rennie landscape Q1 2019

rennie landscape Q1 2019

Welcome to the first edition of the rennie landscape, a quarterly publication produced by rennie’s intelligence team that tracks a variety of demographic and economic indicators that directly and indirectly influence our housing market here in Metro Vancouver. With the level of uncertainty that currently prevails in residential real estate, we hope you will find this publication particularly useful, as it focuses on what matters most in our market. The headlines we see in today's media often distort the fundamental facts; our goal is to provide our partners and colleagues with a basis for evaluating the trajectory of the factors that collectively define the context for the real estate market. We’ve identified six pillars of our market: demographic changes, the interest rate environment, the policy context, residential market features, credit and debt trends, and economic fundamentals. Within each of these pillars are a number of indicators we weigh-in on each quarter as we track the changes that will influence future real estate market evolutions. It is our goal for the rennie 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.

Ryan Berlin SENIOR ECONOMIST

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contents

04

DEMOGRAPHICS

10

ECONOMY

20

CREDIT & DEBT

28

RATES

36

RESIDENTIAL

44

POLICY

47

POCKET GUIDE

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demographics

01. demographics

Canada’s latest immigration targets will benefit the workforce; we need to rise to the challenge of providing enough housing.

CANADA’S LATEST IMMIGRATION TARGETS

Canada is a country that has been built by immigration. To this day, immigration plays a significant role in not only growing the national population, but also shaping its workforce, its cultural landscape, and its cornerstones of universal health care and the Canada Pension Plan. And immigration flows continue to increase, with an average of almost 300,000 immigrants being welcomed to Canada in each of the past two years. Recently, the federal government laid out its plan for even more immigrants to come to Canada in the coming years, a move meant to counterbalance the economic headwind created by an aging—and consequently, slowly-growing—labour force. Canada aims to open its doors to up to 350,000

immigrants in 2021, up from its first-year target of 310,000 in 2018. If we assume that in the absence of these targets Canada would have continued to welcome roughly 300,000 immigrants each year, the implication of the policy is Canada growing by at least an additional 185,000 people between 2018-2021. For Metro Vancouver, this means an additional 22,500 people will need to be accommodated during this period above and beyond what trends would indicate. The region will need to find a way to add almost 9,000 net new homes to accommodate this additional increment of growth over four years. Are policymakers, developers, and all other market participants ready to take on this challenge?

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demographics

CANADIAN IMMIGRATION ON THE RISE ›

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

*

* through Q3

ACTUAL

TARGET

SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA & RENNIE

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demographics

BRITISH COLUMBIA’S EVER-EXPANDING POPULATION Net international migration continues to drive population growth in BC, which is now home to more than 5 million people.

It was with an air of inevitably that the province’s population finally crossed the 5-million-person threshold in Q3 2018 after BC added 24,635 people from July through September. While of no pragmatic relevance, becoming just the third province in Canada with a population north of 5 million reflects BC’s continued attractiveness to people living elsewhere in the country and, to a much greater extent, those living abroad. By far the biggest contributor to growth in BC’s population in Q3 2018 was net international migration, which added 23,400 people and accounted for 95% of the provincial resident expansion. Natural increase—the difference between the number of people born and those who died—added 2,400 people, though its

contribution has been on the decline for years, a consequence of an aging population and a below-replacement fertility rate that has persisted since the mid-1970s. The latest available data show that net interprovincial migration was negative (extracting 1,200 people in Q3) after 21 consecutive quarters of net additions averaging +4,000 people. The landscape of economic opportunities across Canada is a significant influencer of the magnitude and direction of these flows and, in the case of BC, the health of Alberta’s oil patch is a prime factor. This will be something to watch as the rest of the data come in for 2018 and the beginning of 2019, as continued positive net inflows of migrants are needed to bolster BC’s workforce and facilitate continued growth in economic activity.

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BC'S POPULATION GROWTH LED BY INTERNATIONAL MIGRATION ›

30,000

24,635

25,000

23,422

23,407

19,413

20,000

15,000

10,000

5,000

2,886

2,430

1,108

0

-1,217

-5,000

POPULATION CHANGE

NATURAL INCREASE

NET INTERPROV. MIGRATION NET INTL MIGRATION

Q 

Q 

SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA

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demographics

CHANGING INTER-PROVINCIAL MIGRATION FLOWS

The network of BC-as-the-nexus interprovincial migration flows has evolved somewhat over the past year, with BC losing more people than usual to Atlantic Canada, Ontario, and Alberta, while attracting slightly fewer residents from the Prairie provinces in Q3 2018. As noted, these recent trends have reversed interprovincial migration as a source of net growth for BC to one of net loss. Changing economic realities are most likely at play here, from Atlantic Canada’s desperate need

for labour and its low cost of living attracting people from the west, at the margin, to a stabilization in Alberta’s economy amidst a slower-growth trajectory in Lotusland, enticing some BC residents and other Alberta ex-pats back to greener pastures. In light of Metro Vancouver’s normalizing housing market and its rising wages within the context of a historically tight labour market, watch for this trend to potentially reverse in the short-term.

