the rennie landscape - Q2 2019

Q2 2019

Dear Reader, Welcome to the second edition of the rennie landscape, a quarterly publication produced by rennie’s intelligence team tracking the various demographic and economic indicators directly and indirectly influencing our housing market here in Metro Vancouver. Following the successful launch of the first rennie landscape last quarter, this digital-only edition describes a continually-adjusting Metro Vancouver market as it moves along a new trajectory. Some contexts have improved over the past few months, including our local labour market and broader financial conditions, while the accumulation of “bad” debt by Canadians continues to be a concern. In this issue, we focus on six pillars of our market: demographic changes, the interest rate environment, the policy context, residential market features, credit and debt trends, and macroeconomic fundamentals. Within each of these pillars is a number of specific indicators we weigh in on each quarter as we track changes in them that might portend future real estate market evolutions. Our goal is for the landscape to become a dependable, strategic decision-making tool, whether you’re an individual buyer or seller, developer, builder, municipal planner, or other market stakeholder or industry partner. Should you have any questions, the rennie intelligence team is here to assist. We look forward to hearing from you. Enjoy.

Ryan Berlin SENIOR ECONOMIST intel@rennie.com

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contents

DEMOGRAPHICS

ECONOMY

CREDIT & DEBT

RATES

RESIDENTIAL

POLICY

POCKET GUIDE

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demographics

01. demographics

International migration fuelling BC's population expansion at the end of 2018; interprovincial migration a drag.

SLOWER POPULATION GROWTH ON ALL FRONTS IN BC

It continues to be all demographic systems go here in British Columbia, with the province surpassing 5.02 million residents at the end of Q4 2018. Beneath this headline number, though, are some additional data points worthy of contemplation. First, the province added just under 4,000 people in Q4—the fewest in any single quarter since Q4 2010, when BC actually shed 1,349 people (on a net basis). While it’s true that the final three months of each year are typically associated with smaller increments of population growth, BC still averaged growth of just under 7,500 people in fourth quarters between 2010 and 2018. So, what’s going on? For starters, natural increase added only 727 people in Q4 2018 through a combination of fewer births (due to our below-replacement

fertility rate) and more deaths (due to the continued aging of a greater number of people into older, higher-mortality, age groups). Additionally, net interprovincial migration was negative for the second consecutive quarter (a loss of 316 people) after 21 straight quarters of net additions (more on this in the next section). Net international migration was also more muted, with BC having added only 3,569 people from other countries (down 85% from Q3 and 40% from Q4 2017). What does this all mean? Not much on its own, but should this trend of slower growth continue, impacts could be felt within the provincial workforce and, by extension, this could have implications for the ability of our economy to grow. For now, however, it’s something to keep an eye on.

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demographics

THE EBBS AND FLOWS IN THE WAY BC GROWS ›

9,000

8,347

8,000

7,000

5,909

6,000

5,000

3,980

4,000

3,569

3,000

2,000

1,256

1,182

1,000

727

-316

-1,000

POPULATION CHANGE

NATURAL INCREASE

NET INTERPROVINCIAL MIGRATION

NET INTL MIGRATION

Q4 2017

Q4 2018

SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA

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demographics

THE PLUSES AND MINUSES OF BC’S INTERPROVINCIAL MIGRATION FLOWS A second straight quarter of population losses to other provinces is in the books—a trend worth watching.

Migration flows between provinces and territories are inherently cyclical. With BC as the focal point, there is considerable ebb and flow in the exchange of people with our next door neighbour, Alberta, largely driven by the relative economic performance of the two provinces. For 17 straight quarters leading up to Q3 2018, BC gained more people than it lost from Alberta due to steady employment growth (and a low and declining unemployment rate) in the former and a depressed energy sector (and growing unemployment) in the latter. More recently the tide has turned, with BC losing 871 people to Alberta in Q3 2018 and an additional 477 in Q4, influenced by continued improvements in labour market conditions in both Calgary and Edmonton.

While there are no indications oil prices are poised for a permanent rebound, the employment landscape will likely continue to improve, at the margins, in Alberta. This means that at worst BC may continue to experience some resident leakage to our neighbour or, at best, not benefit from huge inflows in the near-term. Meanwhile, Manitoba and Saskatchewan continue to provide much-needed labour force participants to BC (combined, 285 people on a net basis came to BC in Q4 from those two provinces), along with Newfoundland and New Brunswick (271 combined). Looking ahead, these recent interprovincial trends (lower levels) are likely to continue to prevail as economies outside of BC grow and labour markets tighten—barring any unforeseen, landscape-shifting economic events, that is.

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demographics

BC POPULATION LOSSES TO ALBERTA AND ONTARIO CONTINUE ›

800

600

400

239

200

148

123

-32

-146 -138 -111

-200

-400

-477

-600

PEI

NWT/NVT

PREV Q AVG

Q4 2018

SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA

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demographics

THREE COMMUNITIES PUNCHING ABOVE THEIR WEIGHT

Over the past half-decade, Metro Vancouver has grown by between 35-48K people each year, accounting for 55% of BC’s growth over the period. The most recent estimates show that Surrey and Vancouver themselves accounted for 55% of regional growth between 2017-18, despite accounting for only 46% of the existing population. This was entirely due to Surrey alone having accounted for almost 2 out of every 5 additional regional residents (38% of growth) between 2017 and 2018, while accounting for only 1 out of every 5 residents currently living in the region (21% of total population). Put slightly differently, Vancouver has been punching below its weight.

