDENTIAL PROPERTY TRANSACTIONS WITH FOREIGN INVOLVEMENT, METRO VANCOUVER

SOURCE: BC GOVERNMENT PROPERTY TRANSFER TAX DATABASE

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housing

PANNING THE BAN The implementation of a foreign home buyer ban is not likely to have any material impacts here in Metro Vancouver (or anywhere, for that matter). ›

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policy

06. policy The current policy flavour of the day is one of unwinding Covid-era programs intended to aggressively promote expansion and growth, including shrinking monthly federal deficits and a reduction in Q uantitative Easing. That said, there are a couple of recently introduced policy changes that are worth sharing.

THE OSFI MAKES IT HARDER TO QUALIFY Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), raised the minimum qualifying rate for uninsured mortgages on June 1st, 2021. This means that effective that date, home buyers with at least a 20% down payment would need to qualify for their mortgage at their contract rate plus 2 percentage points or 5.25% (up from 4.79%), whichever is higher. This type of change is intended to reduce banking risk in the face of what could be rising interest rates, as it ensures that borrowers can afford to service their debt at higher interest rates than they are currently enjoying.

At the margin this makes it more restrictive for some buyers, reducing the amount they can borrow and pair with their downpayment and thus reducing the maximum purchase price, all else being equal. The overall impact of this change on the market was not directly perceptible, at least in the Vancouver Region: sales in June 2021 were in fact down for the 3rd straight month, though the 5,952 MLS sales were the most any June going back to 2017.

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