BC'S NET INTERPROVINCIAL MIGRATION: GO EAST, YOUNG ONE? ›

1,000

800

558

600

444

400

200

36

35

0

-10

-16

-88

-120

-200

-400

-392

-600

-800

-793

-871

-1,000

AB

ON

NS

PEI

NB

QC

YK

NWT/NVT NL

SK

MB

PREV Q AVG

Q 

SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA

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demographics

BC'S TRADE IN PEOPLE The ebb and flow of BC’s trade in population with other Canadian provinces continues, with the workforces of Alberta and Ontario being the biggest beneficiaries. ›

economy

02. economy For the past few years, per capita retail spending in Metro Vancouver has been robust. Is it time for an adjustment?

THE TREND IN RETAIL SPEND

Retail sales have long been viewed as a dependable leading indicator of economic activity: increases imply consumer confidence, support employment, and yield corporate profits, while decreases often precede economic slowdowns. In Metro Vancouver, retail sales have carved an impressive upward path since the beginning of 2014, increasing by 36% in aggregate. By the end of 2018, regional retail sales were bringing in almost $900 million more per month than at the beginning of 2014. Retail sales in Metro Vancouver accelerated towards the end of 2014 through late 2017, when they increased by 33%. To put this in context, retail sales in the Montreal and Toronto markets rose by only 16% and 23%, respectively. Of note is that these increases were not merely the product of growing local populations, as the the number of adult residents living in these regions rose by only

3% in Montreal, 5% in Vancouver, and 6% in Toronto. When adjusted on a per capita basis, Metro Vancouver’s increase in retail sales is even more impressive, posting 27% growth in the three years ending in Q4 2017 compared to 17% in Toronto and 12% in Montreal. Increasing aggregate income and tourism are two driving forces here, but a third is rising home prices and the “wealth effect” (whereby rising asset prices result in more spending). With this in mind, the ongoing normalization of Metro Vancouver’s housing market and the associated moderation of prices are likely culprits in aggregate regional retails sales falling by 3%, and per capita sales falling by 5%, since the beginning of 2018. If home prices continue to recede over the coming months, it is likely that retail sales will too— and this, in turn, may generate some minor labour market wrinkles.

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economy

RETAIL SPENDING IN VANCOUVER OUTPACING TORONTO & MONTREAL ›

$1,700

$1,600

$1,438 $1,445 $1,515

$1,500

$1,400

$1,300

$1,200

$1,100

$1,000

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

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

JOBS IN METRO VANCOUVER Employment in Metro Vancouver expanded at a respectable rate last year; the challenge will be to keep it up.

Often overlooked in conversations about housing in Canada’s most expensive market is the health of what might be referred to as “local fundamentals”. While there is no unanimous consensus around what these fundamentals comprise, local population growth and change, incomes, and employment are commonly cited as three of the most important factors. Put slightly differently, a housing market that has the benefit of a growing local population (and hence growing demand) and increasing purchasing power (through rising incomes and employment) is more likely to be dynamic than one that features slow or no population growth and a stagnant local economy. It is, therefore, useful to note that the normalization of Metro Vancouver's

housing market has been occurring concurrently with an employment base that has continued to grow in 2018, outpacing national employment growth over the same period by more than half, at 2.2% versus 1.4%. Impressively—but not surprising given the hole out of which it is climbing— Edmonton registered a 4.4% increase in jobs in 2018, which is the fastest among the group of metros that also includes Calgary and Toronto. With much tighter conditions characterizing labour markets across Canada, a continuation of the most recent rate of employment growth in Metro Vancouver is likely in the near-term (in contrast to the past 5-year average growth rate of 3.6%, for example), which in turn will provide support for a stabilizing housing market.

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economy

THE COMPARATIVE STRENGTH OF VANCOUVER'S JOB GROWTH ›

5.0%

4.4%

4.5%

4.0%

3.6%

3.5%

3.0%

2.5%

2.5%

2.2%

2.2%

2.0%

1.7%

1.5%

1.1%

1.0%

0.8%

0.5%

0.0%

TORONTO

CALGARY

EDMONTON

VANCOUVER

Q   Q  ANNUAL AVERAGE

Q   Q 

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

WEEKLY WAGES GROWING MEEKLY BC’s recent wage performance has been somewhat uninspiring, but there are signs this could be changing.

There is a degree of ambivalence that the latest wage data elicit—particularly for those interested in how British Columbia has been faring. What is unambiguously positive is that during 2018, full-time median weekly wages in BC rose at almost twice the rate of those Canada-wide, at 1.1% vs 0.6%. However, as of Q1 2019, this merely served to wedge BC’s median weekly wages of $875 right in-between Canada’s $870 and Ontario’s $880—still far off from Alberta’s uncatchable-anytime-soon $1,034.

Of some concern is that BC’s 1.1% increase in median weekly wages in 2018 was slower than both the province’s rate inflation (of more than 3% annually most recently) and its previous 5-year wage increase of 2.0%. Looking ahead, the province’s relatively high cost of living, combined with a historically- tight labour market and a rising job vacancy rate, will likely put some additional upward pressure on wages.