Richmond and the Township of Langley also accounted for a combined 15% of regional growth while accommodating only 13% of current residents, meaning these three communities (Richmond, Langley, and Surrey) accounted for more than half of the region’s growth but only roughly one-third of its existing population. Expect this trend to continue. While local land use policy unequivocally influences the pace and form that residential growth takes, the availability of land and associated lower cost of ownership (and rental) continues to play a significant role in the spatial distribution of Metro Vancouver’s growth.

THE CHANGING DEMOGRAPHIC LANDSCAPE IN METRO VANCOUVER ›

POPULATION ADDITIONS

POPULATION

SURREY

14,865

569,065

VANCOUVER

6,653

672,963

RICHMOND

3,473

216,300

BURNABY

2,740

248,476

LANGLEY TOWNSHIP

2,259

127,290

POPULATION

COQUITLAM

1,681

149,490

MAPLE RIDGE

1,354

88,626

DELTA

1,276

109,484

NEW WESTMINSTER

1,245

76,799

ALL OTHER

3,916

395,733

SOURCE: MUNICIPAL ESTIMATES, BC STATS

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demographics

GOING WHERE THE HOUSING IS Surrey will continue to add more people than any other municipality in Metro Vancouver in the coming years. ›

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economy

02. economy The cresting and subsequent adjustment in Metro Vancouver home prices has been accompanied by a tempering of retail spending.

NOT MUCH WIND IN RETAIL’S SAILS

Retail sales are a dependable barometer of economic health, reflecting a medley of changing job prospects, incomes and expectations consumers have about their financial future. Needless to say, rising retail sales figures are generally a good sign for the economy; conversely, falling figures suggest something might be amiss. What, then, to make of Metro Vancouver’s recent retail trends? Since peaking at $1,596 in Q4 2017, monthly per capita retail spending in the region has sagged, having plateaued in the neighbourhood of $1,500 since Q1 2018. Since this peak at the end of 2017, when per capita retail spending in Metro Vancouver was 11% higher than in Greater Toronto and 14% higher than in Greater Montreal, the most recent data show it is now 4% above Toronto and 3% below Montreal. More important than the relative ranking among metros, however, is how recent figures

compare with historical ones here in this region, and why we may be seeing the changes we’re seeing. To answer the first question: since the beginning of 2018 the month-over- month average change in per capita retail sales in Metro Vancouver has been -0.4%. This is a clear downshift in consumer spending from the 0.6% average monthly growth experienced in the 18 months leading up to the peak. The answer to the second—the why—is likely tied to housing market performance (which makes owners feel richer or poorer, depending on the directional change in prices). In the same period since retail sales came off their peak, the benchmark home price in Metro Vancouver increased by an average of 0.2% per month; in the 18 months leading up to the retail peak, it increased an average of 1.4% each month. As we see home prices remaining stable in the near-term, expect retail sales to continue to middle.

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economy

A RETAIL SPENDING HANGOVER IN METRO VANCOUVER ›

$1,700

$1,600

$1,552 $1,446 $1,501

$1,500

$1,400

$1,300

$1,200

$1,100

$1,000

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 2019

MONTREAL

TORONTO

VANCOUVER

SOURCE: RETAIL TRADE SURVEY & LABOUR FORCE SURVEY, STATISTICS CANADA DATA: MONTHLY RETAIL SPENDING PER RESIDENT AGED 15+

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economy

METRO VANCOUVER’S JOB GROWTH SECOND TO NONE A strong labour market got even stronger in Q 2 2019, with year-over-year employment growth in Metro Vancouver ticking up by more than twice the national average.

The latest batch of labour market data that flowed in from Statistics Canada for May 2019 was overwhelmingly positive, with the national unemployment rate dipping to an all-time low of 5.6% following annual job growth of 2.2%. Against this strong national backdrop, Metro Vancouver really flexed its economic muscles: compared to one year ago, employment in this region grew by a whopping 5.1%, the fastest growth registered in 15 months. This was 2.4 times the national rate, and faster than Calgary (4.1%), Toronto (3.7%), and Edmonton (3.6%). It was also two-thirds faster than Metro Vancouver’s previous five- year average of 3.1%. This continues a trend of accelerating year-over-year employment growth that now spans four months.

Why does this matter in a real estate context? Employment is a key indicator of stability, as it serves as a proxy for the ability of a region’s residents to afford to buy, rent, or continue to live in a home. In the context of Metro Vancouver’s tight labour market, this can rightly also be considered remarkable growth, as the continued expansion of the region’s workforce has largely meant businesses have had to attract workers from outside of this market and coax locals not in the labour force to start working. Looking ahead, all signs point to employment growing in Metro Vancouver, though the current pace may prove difficult to maintain given the lack of slack in the region's labour market.