MIDDLING MEDIAN WAGE GROWTH ›

3.5%

3.0%

3.0%

2.5%

2.4%

2.4%

2.0%

2.0%

1.7%

1.5%

1.1%

1.0%

0.9%

0.6%

0.5%

0.0%

CANADA

ONTARIO

ALBERTA

BRITISH COLUMBIA

MED.WEEKLY WAGE FULL TIME

$870

$880

$1034

$875

Q   Q  ANNUAL AVERAGE

Q   Q 

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

UNEMPLOYMENT RATE LIMBO: HOW LOW CAN WE GO? In a region with full employment, new housing is an economic facilitator.

Housing market stability is predicated on solid economic fundamentals. One such fundamental is employment—or a lack of unemployment—and this is where Metro Vancouver's labour market really flexes its muscles: its current unemployment rate of 4.8% rivals both its all-time historical low and, more broadly, its theoretical lower limit. For Metro Vancouver’s regional peers, envy is the word, with the unemployment rate ranging from 6.1% in Toronto to 6.4% in Edmonton and 7.1% in Calgary. A recent uptick in Vancouver’s unemployment rate is something to keep

an eye on, though for those intent on scrutinizing the data on a month-to-month basis, it’s worth noting the inherent short- term variability in the data. At a high-level, Vancouver’s labour market is performing near capacity. This bodes well generally for local economic dynamism, but it does mean that if the regional economy is to grow further, additional employment gains will be accompanied by migration. The fact that an adequate supply of housing is a necessary precondition for effectively growing Vancouver’s labour market underscores the role of housing as an economic facilitator (in more ways than one).

A HISTORICALLY, AND COMPARATIVELY, LOW UNEMPLOYMENT RATE

12.0%

10.0%

8.0%

6.4% 7.3% 6.1% 4.8%

6.0%

4.0%

2.0%

0.0%

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

EDMONTON CALGARY

TORONTO

VANCOUVER

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

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economy

Metro Vancouver’s rate of discouraged workers is near an all-time low and showing no signs of rising.

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economy

ENCOURAGING TRENDS FOR DISCOURAGED WORKERS

Hidden from the unemployment rate statistics is the plight of individuals who have given up in their search for work because they have been unsuccessful for a prolonged period of time. Such discouraged workers, as they are termed, are excluded from data on unemployment, which reflects only those people who are actively looking for work; however, they are no less important when contemplating overall labour market conditions. Indeed, the discouraged worker rate rises and falls with economic cycles, thereby representing another barometer of economic prosperity.

In British Columbia, the Q1 2019 discouraged worker rate of 0.08% sits near its all-time low of 0.07% from early 2008 and is less than half the discouraged worker rates observed in Alberta (0.23%), Ontario (0.19%), and Canada as a whole (0.20%). While the percentages are small—even during Alberta’s economic low point in 2017, that province’s discouraged worker rate rose to only 0.50%—they are instructive for those looking to gauge economic health. Viewed through this lens, British Columbia gets a clean bill.

DISCOURAGED WORKER RATE HITTING NEW LOWS

0.60%

0.50%

0.40%

0.30%

0.23% 0.19% 0.20%

0.20%

0.10%

0.08%

0.00%

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

CANADA

ONTARIO

ALBERTA

BRITISH COLUMBIA

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

THE JOB VACANCY VOID GROWS

While much attention is typically given to the supply side of the labour market—think employment, wages, and the unemployment rate metrics—the job vacancy rate is an important reflection of both the intentions and the frustrations of employers. The most recent data for Metro Vancouver reveal a 5.1% job vacancy rate. This is markedly higher than in Toronto (3.1%), Calgary (2.8%), and Edmonton (2.7%), and up almost a full percentage point compared to where it was one year ago.

One positive feature associated with Vancouver’s current job vacancy level is that employment has space to grow above where it currently sits—that is, if the conditions are right (including that a fair wage is on offer and that adequate, affordable housing is available). Having noted this, employers are evidently unable to effectively fill positions for which there is a need; this could prove to be a drag on future economic growth should this challenge persist.

JOB VACANCY RATE: WHERE ARE THE WORKERS? ›

6.0%

5.1%

5.0%

4.0%

2.7% 2.8% 3.1%

3.0%

2.0%

1.0%

0.0%

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3

2015

2016

2017

2018

EDMONTON CALGARY

TORONTO

VANCOUVER

SOURCE: JOB VACANCY & WAGE SURVEY, STATISTICS CANADA

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economy

HELP WANTED Employers in Metro Vancouver continue to need more workers. Where will they come from, and do we have enough housing for them? ›

credit and debt

03. credit & debt

An increasing amount of debt is one thing, an increasing cost to service it is another. How is Canada faring?

THE CANADIAN DEBT SERVICE RATIO IS STABLE

In the past year alone, the aggregate outstanding balance owed by Canadians to the big banks (for mortgages, car loans, HELOCs, etc) rose by $89.7 billion. Within this environment of rising debt, it is natural to become concerned about households’ ability to repay what they owe. As aggregate and average household debts have risen over the past three decades, they’ve done so in an environment of declining interest rates, reinforcing the fundamental tenet of economics that when the price of something drops, more of it is bought. In this case, debt is the thing that has become cheaper (via falling interest rates); ergo, Canadians have more of it. Certainly, this presents a medium-term risk to the Canadian economy, particularly should there be a downturn that precipitates a widespread inability to repay debt. That scenario notwithstanding, it’s reasonable to assume that as debt has grown over time it has eaten up more and more of

household budgets. The reality? Canadians currently spend 14.51% of their gross income on (all) debt servicing, which is 36% higher than the 10.64% that was spent in 1993 (a debt service ratio (DSR) low point over the past three decades). Having said that, the current DSR is 3% below the past-three- decade peak of 14.95%, achieved in 2008. Since then, the overall DSR has been stable and mostly flat. As part of this, the mortgage DSR has actually fallen over time, to only 7.22% most recently (though it should be said that over the past three years it increased by 13% as home prices ratcheted up). The key metric to watch here is the non- mortgage DSR, at least part of which reflects unsecured debt. This particular DSR has been on the rise since 1990, reaching 7.29% most recently, though it has fallen by 4% since reaching its peak a year ago. Further declines would be a welcome sight.

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credit and debt

DEBT IS GROWING, BUT THE COST OF SERVICING IT REMAINS LOW ›

% BELOW PEAK % ABOVE TROUGH

16.00%

14.95

14.51

14.00%

12.00%

11.22

10.64

10.00%

% BELOW PEAK % ABOVE TROUGH

8.00%

7.59

7.22 7.29

6.00%

6.39

% BELOW PEAK % ABOVE TROUGH

4.00%

2.00%

1.50

1.13

0.00%

Q1 1990 - Q3 2018

NONMORTGAGE DEBT

MORTGAGE DEBT

TOTAL DEBT

BOC TARGET RATE

SOURCE: NATIONAL BALANCE SHEET ACCOUNTS, STATISTICS CANADA & BANK OF CANADA DATA: TOTAL DEBT SERVICE RATIOS IN CANADA

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credit and debt

CANADIANS’ MORTGAGE DEBT ACCUMULATION SLOWING Canada’s mortgage market continues to expand, but in a more tepid manner than in past years.

Canada’s mortgage market eased its way into 2018, with outstanding mortgage debt, net mortgage growth, and the average outstanding balance per mortgage all rising more slowing in the four quarters ending in Q2 2018 than during the previous year. Notably, total outstanding mortgage debt rose by only 2.6% between Q2 2017 and Q2 2018—markedly lower than the 5.5%-6.9% annual growth registered over the preceding three years. This reflected slower growth in the number of active mortgages—a 1.3% expansion over four quarters versus an average of 4.2% over the previous three years—as well as slower growth in average

outstanding balances (3.7% most recently versus 4.5% over the preceding three years). Part of this deleveraging activity comes down to responsible fiscal behaviour on the part of households, but it also reflects tougher lending conditions, slowing housing markets in Toronto and Vancouver, and rising interest rates, which has made borrowing more expensive. Indeed, the average scheduled mortgage payment per household rose by 4.1% between Q2 2017 and Q2 2018—almost double the 2.2% annual increase experienced over the prior three years. Look for this trend to continue through the remaining 2018 data.

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credit and debt

CANADIAN MORTGAGE DEBT IS GROWING AT A RATE THAT IS SLOWING ›

AVERAGE OUTSTANDING BALANCE PER MORTGAGE

OUTSTANDING MORTGAGE DEBT  MILLIONS

NUMBER OF ACTIVE MORTGAGES S

AVERAGE SCHEDULED PAYMENTCONSUMER

5,215

2014

Q2

$1,228,014

$173,900

$1,132

$1,295,524

5,542

$182,300

$1,156

2015

Q2

5,734

$190,700

$1,377,486

$1,181

2016

Q2

5,901

$1,472,231

$198,690

$1,210

Q2

2017

5,980

$205,980

$1,260

2018

Q2

$1,510,376

5.5%

6.3%

4.8%

2.1%

2014-15 Q2

6.3%

4.6%

2015-16 Q2

3.5%

2.2%

6.9%

2016-17 Q2

2.9%

4.2%

2.4%

2.6%

1.3%

3.7%

2017-18 Q2

4.1%

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

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credit and debt

BORROWER BEWARE: CAR LOANS AND CREDIT CARD DEBT GROW Debt can be a very useful tool for consumers; it must, however, be deployed strategically.

Recently, the slowdown in debt accumulation in Canada has been uneven. Overall, the total outstanding balance owed by Canadians to the big banks rose by 5.1% between Q2 2017 and Q2 2018, down from 6.4% growth during the previous year—on the surface, that’s a good thing. Dig a little deeper and the picture becomes a little more muddled: the slow down in the growth of monies owed to banks has been entirely on the back of slower growth in outstanding mortgage balances; meanwhile, balances on HELOCs (Home Equity Lines of Credit), credit cards, car loans, and other lines of credit have all grown at an accelerated pace, led by a 6.3% increase in

outstanding car loan amounts (versus 5.3% in the previous year). While HELOC and LOC (Line of Credit, or credit not backed by one’s home) growth has been more modest than this (a 1.5% and 0.4% rate of growth most recently), it is somewhat concerning that credit card balances expanded by 5.9% in the four quarters to Q2 2018. Growth in this slice of the debt pie masks levels of consumer spending that are beyond what incomes can (or should) support. To the extent that credit card balances are eventually serviced, the associated high interest costs will, in the meantime, take a bite out Canadians’ wallets.