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economy

VANCOUVER’S EMPLOYMENT EXPANSION THE ENVY OF THE NATION ›

6.0%

5.1%

5.0%

4.1%

4.0%

3.7%

3.6%

3.1%

3.0%

2.2%

2.1%

2.0%

1.7%

1.0%

0.0%

TORONTO

CALGARY

EDMONTON

VANCOUVER

Q Q ANNUAL AVERAGE

Q2 2018 - Q2 2019

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED

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economy

METRO VANCOUVER’S FULL-TIME JOBS BOOM The past year’s job surge has been fuelled by growth in full-time positions; we will all benefit from this trend continuing.

Job growth, on the surface, would appear to be an unambiguously positive feature of any market, given the improvements in a region’s overall quality of life that are associated with it. This is why there is much to be pleased about in the latest employment figures for Canada, British Columbia, and Metro Vancouver. One question often not asked, however, is: what type of jobs are fuelling overall employment growth? In the case of Metro Vancouver, and indeed, in most

markets across Canada, full-time positions accounted for most (or in some cases all) of the growth over the past year. Indeed, in Metro Vancouver, 57% of total job growth was in full-time work, with the 40,700 full-time positions added being 142% higher than over the preceding year. Because full-time jobs are associated with both higher wages (often including benefits) and security of tenure, recent trends bode well for near-term economic and housing market stability.

VANCOUVER JOB GROWTH: FULL-TIME, FULL SPEED AHEAD ›

40.70

30.90

25.68

16.80

5.14

0.50

PREVIOUS YEAR AVG

PREVIOUS YEAR

PAST YEAR

CHANGE IN JOBS ’ S :

PART TIME

FULL TIME

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

DATA: 3-MONTH MOVING AVERAGE, UNADJUSTED FOR SEASONALITY

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economy

A JOURNEY TOWARDS THE THEORETICAL MINIMUM UNEMPLOYMENT RATE Continued job growth amidst a slowly-expanding labour force pushes regional unemployment rates to near all-time lows.

A market with a low unemployment rate has a variety of related features: low credit default rates, including on mortgages; rising wages; and a reason for skilled (and other) workers to migrate into that market, thereby bolstering its productive capacity. This is all true for British Columbia and (largely) for its metro regions, including Metro Vancouver, whose unemployment rate dipped to a rather trim 4.2% in May 2019. This isn’t far off of the historical low experienced within this region (of 3.5% in February 2007), and similarly isn’t far from what could be considered the theoretical

minimum unemployment rate for the region. This is because unemployment can never be zero; there will always be some degree of structural unemployment (a macro-based mismatch between worker skill sets and employer needs as economies evolve) and frictional unemployment (people changing jobs). While creating some challenges for employers (through a relative scarcity of labour and rising wages), the region’s economy and housing market benefit overall from this low unemployment rate.

AN ALREADY TIGHT LABOUR MARKET GETS EVEN TIGHTER

›

10.0%

8.0%

6.8% 7.0% 6.3%

6.0%

4.2%

4.0%

2.0%

0.0%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 2019

UNEMPLOYMENT RATE:

EDMONTON CALGARY

TORONTO

VANCOUVER

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED

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economy

Persistently low unemployment and robust job growth have translated to a recent surge in wages in British Columbia.

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economy

TURNING THE PAGE ON THE SLOWLY-GROWING WAGE?

What of wages in British Columbia, where the unemployment rate fell by 8% in the past year, to 4.5% in May 2019 (only marginally higher than the all-time low of 4.1% recorded in January 2008), and where employment has risen faster in the past year than in any other province (at 3.6%)? You guessed it: wages have risen, both faster than the previous five-year average rate of increase, and faster than most of the rest of the country. Compared to Canada’s 2.6% increase, median weekly wages in BC rose by 4.0%

in the four quarters leading up to Q2 2019. They have also increased significantly faster than in Ontario (2.8%) and Alberta (0.3%), and compared to BC’s previous five-year average (2.3%). Perhaps some of this is catch-up: at $900, the median weekly wage in BC is still below that of Ontario ($904) and Alberta ($1,038). Should current tight labour market conditions persist, chances are BC will make up more ground in the coming months.

LABOUR MARKET CONDITIONS AND WAGE GROWTH FRUITION

›

4.5%

4.0%

3.5%

3.0%

2.9%

3.0%

2.8%

2.7%

2.6%

2.5%

2.3%

2.0%

1.5%

1.0%

0.5%

0.3%

0.0%

CANADA

ONTARIO

ALBERTA

BRITISH COLUMBIA

MED.WEEKLY WAGE FULL TIME

$888

$904

$1,038

$900

Q Q ANNUAL AVERAGE

Q2 2018 - Q2 2019

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

HIRE EXPECTATIONS FOR CANADIAN BUSINESSES

It is true that the best laid plans of mice and men often go awry. Regardless, surely a scenario wherein many more employers plan to expand their workforces than shrink them it is better than the inverse. Assuming this is true, there was good news reported as part of the Bank of Canada’s Q1 2019 Business Outlook Survey, which indicated that 49% of businesses polled expected to expand their employed workforce in the next year, compared to only 14% that expected to employ fewer people over the coming 12 months.

Overall, this expectation reflects confidence in Canada’s economic prospects, but it does come with a caveat: one year ago (Q1 2018), 54% of businesses expected to grow their workforce, compared to only 9% that thought they would do the opposite. While the current difference in the “positive” business outlook versus the “negative” one of 35% is down from both last year (45%) and the year before (38%), it is higher than each of the preceding two years and on its own shows that despite slowing overall economic growth, business confidence remains elevated.