ANNUAL DEBT GROWTH: THE GOOD, THE BAD & THE UGLY ›

10.0%

8.9%

8.0%

6.4%

6.3%

5.9%

6.0%

5.3%

5.1%

5.0%

4.1%

4.0%

2.0%

1.5%

0.4%

0.0%

- 1.5%

-2.0%

- 2.6%

-4.0%

ALL

MORTGAGE

HELOC

CREDIT CARD

AUTO

LOC

OUTSTANDING BALANCE  BILLIONS

$1,851.4

$1,231.7

$203.2

$98.2

$73.0

$59.0

Q   Q  ANNUAL AVERAGE

Q   Q 

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

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rennie.com

credit and debt

CREDIT THRILLS: CANADIANS PAY THEIR BILLS Rising delinquency rates are a sign that another shoe is yet to drop. It should be settling, then, that in Canada they remain stable.

Following the changing delinquency rates associated with various forms of credit and debt is useful when trying to better understand where there are potential pitfalls for the economy as it evolves. Rising delinquency rates, for example, may very well reflect a growing inability to service debt, which itself may reflect wages that are not growing sufficiently or an unemployment rate that is rising. Falling delinquency rates are more likely to be seen when incomes are stable and growing, and the unemployment rate is low and/or falling. When considered over the past five years, the delinquency rate associated with HELOCs, LOCs, and credit cards has been relatively

low and stable—both good things. For these three types of credit, the most recent associated delinquency rates (as of Q2 2018) were 0.15%, 0.61%, and 1.66%, respectively. Compared to one year previous, these rates were down by 3% for LOCs and by 4% for credit cards, while remaining unchanged for HELOCs. In comparison, auto loan delinquencies rose considerably during 2015, at the same time Canada’s unemployment rate began to tick upwards. As with the unemployment rate increases, the auto delinquency rate rise was relatively short-lived, having fallen by 11% in the past year.

CANADIAN DELINQUENCY RATES & EMPLOYMENT: TWO PEAS IN A POD

2.5%

16.0%

14.0%

2.0%

12.0%

1.66%

10.0%

1.5%

1.50%

8.0%

5.9%

1.0%

6.0%

0.61%

4.0%

0.5%

2.0%

0.15%

0.0%

0.0%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018

HELOC

CREDIT CARD

AUTO

LOC

CANADIAN UNEMPLOYMENT RATE

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

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credit and debt

MORTGAGE DEFAULTS IN THE ARREARS-VIEW MIRROR

The last thing a household will default on is its mortgage. While not ideal, consumers can make do without credit cards, lines of credit, and even cars (particularly with the advent of ride-sharing services)—but not so much their home. Most people would exhaust all of their options in order to protect what is both their largest financial commitment and the literal roof over their head. Even so, British Columbia’s historically low mortgage arrears rate gets far less attention than perhaps it should, because whatever the order that one assigns to defaulting on his or her debt obligations, the reality is that British Columbians are very good at paying down their mortgages in a timely manner. At 0.14%, BC’s current arrears rate sits behind only Ontario’s (an unfathomably low

0.09%) and is roughly 40% lower than the national average. It’s also 10% lower than it was one year ago, and 69% lower than it was five years ago. Not surprisingly, BC’s arrears rate moves in step with its unemployment rate; when people are working and earning incomes, they make their housing payments. This may be why the province’s historically low arrears rate has been accompanied by a near- historically-low unemployment rate. This relationship won’t change anytime soon with BC’s labour market likely to remain tight in the coming years. Don’t expect the arrears rate to deviate much from where it sits today.

HAVE JOB, CAN PAY MORTGAGE ›

8%

0.60%

7%

0.50%

0.46%

6%

0.40%

5%

4.5%

4%

0.30%

0.24%

3%

0.20%

0.09% 0.14%

2%

0.10%

1%

0%

0.00%

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017 2018 2013

CANADA

ONTARIO

ALBERTA

BRITISH COLUMBIA

BC UNEMPLOYMENT RATE

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

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rennie.com

credit and debt

PAYING IT DOWN Despite higher-than-average home prices compared to the rest of Canada, BC enjoys a historically-low mortgage arrears rate that reflects a strong economy. ›

rates

04. rates Interest rates continue to be supportive of economic and housing market activity, and this may be even more true by the end of 2019.

GUESSING THE FATE OF INTEREST RATES

Beginning in the middle of 2017, interest rates began an 18-month climb which, until recently, was expected to continue through 2019 and beyond. The era of cheap money supposedly ended when the Bank of Canada embarked on a campaign of measured increases in its overnight target rate, taking it from 0.5% in July 2017 to 1.75% by Q4 2018. In part this was a response to the rising annual rate of inflation, which increased from 1% in mid-2017 to 3% just over 12 months later, but since then it has subsided to 2%. Accompanying this deceleration in inflation has been a moderation in consumer spending, a normalization of housing markets across the Canada, slowing employment growth, and a downgrade in the outlook for economic growth over the next few years, in part due to a number of ongoing international trade disputes. In statements made on March 6, 2019, Bank of Canada governor Stephen Poloz indicated that going forward, rate changes (up or down) will hinge

on “developments in household spending, oil markets, and global trade policy.” Markets continue to price in a relatively small chance of the overnight rate being cut in the coming months, so it will be instructive to follow the evolution of the Bank’s key economic indicators over time. Not waiting for central banks to make the first move, the dynamics in bond markets have changed significantly since Q4 2018, resulting in declining yields. Five-to-ten- year Canadian government bond yields in particular—which strongly influence the interest rate banks offer on fixed-rate mortgages—have fallen by 2% in the past few months. Looking ahead through the balance of 2019, we think it most likely that interest rates will remain where they are today, with a reduction certainly in play. Regardless, the change in the trajectory of the interest rate outlook more generally points to a continued supportive lending environment.

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rates

INTEREST RATES: SLOW TO GROW WHILE STILL NEAR THEIR HISTORICAL LOW

6%

5.34

5%

4%

3%

1.75 1.88 1.99

2%

1%

0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1 2019

2014

2015

2016

2017

2018

BOC OVERNIGHT TARGET RATE

YR GOC MARKETABLE BONDS

CANADIAN CPI INFLATION

 YR CONVENTIONAL MORTGAGE

SOURCE: BANK OF CANADA & STATISTICS CANADA

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rates

RISING RATES, LIGHTER WALLETS Over the past 36 months, slowly increasing interest rates have impacted the cost of servicing mortgage (and other) debt.

While interest rates remain unambiguously low when placed in a longer-term historical context, it is also true that the cost of borrowing (for everyone) has increased over the past two years. On top of this, home purchasers have been additionally impacted by the Office of the Superintendent of Financial Institution’s (OSFI) mortgage stress test, which was fully implemented at the beginning of 2018. Together, rising interest rates and the stress test have squeezed buyers’ purchasing power. Because it is useful to consider how increasing interest rates in particular have affected monthly payments for borrowers, we do it here—and what we see is that overall, the dollar-impact of rising rates is relatively moderate. For example, using the Bank of Canada’s Q1 2019 conventional

5-year mortgage rate of 5.34%, it costs $605 per month to borrow $100K. While this is unchanged fromQ4 2018, it’s up $12 from $593 in Q1 2018 (but up only $6 per month fromQ1 2014, with many new borrowers from that time now looking to renew their mortgage contracts). Of course, the math is different when we consider that the average home sale price in the Greater Vancouver board area was $956,690 in February 2019. Assuming a loan-to-value ratio of 80%, the impact of rising rates over the past year on monthly servicing costs would be $92. Clearly, rising rates have been hitting the wallets of buyers and owners alike, but this could soon change for the better given the potential trajectory of borrowing costs. Stay tuned.

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rates

WHAT DOES IT COST TO SERVICE $100K IN DEBT?

$620

$610

$605

$605

$600

$599

$593

$590

No Change

$580

+$12

$570

+$6

$560

Q1 2014

Q1 2018

Q4 2018

Q1 2019

ASSUMPTIONS:

% GDS

 YEAR AMORTIZATION .% BOC BENCHMARK RATE

SOURCE: RENNIE

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rates

VANCOUVER INFLATION ACCELERATING

Central banks don’t just raise and drop interest rates for the fun of it. For example, the Bank of Canada’s mandate is to promote the economic and financial welfare of the country and, as part of that, to maintain a low and stable rate of price inflation. The primary tool used to do this is the overnight target interest rate: higher rates encourage saving over spending, which tends to reduce inflation, while lower rates encourage spending over saving, with the opposite effect on inflation. The target inflation range for the Bank is 1%-3%, as measured on a year- over-year basis. Nationally, the inflation rate is currently 1.4%, though in the country’s large metro

regions it is higher, reflecting relatively robust economic activity. Metro Vancouver leads the way, with a 3.1% inflation rate in the four quarters ending in Q4 2018, ahead of Toronto (2.6%) as well as Calgary and Edmonton (2.0% and 2.1%, respectively). Despite lower home prices, a tight labour market and an active consumption economy in Vancouver have seen the most recent rate of inflation (3.1%) double that which averaged the past five years (1.6%). The future direction of local inflation is uncertain, with slowing inflation at the national level competing with factors in this region that point towards continued increases in the prices of things.

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rates

Despite tightening monetary policy at the national level, Metro Vancouver’s at- capacity labour market and its dynamic market for goods and services have seen prices soar in the past year.