HIRING ON ALL CYLINDERS: BUSINESSES BULLISH ON GROWTH ›

60%

54%

52%

50%

49%

45%

43%

40%

38%

35%

30%

26%

20%

17%

20%

14%

10%

EXPECTED CHANGE IN EMPLOYMENT LEVELS IN COMING YEAR:

HIGHER

LOWER

BALANCE HIGHER MINUS LOWER

SOURCE: BUSINESS OUTLOOK SURVEY, BANK OF CANADA DATA: SHARE OF BUSINESSES POLLED, CANADA

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economy

HELP (STILL) NEEDED Canada’s business community is bullish on future hiring. This bodes well for continued economic growth. ›

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credit and debt

03. credit & debt Canadians’ debt payments continue to grow, but is there a silver lining?

DWINDLING INTEREST IN CANADIAN DEBT PAYMENTS

It’s no secret that in aggregate, Canadians are acquiring evermore debt through a variety of conduits (mortgages, lines of credit, credit cards, and car loans, to name the biggies). This has led to annual debt payments reaching record levels in Canada in Q1 2019, at just under $202 billion. This is up 8% from one year earlier, amd 51% compared to a decade ago—certainly warranting an eyebrow-raise, at the very least. However, we'd all benefit from showing more interest in the topics of debt and debt payments. First, in a country that is growing in population, it is reasonable—indeed, expected—that aggregate debt and debt payments would rise over time. In Canada, the national population expanded by 1.4% over the most recent year, and by 12% over the most recent decade. These rates are well

below the growth in debt payments, but they do help explain some of the increase. Second, the proportion of debt payments going to the interest component of the amount owing (versus loan principal) has, generally-speaking, been declining over the past 30 years: from a high of 91% of payments going to interest in Q2 1991, the share has fallen to 50% in Q1 2019. This, of course, has been on the back of declining interest rates, with the benefit being that with each debt payment Canadians have been drawing down outstanding loan balances increasingly faster for a given amount of debt. Rate increases in the past couple of years have pushed the proportion of debt payments going to interest upwards from a low of 46% in Q3 2016, but with rates on hold or falling, expect this trend to level out for at least the next year. This will benefit Canadian households.

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credit and debt

DEBT GROWING, BUT MORE OF EACH DEBT PAYMENT GOING TO PRINCIPAL ›

$250

100%

90%

$200

80%

70%

$150

60%

50%

$100

40%

30%

$50

20%

10%

INTEREST SHARE OF DEBT PAYMENTS

TOTAL DEBT PAYMENTS

SOURCE: NATIONAL BALANCE SHEET ACCOUNTS, STATISTICS CANADA & BANK OF CANADA DATA: SEASONALLY-ADJUSTED AT ANNUAL RATES, HOUSEHOLDS IN CANADA

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credit and debt

CANADIANS’ MORTGAGE DEBT ACCUMULATION CONTINUES TO SLOW Growth in total and average outstanding mortgage debt in Canada has slowed markedly in the past year; that’s probably a good thing.

In addition to aggregate debt increasing in Canada, outstanding mortgage debt has been growing, albeit at a slowing pace; we have recently-increasing interest rates, the mortgage stress test, and home purchase trepidation, among other things, to thank for that. In Q4 2018, total outstanding mortgage debt, at $1.54 trillion, was up only 1.4% from the previous year, compared to consecutive increases of 6.2%, 6.0%, and 6.3% in the preceding three years. This change has in part been driven by a slowing rate of increase in the number of active mortgages: the 1.9% growth over the past year, and 1.6% in the previous year, were both significantly below the 3.9% and 2.8% increases experienced between 2014-15 and 2015-16, respectively. Additionally, the average outstanding balance per mortgage has been rising more slowly, at 3.1% annually most recently, compared

to 4.1%, 4.4%, and 3.9% over each of the previous three years. Running counter to these trends is rising borrowing costs, which became a thing starting in the middle of 2017 and prevailed through the end of 2018, have increased more rapidly more recently, at 4.4% over the past year. This compared to an average of 2.4% over the prior three years, with the monthly average mortgage payment made by Canadians equalling $1,289 by the end of 2018. For now, rising wages have helped to keep rising mortgage payments manageable. The risk going forward is that wage growth moderates and rates begin to rise again after falling for the past 8 months. While this is unlikely for now, it is a trend that will continue to be monitored by the Bank of Canada.

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credit and debt

CANADA’S MORTGAGE DEBT STABILIZING ›

AVERAGE OUTSTANDING BALANCE PER MORTGAGE

OUTSTANDING MORTGAGE DEBT MILLIONS

NUMBER OF ACTIVE MORTGAGES S

AVERAGE SCHEDULED PAYMENTCONSUMER

$1,269,152

5,474

$180,100

$1,149

2014 Q4

$1,347,343

5,690

$187,500

$1,168

2015 Q4

$1,428,454

5,850

$195,800

$1,196

2016 Q4

$1,518,597

5,941

$203,350

$1,235

2017 Q4

$1,540,424

6,053

$209,570

$1,289

2018 Q4

6.2%

3.9%

4.1%

1.7%

2014-15 Q4

6.0%

2.8%

4.4%

2.4%

2015-16 Q4

6.3%

1.6%

3.9%

3.2%

2016-17 Q4

1.4%

1.9%

3.1%

4.4%

2017-18 Q4

SOURCE: MORTGAGE & CONSUMER CREDIT TRENDS, CANADA MORTGAGE & HOUSING CORPORATION

rennie.com

credit and debt

CAPTIVE TO EASY CREDIT There are strategic ways for Canadians to financially leverage themselves. Adding credit card, line of credit, and car loan liabilities is the wrong way to do it.

To put it simply, there is good debt and there is bad debt. Not all debt can easily be categorized into these two buckets, and the financial circumstances of a borrower factors in significantly when determining whether a particular “investment” is prudent or not. With those caveats stated, it is concerning that Canadians continue to consume non- mortgage debt at an increasing rate. In the year ending in Q4 2018, total outstanding credit card debt was up 5.2%, higher than the 4.7% average growth of the preceding five years. The rate of increase in home equity

lines of credit balances also rose faster (2.5% in the most recent year) than the historical average, as did those of good ol’ lines of credit (a 2.5% increase). While auto loan balances rose at a slowing pace, they still rose faster than other types of debt over the past year, at 6.0%. From a financial perspective, this is not a viable path forward for Canadians over the long-term, and we expect these trends to moderate somewhat in the wake of a slowdown in Canadian housing markets.

PERHAPS DEBIT IS OWED MORE CREDIT ›

8.0%

7.0%

6.9%

6.0%

5.2%

5.0%

4.7%

4.0%

3.0%

2.5%

2.0%

1.1%

1.0%

0.0%

-0.2%

-1.0%

ALL

MORTGAGE

HELOC $206.9

CREDIT CARD

AUTO $77.8

LOC $60.0

OUTSTANDING BALANCE BILLIONS

$1,911.6

$1,268.5

$101.1

Q Q ANNUAL AVERAGE

Q Q

SOURCE: MORTGAGE & CONSUMER CREDIT TRENDS, CANADA MORTGAGE & HOUSING CORPORATION

DATA: CANADA

rennie.com

credit and debt

UNEMPLOYMENT AND CREDIT DELINQUENCY: NATURAL BEDFELLOWS In Canada, declining unemployment has helped to stabilize credit defaults—just one reason why it’s important to keep our jobless rate low.

Before considering changes in the trajectory of credit delinquencies it must be noted that in Canada, delinquency rates tend to be very low. For home equity lines of credit and regular lines of credit, delinquency rates are below 1%; for credit cards and auto loans, they are below 2%. Additionally, the prevailing rate of unemployment—a proxy for whether borrowers are earning a steady income or not (and hence have some ability to repay their debts or not)—tends to move pro-cyclically with delinquency rates.

This is an important point, because in Canada the unemployment rate has been trending downwards for much of the past decade, thereby keeping delinquency rates in check. At the end of 2018, however, when the Canadian unemployment rate ticked up ever so slightly from 5.8% to 5.9%, so too did auto loan and credit card delinquency rates. Though they were small changes, it is a reminder of how important robust economic fundamentals are in the context of servicing our debts.

AS ONE GOES, SO GOES THE OTHER: UNEMPLOYMENT AND DELINQUENCY RATES

›

2.5%

16.0%

14.0%

2.0%

1.51% 1.76%

12.0%

10.0%

1.5%

8.0%

1.0%

5.9%

6.0%

0.61%

4.0%

0.5%

2.0%

0.15%

0.0%

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

Q2 Q3 Q4 Q1

2013

2014

2015

2016

2017

2018

HELOC

CREDIT CARD

AUTO

LOC

CANADIAN UNEMPLOYMENT RATE

SOURCE: MORTGAGE & CONSUMER CREDIT TRENDS, CANADA MORTGAGE & HOUSING CORPORATION; LABOUR FORCE SURVEY, STATISTICS CANADA

rennie.com

credit and debt

FALLING HOME PRICES, BUT THAT’S NO DEFAULT OF OURS

As with other types of debt, mortgage arrears rates (those mortgages that are three or more months in arrears as a share of all outstanding mortgages) move cyclically with the unemployment rate. Do you have a job? Are you earning an income? Then chances are you are paying your mortgage. That’s the general rule of thumb, and this was evidenced by the recent uptick in BC’s unemployment rate early in 2019 and the knock-on effect it had on the arrears rate.

Specifically, while the provincial unemployment rate rose from 4.3% to 4.5% by the end of Q1, BC’s mortgage arrears rate rose from 0.14% to 0.15%. These are small changes to be sure, and provincial mortgage arrears rates remain historically low, but maintaining a dynamic economy nationally, provincially, and more locally is a key component of ensuring our housing market is sustainable moving forward.