CPI INFLATION ACROSS THE NATION, VANCOUVER OUTPACES OTHER METROS

3.5%

3.1%

3.0%

2.6%

2.5%

2.1%

2.0%

2.0%

2.0%

1.8%

1.6%

1.6%

1.5%

1.0%

0.5%

0.0%

TORONTO

CALGARY

EDMONTON

VANCOUVER

Q   Q  ANNUAL AVERAGE

Q   Q 

SOURCE: STATISTICS CANADA

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rates

A WEAKENING CANADIAN DOLLAR

Over the past five years. the value of the Canadian dollar has depreciated against the currencies of four of the country’s five largest trading partners: specifically, the Loonie declined by 18% versus the US dollar, 14% against the KoreanWon and Japanese Yen, and 8% versus China’s Yuan. (Some might be excited to note that the Canadian dollar has appreciated by 19% compared to the Mexican Peso, making margaritas that much more affordable.) In the most recent quarter, the Canadian dollar has depreciated against all five of these

currencies by between 2% (the US dollar and the Peso) and 5% (the Yen). Why does this matter to real estate in Metro Vancouver? For one, a cheaper currency encourages exports, which in turn boosts local incomes. Second, a depreciation in currency offsets at least some of the impact of BC’s foreign buyer tax, thereby better positioning real estate in this region within the international marketplace (for better or for worse).

CANADIAN DOLLAR LOSING STEAM ›

1.40

1.30

MORE

1.20

1.19

1.10

CANADIAN DOLLAR WORTH:

1.00

0.82 0.86 0.92

0.90

LESS

0.80

0.70

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

US DOLLAR

CHINESE YUAN

MEXICAN PESO

JAPANESE YEN

SK WON

SOURCE: US FEDERAL RESERVE

DATA: INDEXED CANADIAN-DOLLAR EXCHANGE RATES, Q1 2014 = 1.00

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rates

EXPORT STIMULUS? While it's true the Loonie has lost much ground to the US dollar in the past five years, you won't hear BC exporters complaining. ›

residential

05. residential Housing construction is showing signs of slowing in Metro Vancouver; this may present a challenge for regional job growth.

NEW APARTMENT STARTS DECLINED IN 2018

In current discussions of housing in Metro Vancouver, the words “more”, “a lot”, and “too much” are increasingly being used to characterize housing supply over the next few years. And while this may be the case compared to the pre-2016 period, the latest data on new apartment construction in Metro Vancouver reveal a slowdown in new building activity is underway: in 2018, there were 15,888 apartment starts across the region (this includes owned, co-op, and purpose-built rental units), and a 9% decrease from the 17,498 that were started in 2017. As the vast majority of starts do eventually become completions, this points to slowing future supply when these units complete in the next two to three years. As points of comparison, Edmonton experienced a 33% year-over-year decline

in apartment starts between 2017 and 2018, while both Calgary and Toronto registered increases. In Toronto specifically, apartment construction activity boomed in 2018, jumping 27% from the previous year as 29,639 apartment units were started. Combined with an already-cooling market in that region, this should help to stabilize conditions in that market in the medium term. With population growth in Metro Vancouver averaging between 35-45K people annually over the coming years, new housing supply will play a key role in supporting growth. This will be something to watch as 2019 progresses as it could eventually also have economic consequences: there is the potential for workforce growth to be limited by a dearth of available homes.

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residential

YEAR-OVER-YEAR APARTMENT STARTS HAVE SLOWED

40,000

35,000

29,639

30,000

25,000

17,498

23,407

15,888

20,000

15,000

10,000

4,403

4,226

5,000

2,090

3,134

0

TORONTO

CALGARY

EDMONTON

VANCOUVER

27%

4%

9%

33%

QQ 

QQ 

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION

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residential

With the pipeline of new homes under construction shrinking, starts must pick up to accommodate our growing population. THE ISSUE OF ADEQUATE HOUSING SUPPLY REMAINS A KEY REGIONAL CHALLENGE

Coinciding with the heady rise in home prices into 2016, was an uptick in the number of new homes under construction—not a surprising development given that basic economic principles tell us that when the price of a thing increases the quantity supplied of that thing does, too. Of course, issues of housing supply generally—and housing supply in Metro Vancouver specifically, with its political overlay— cannot be fully understood using only those tools obtained from Econ 101. Regardless, housing stakeholders and relevant market participants together created conditions that supported an increased pipeline of new housing in 2016. Per the data, there was an average of 26,587 homes under construction at a given point in time in 2015, and only 23,941 in 2014. In comparison, there were 31,964 homes under

construction in 2016, 39,056 in 2017, and 42,328 in 2018. What these annual data don't reveal, however, is that the under-construction inventory peaked in Q2 2018, driven by the apartment segment which saw its inventory of units under construction fall in both Q3 and Q4. There is currently an array of challenges facing housing suppliers in the current market, from construction costs and labour scarcity to approvals delays, political uncertainty, and the broad normalization of market conditions. The trend in new housing supply will be an important one to monitor: “nimble” and “responsive” are two things supply is not, if and when it is needed in the short-term.

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residential

A Q2 2018 PEAK IN NEW HOUSING INVENTORY IMPLIES LESS NEW SUPPLY ›

50,000

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

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

OTHER APARTMENT SOURCE: CANADA MORTGAGE & HOUSING CORPORATION

DATA: INVENTORY OF HOMES UNDER CONSTRUCTION, METRO VANCOUVER

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residential sector

New rental housing supply will be a cornerstone of Metro Vancouver’s economic development. We should be doing more to encourage its growth.

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residential sector

GROWING RENTAL POTENTIAL

An unambiguous trend has emerged in the temporal pattern of apartment starts in Metro Vancouver, with new apartment construction slowing in each quarter between Q4 2017 and Q3 2018. Most recently, there were 3,517 apartment starts throughout the region in Q4 2018, up 5% fromQ3’s recent low of 3,351. Starts in Q4 were, however, 39% below those in Q4 2017, and 5% below the past half-decade quarterly average.

If there is a positive takeaway from the dwindling-supply picture painted by these data it is that rental apartment starts—the most common entry point into the housing market for young people and into the country for new immigrants—have been relatively robust. Indeed, the 1,466 rental apartment starts in Q4 2018 were 12% higher than in the previous quarter, and 43% higher than the average quarter from the past five years. If this trend can be sustained, it's good news for a balanced market and a growing economy.

OWNED STARTS SLOW WHILE RENTAL STARTS GROW ›

7,000

60%

6,000

50%

42%

5,000

40%

4,000

30%

3,000

20%

2,000

10%

1,000

0%

0

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

RENTAL

OWNED

RENTALCOOP SHARE OF ALL STARTS

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: APARTMENT STARTS BY INTENDED TENURE, METRO VANCOUVER

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residential

FOREIGN BUYERS: A SMALL AND STEADY SHARE

In August 2016, BC’s provincial government implemented the first of what would be many interventionist housing market policies aimed at curbing demand, the foreign buyer tax (equal to 15% of a residential property’s purchase price). Since then, additional national, provincial, and municipal-level policies have been introduced in an attempt to bring more balance to markets in Canada, particularly in Toronto and Vancouver. Since the original implementation of the foreign buyer tax, and through its increase to 20% in February 2018, the proportion of sales in Metro Vancouver with foreign involvement has mainly oscillated between 2%-5%. Over the past year a trend appeared

to emerge after the share of sales with foreign involvement dipped to 1.6% in July, with increases that brought the share to 4.1% by November, before it slipped back to 2.8% in December. The month-to-month variations notwithstanding, foreign buyers account for a small proportion of sales in Metro Vancouver. The same can also be said—perhaps even more so—for BC’s other metropolitan areas, with the most recent data showing foreign buyers involved in only 2.1% of sales in Kelowna, 1.1% in Victoria, and 0.6% in the Fraser Valley. For the foreseeable future, the lack of foreign buyers is unlikely to change in these regions or in Metro Vancouver.

BC'S MARKETS NOT BEING DRIVEN BY FOREIGN BUYERS ›

5.2%

4.5%

4.1%

3.2%

3.1%

3.0%

2.9%

2.8%

2.7%

2.6%

2.3%

2.2%

1.6%

DEC

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

2017

2018

2.0%

1.6%

2.4%

1.4%

1.7%

0.6%

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Fraser Valley

Victoria

3.3%

3.7%

4.4%

3.1%

3.4%

3.4%

0.7%

n/a

1.4%

0.8%

1.5%

1.1%

n/a

Kelowna

1.5%

2.7%

2.2%

n/a

n/a

n/a

n/a

n/a

1.3%

0.0%

0.8%

2.1%

n/a

SOURCE: BC MINISTRY OF FINANCE

DATA: SHARE OF RESIDENTIAL SALES WITH FOREIGN INVOLVEMENT

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residential

THE VIEW FROM HERE Among the various elements that influence Metro Vancouver’s housing market, foreign buyers take a back seat to more basic fundamentals of supply and local demand. ›

policy

06. policy Metro Vancouver’s housing market has been buffeted by an unprecedented number of policy interventions since 2016.

THE THREE HOUSING MARKET AMIGOS: DEMOGRAPHICS, ECONOMICS, AND POLICY

In order to develop a fulsome perspective of housing market dynamics, one must not only acknowledge traditional demographic and economic drivers, but also the role played by policy, whether its origins are at the national, provincial, or a more local level. Many government policies can have indirect effects on housing, including ones that alter personal income tax rates, introduce new public transit options, or increase immigration. Others have a much more direct impact on local housing markets—such as, to put a fine point on it, those actually aimed at altering local housing markets.

There is no better example of this in Canada than Metro Vancouver, whose housing market trajectory has been altered over the past 2.5 years by a variety of policies aimed largely at quelling the demand side of the market. Our belief is that these policies (the most prominent of which are summarized below) have largely been “baked” into today’s housing market dynamics. In subsequent editions of the rennie landscape, we will provide updates on relevant, new, housing-related policies that have been introduced in the previous quarter and share our expectation of any future policy interventions. A rarely-discussed feature of this policy is its anti-competitive consequence. Want to renew your mortgage terms but don’t like what your lender is offering? If you decide to shop around you better hope you qualify for your own mortgage under the rules; some borrowers will not, and their current lenders know it. Ergo, there is no reason to believe mortgage renewal interest rates will be as competitive as they were in a pre-stress test world.

THE MORTGAGE STRESS TEST (OSFI, JANUARY 2018) At the beginning of 2018, Canada’s financial

institutions regulator (the Office of the Superintendent of Financial Institutions) implemented the final phase of its new mortgage borrowers rules, whereby uninsured borrows must qualify for their mortgage at an interest rate equal to the Bank of Canada’s benchmark rate or the borrower’s own contract rate plus two percentage points—whichever is higher. All else being equal, this has reduced household purchasing power by at least 15%.

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