FAVOURABLE LABOUR MARKET CONDITIONS KEEP MORTGAGE ARREARS IN CHECK ›

0.60%

0.49%

0.50%

4.5%

0.40%

0.30%

0.25%

0.20%

0.15%

0.10%

0.00%

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

Q2 Q3 Q4 Q1 Q1

2014

2015

2016

2017

2018

2019

CANADA ONTARIO ALBERTA BRITISH COLUMBIA BC UNEMPLOYMENT RATE

SOURCE: CANADIAN BANKERS’ ASSOCIATION & LABOUR FORCE SURVEY, STATISTICS CANADA

rennie.com

credit and debt

LOW AND STABLE BC’s near-historically-low unemployment rate continues to support a historically-low mortgage arrears rate. ›

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rates

04. rates

A downward trajectory in interest rates has provided some relief for borrowers, and will continue to do so through 2019.

DIAMONDS ARE FOREVER; SO, TOO, MAY BE LOW BOND YIELDS

What a difference a few months make. While the latter half of 2017 and most of 2018 were dominated by prognostications about how many interest rate increases we’d see in 2019 and beyond, the predictions have been flipped on their collective heads. The question in the near-term is no longer “how much higher will rates go?”, but rather “how much lower will bond yields fall?” and “will central banks soon beginning cutting rates again?”. Before anyone gets too excited at the prospect of cheaper money for longer, we are behooved to note that interest rates move lower when it is expected that economic growth will continue to slow. Indeed, at the root of the recent halting of central bank rate-increasing regimes and the 7-month decline in bond yields are a number of factors, including trade tensions and geopolitical uncertainty,

that are conspiring to drag global economic growth downwards. For now, global GDP continues to expand, as it does in Canada and closer to home here in British Columbia. For employed borrowers, then, lower interest rates mean less financial strain. More specifically, the Bank of Canada (BOC) continues to maintain its overnight target rate at 1.75%, as it has since October 2018, while five-year government of Canada (GOC) bond yields have declined by 40% since October. This in turn has pulled CMHC’s 5-year conventional mortgage rate down 6% since January alone; some chartered banks in Canada are even offering 5-year fixed-rate mortgages in the neighbourhood of 2.75%— a rate not seen in two years. In a world characterized by growth that will be lower for longer, expect rates to follow suit, even if there are a few burbles along the way.

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rates

INTEREST RATES DIVE, BORROWERS HIGH-FIVE

›

5.00%

4.50%

4.30

4.00%

3.50%

3.00%

2.50%

1.75 1.46 2.03

2.00%

1.50%

1.00%

0.50%

0.00%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 2019

BOC OVERNIGHT TARGET RATE YR GOC BENCHMARK BOND YIELD

YR CONVENTIONAL MORTGAGE

CANADIAN CPI INFLATION

SOURCE: BANK OF CANADA & STATISTICS CANADA

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rates

RECESSION CONCESSION? BOND YIELDS CONVERGE Good news for borrowers: bond yields have fallen to levels that preceded the first of five Bank of Canada rate increases in 2017. More concerning: the gap between short- and long-term yields is virtually non-existent.

The inverted yield curve is an oft-referenced, but not well understood, a phenomenon wherein short-term interest rates (for example, those associated with 2-year Canadian government bonds) rise above longer-term ones (say, 10-year bonds). When this happens, it means that it costs more to borrow today then it does tomorrow, a situation usually associated with rising central bank rates and the end of the business cycle. In Canada, 3 of the past 4 inverted yield curves (as measured by the spread between 2- and 10-year government bond yields) since the early-1980s have preceded a nation-wide recession. Why does this matter now? Quite simply, because the spread between 2- and 10- year bond yields fell to a miniscule 0.04% in May. In fact, the spread between 2-year

yields and those of 3-, 5-, and 7-year bonds has already turned negative. The good news for borrowers is that yields are now much lower than they have been in the recent past, having fallen back to their late-2017 levels. Because this directly impacts fixed-rate mortgage rates, it will ease some of the burden of monthly mortgage payments (for those renewing) and will make it slightly easier to qualify for a new mortgage (for purchasers). convergence, as an inverted yield curve does not necessarily imply a recession is coming. However, with slowing growth and trade tensions abounding, Canada may in fact be walking an economic tightrope over the next couple of years. In any event, no panic is in order at the moment because of the bond yield

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rates

THE LOOMING INVERSION OF THE YIELD CURVE

›

3.00%

2.50%

2.00%

1.50% 1.53% 1.57% 1.46% 1.49%

1.50%

1.00%

0.50%

0.04%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 2019 0.00%

GOVERNMENT OF CANADA BENCHMARK BOND YIELDS:

YEAR YEAR

YEAR

YEAR MINUS YEAR SPREAD

SOURCE: STATISTICS CANADA

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rates

Consumer prices continue to exhibit robust year-over-year growth in Canada’s major metros, with Vancouver leading the way.

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rates

CONSUMER PRICE CHANGES: HIGHER HERE, BUT SLOWING One of the key variables the Bank of Canada tracks closely as it nudges interest rates

Compared to the fall of 2018, the national inflation rate has been slowing; here in Metro Vancouver, it has been too, though it remains elevated relative to our metro peers. The latest data show a 2.5% rate of inflation in April 2019, down from 3.2% one year ago, but still north of the sacred 2%-threshold. This is squarely on the back of increasing housing costs and gas prices. Keep a close eye on this figure moving forward, as it will reveal a lot about where short-term interest rates are likely to move.

upwards, downwards, or kicks the can down the road until the next time it meets—indeed, one of its mandates—is consumer price inflation and, more specifically, controlling the rate at which prices change. The target for the Bank is a 2% increase in year-over-year prices, including a one percentage-point buffer on either side (with the acceptable inflation range being 1-3%).

A LEADING INTEREST RATE INDICATOR ABATES

›

3.5%

3.2%

3.0%

2.5%

2.4%

2.5%

2.2%

2.1%

1.8%

2.0%

1.5%

1.0%

0.5%

0.0%

TORONTO

CALGARY

EDMONTON

VANCOUVER

Q Q ANNUAL AVERAGE

Q Q

SOURCE: STATISTICS CANADA

DATA: CHANGE IN CONSUMER PRICE INDEX

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rates

LOWER RATES STIMULATE ECONOMIC ACTIVITY

For most people, it’s easy to comprehend that interest rates are falling (and to see by how much), but it’s more challenging to understand what it means for their monthly debt repayments. To help with this, we’ve used CMHC's benchmark 5-year conventional mortgage rate, assumed a 30% gross-debt-service ratio and calculated what the monthly cost would be to service $100K worth of debt (including both principal and interest over a 25-year amortization period). Not surprisingly, the pattern in monthly charges mimics that of the interest rate, with payments having risen over a five-year period,

but having declined compared to one year and one quarter ago. At $545, the current monthly payment associated with $100K of debt is $12 lower than in Q1 2019 and $2 below that of Q2 2018. In comparison, the monthly charge on this representative amount owing is still $16 higher than five years ago, when short- and long-term rates were at historic lows. To the extent that the most recent changes in borrowing costs haven’t been capitalized into asset (home) prices—which they likely have not—this is a boon for borrowers, and will help, at the margin, to stimulate economic growth in other sectors.

THE COST OF SERVICING $100K IN DEBT JUST WENT DOWN ›

$560

$557

$550

$545

$547

$540

-$12

$529

$530

-$2

$520

+$16

$510

ASSUMPTIONS:

YEAR AMORTIZATION CMHC CONVENTIONAL YEAR RATE % GDS

SOURCE: RENNIE DATA: MONTHLY

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rates

LOOSENING THEIR GRIP Interest rates dip, yielding tangible benefits to first-time home buyers and existing owners that are up for mortgage renewal. ›

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residential

05. residential

Vancouver continues to trend below last year’s pace in contrast to modest construction increases in some Canadian metro markets.

WITH DEMAND TEMPORARILY STAGNATING, A SLOWDOWN IN STARTS

While a number of macro factors influence all of Canada’s regional housing markets—think interest rates, national immigration trends, and mortgage rules, to name a few—Canada’s regional housing markets are, well, distinctly regional. If they weren’t, supply, demand, and prices would all move in a synchronized manner, which they don’t. Local demographic trends, land use policies, geographic constraints, and economic fundamentals all play a role in differentiating our housing markets coast to coast. It is therefore unsurprising to note that the pattern of new apartment construction has differed in Metro Vancouver compared to other large metros. Most obviously, cumulative apartment starts in Metro Vancouver in the four quarters ending in Q1 2019 are down 20% versus the same period one year ago. In contrast, each of Toronto, Calgary, and Edmonton saw apartment starts

increase over the same period by 12%, 8%, and 7%, respectively. It goes without saying that Calgary and Edmonton are in the process of digging themselves out of an economic rut, so an increase in construction activity is to be expected (note, however, that while the combined populations of the Calgary Region and Greater Edmonton is roughly the same as Metro Vancouver’s, their collective apartment starts over the past year were still 55% below those of Metro Vancouver). Toronto is perhaps a better point of comparison, as its housing market has faced similar headwinds to Vancouver’s. Having said that, Toronto’s market seems to be normalizing faster than Vancouver’s, and until demand more obviously re-emerges from the sidelines, there may be additional quarters ahead of relatively modest new apartment construction.

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residential

METRO VANCOUVER’S PACE OF APARTMENT CONSTRUCTION HAS SLOWED

›

30,000

26,098

25,000

23,315

20,000

18,921

15,134

15,000

10,000

5,000

4,334

4,016

2,490

2,323

TORONTO

CALGARY

EDMONTON

VANCOUVER

12%

20%

HOUSING STARTS INCLUSIVE:

Q Q

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION

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residential

ADDING MUCH-NEEDED RENTAL SUPPLY

Recently, Metro Vancouver has been an outlier among its peers in its high proportion of new housing that is being constructed as rental. This is good.

When compared to Toronto, Calgary, and Edmonton, Metro Vancouver does share a few common traits—like, none of us have won a Stanley Cup in the past 30 years, and… Maybe there’s more, but each of these four housing markets are unique in their own right, growing at different rates and in different ways, all against local economic backdrops that create a unique set of housing conditions and needs. It is therefore not surprising that Metro Vancouver has stood alone in its share of housing starts that are destined for the purpose-built rental market, most recently at 26% (as a four-quarter moving average); this compares to only 9.2% for Edmonton, 7.3% for Toronto, and 6.7% for Calgary. Additionally, Metro Vancouver’s share

of starts in rental has been increasing over the past two years, taking it above the past five-year average share of 20%. It is easy to argue that these rental homes are greatly needed. With a purpose-built rental stock that has shrunk by 7% since the early- 1990s as the regional population has grown by 60%, and with a regional unemployment rate currently at 4.2%—meaning growth in the local labour force is being driven by in- migrants, the majority of whom rent— Metro Vancouver’s rental stock of housing is in some senses facilitating economic and population growth. The region has a long way to go to bring its stock of purpose-built rental housing to an adequate level, but this trend is encouraging.

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residential

NEW RENTAL CONSTRUCTION IN METRO VANCOUVER ON THE UPSWING ›

35%

30%

26%

25%

20%

15%

10%

6.7% 7.3% 9.2%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 2019 0%

EDMONTON CALGARY

TORONTO

VANCOUVER VAN. YR QUARTERLY AVG

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION

DATA: HOUSING STARTS BY INTENDED MARKET

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residential

The consistency in Metro Vancouver’s demolition rate shouldn’t mask its importance when considering if we’re building enough new homes to satisfy demand.

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residential

DEMOLITIONS: THE FORGOTTEN VARIABLE IN THE NEW HOUSING EQUATION

Often missing in conversations about new housing construction is the impact that demolition activity has on the net number of new homes that will ultimately be available for occupancy. The best example of this is in the City of Vancouver, where there were 5,885 single detached starts between 2011 and 2016, when the Census indicated the change in the City’s occupied detached stock was a net loss of 6,200 homes. Demolitions equate to approximately 15% of starts in a given year in Metro Vancouver, with this proportion remaining relatively

stable over the past decade (save for a blip during the Financial Crisis, when starts plummeted).

In a region such as this one, constrained as it is by water, mountains, the Agricultural Land Reserve, industrial land, the US border, and existing urban development, acknowledging the headwind that is demolition activity when evaluating new construction trends is paramount, particularly as we strive to ensure we’re building enough homes to accommodate our growing and changing population.

THE DEMOLITION ADMISSION: THE TEMPERING OF REAL GROWTH ›

60%

50%

25,000

40%

15,000

30%

20%

5,000

15%

10%

-10%

-5000

HOUSING STARTS

DEMOLITIONS

DEMOLITION RATE

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION & METRO VANCOUVER

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residential

ABSORBING THE SLOWDOWN IN DEMAND

Within the pre-sale segment of Metro Vancouver’s market in particular, much ado has been made recently about both realized and potential completed and unabsorbed condo inventory. To put a finer point on it, with projects not selling-out the way they had been during the two years leading up to mid-2017, rising inventory levels could add to the already-elevated stock of available resale homes—the concern being that this could exert additional downward pressure on prices and, by extension, threaten the financial viability of new projects. Indeed, the regional completed and unabsorbed condo inventory spiked in July 2018, averaging 680 homes monthly

since then, on the heels of a two-year period when the monthly average was 300 homes. But additional context is warranted, because inventories across the region were unsustainably low between 2016 and 2018: to wit, there was a monthly average of 1,730 completed and unabsorbed condos in Metro Vancouver in the immediate aftermath of the Financial Crisis through to 2016—2.5 times the current level. We do expect this number to go up in the short-term, but with the overall number of starts slowing, this completed and unabsorbed inventory is unlikely to reach the heights achieved during the 2010-2016 period.

VANCOUVER’S RECENT UPTICK IN COMPLETED & UNSOLD CONDOS ›

2,500

2,000

1,500

1,000

500

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION

DATA: INVENTORY (STOCK)

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residential

AS EINSTEIN SAID, IT’S ALL RELATIVE

›

Completed and unabsorbed apartment inventory is up across the region, but we have a long way to go before we return to our long-run average.

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policy

06. policy

(ALMOST) ALL QUIET ON THE POLICY FRONT

New housing policy took a backseat to more organic market evolutions in Q2 2019. The provincial government hit pause on the introduction of any new demand-suppressing policies after implementing numerous ones in 2018. The most notable policy-related issue was CMHC releasing details of its shared

home equity plan for first-time buyers, which won’t take effect until September 2019. While it may have an impact on specific market segments, it is unlikely to have tangible effects on the Metro Vancouver market on a broad scale.

GOVERNMENT OF CANADA FIRST-TIME HOME BUYER INCENTIVE The intention of the First-Time Home Buyer Incentive is to help qualified first-time home buyers reduce their monthly mortgage carrying costs without adding to their financial burdens. Buyers must have the minimum down

The incentive can be repaid: at any time without penalty; when the property is sold; or at the end of 25 years. The repayment is based on the property’s fair market value at the time of repayment, with the government sharing in the upside and downside of a property’s value. While the scope for this policy’s effectiveness may be greater in markets with lower average prices than in Metro Vancouver, some impact could be felt within less-expensive sub-markets of the region within the multi-family space.

payment to be eligible, and can then apply for a 5% (for an existing home) or 10% (for a new home) shared equity mortgage with the Government of Canada. A purchaser’s maximum qualifying income cannot exceed $120,000, with the total amount borrowed not exceeding 4 times the qualifying income.

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policy

New housing policies impacting Metro Vancouver have been conspicuously absent to start 2019, as governments at all levels—as well as market participants—have largely taken a wait-and- see approach.

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