Spring 2023 edition of the rennie landscape

We hope you find this edition of the rennie landscape informative and useful in helping you navigate this most recent period of transition.

rennie landscape spring 2023

Dear Reader, Thank you for taking the time to read the Spring 2023 edition of the rennie landscape. As we seek to understand the world around us, and how our local housing market fits within the broader economic landscape, it’s striking just how much of the past year has been defined by a single issue: inflation. Today, too-high inflation remains outside of the Bank of Canada's target range despite the central bank's forceful response to it vis-a-vis raising interest rates, which has required borrowers, savers, and spenders to adjust their behaviours on the fly. As we progress through 2023, we're all wondering if the Bank of Canada is finished raising interest rates. If it is, how long will rates stay elevated? If it isn't, how many more hikes can we expect (and tolerate)? From there, what does it mean for our housing market in terms of sales, listings, and prices? Of course, to have an opinion on these questions one must have an opinion on the path of inflation. And in order to opine on inflation, one must disentangle the myriad factors affecting the overall price level. So as we delve into things like a bloated Consumer Price Index, a tight Canadian labour market, high interest rates, increasing levels of variable-rate debt, a growing population, and others, we remind you to keep an eye on the data. We hope you find this edition of the rennie landscape informative and useful in helping you navigate this most recent period of economic transition.

Ryan Berlin DIRECTOR OF INTELLIGENCE & SENIOR ECONOMIST rberlin@rennie.com

Ryan Wyse SENIOR ANALYST, INTELLIGENCE rwyse@rennie.com

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contents

ECONOMY

RATES

CREDIT & DEBT

DEMOGRAPHICS

HOUSING

POLICY

KEY INSIGHTS

GET THE DATA

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economy

01. economy By most metrics, the labour market in Metro Vancouver is operating as efficiently as ever, but there are potential setbacks on the horizon.

A ROBUST LABOUR MARKET, FOR NOW

The labour market in Metro Vancouver has performed about as well as any one (economist) could hope for over the past twelve months. When it comes to labour market metrics, the unemployment rate gets the bulk of the attention and for good reason as it’s the most useful as a single metric for evaluating its health. And while the unemployment rate here in Metro Vancouver decreased from 5.3% to 5.1% over the past year, that only tells part of the story (more on that later). In fact, when we look across seven different labour market indicators over the past year, all but one show signs of improvement. In Metro Vancouver we have a growing population of those aged 15+, AKA working-age population, which translates into a growing labour force. Interestingly, our labour force grew by more than the population did, and that’s because our participation rate also increased.

Although the number of unemployed people increased, it's because of a combination of increasing population and a significant increase in the participation rate. This explains why the employment rate increased even though there are more unemployed people. To put it another way, the big change to the labour market over the past year is that there are more working aged people in Metro Vancouver and a greater share of them are engaged in the labour force. So where does the labour market go from here? Well, in the face of high inflation, followed by high interest rates and tightening of monetary policy, the labour market both locally and nationally has proven resilient. We’ll be watching these indicators closely in the coming months to see if there’s deterioration in the labour market, as this is arguably the most important indicator of health in our economy.

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economy

GAUGING THE HEALTH OF THE LABOUR MARKET

18%

84,800

68.4%

16%

+15.8%

14%

+13.3%

12%

10%

1.6 MILLION

2.4 MILLION

1.5 MILLION

64.9%

+1.9%

5.1%

+1.4%

+1.2%

+0.4%

-0.2%

-2%

POPULATION

LABOUR FORCE

EMPLOYED UNEMPLOYED PARTICIPATION RATE

EMPLOYMENT RATE

UNEMPLOYMENT RATE

YEAROVERYEAR % CHANGE

FEB LEVEL

DATA: MONTHLY, SEASONALLY-ADJUSTED, LABOUR MARKET STATISTICS, METRO VANCOUVER SOURCE: LABOUR FORCE SURVEY & TABLE 14-10-0383-01, STATISTICS CANADA

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economy

TWO WAYS TO LOOK AT WORK The unemployment rate is just one piece of the puzzle when understanding the labour market. Its relationship with the employment rate tells us a little more.

The unemployment rate, while an exceedingly useful measure on its own, does not tell us all the ways the labour market is, or isn’t, working for the population. For example, if the working-age population stays constant, and people drop out of the labour force then the unemployment rate falls even though the same number of people are working. So other metrics like labour force participation (which we’ll explore next) and the employment rate give us additional information into how many people are actually working relative to the overall population of those aged 15+.

In Metro Vancouver, there is a clear pattern between the unemployment rate and the employment rate, a very strong negative correlation, which means when one is high, the other is low. This may seem obvious at first glance, but tells us something important, which is that historically when the unemployment rate in Metro Vancouver rises or falls, the primary cause isn’t people entering or leaving the workforce but rather an increase or decrease in the number of people working.

JOINED AT THE HIP: EMPLOYMENT AND UNEMPLOYMENT

67%

66%

FEBRUARY

65%

64%

63%

62%

61%

60%

59%

58%

10%

UNEMPLOYMENT RATE

DATA: EMPLOYMENT RATE & UNEMPLOYMENT RATE, MONTHLY, SEASONALLY ADJUSTED, METRO VANCOUVER

SOURCE: LABOUR FORCE SURVEY & TABLE 14-10-0383-01, STATISTICS CANADA

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economy

SHOWING UP IS HALF THE BATTLE Total labour force participation rates have been fairly stagnant for decades - but not when viewed through the lens of demography.

Total labour force participation in BC has been relatively steady since it was first captured in 1976, oscillating between a low of 61% in the late 1970's to a high of 67% in the early 1990’s. And while today’s rate of 65% is on the upper end of the spectrum, it’s below the 66% level from 1997. The reason why is in the underlying participation rates by age group and the relative size of those age groups that tell the story of changing participation over time. Participation rates for prime working aged adults, those from 25-54, have been steadily

growing for the past 25 years, from 85% in 1997 to 88% today. Similarly, participation rates for older adults have risen over the same period, from 25% to 37% today. However, the total hasn’t increased because we have an aging population and aging labour force. In 1997 those aged 25-54 made up 58% of the total 15+ population, whereas today they account for just 47%. Those aged 55+ went from 26% of the working age population in 1997 to 39% today. This is also why immigration is so important to our labour market, which we explore further later on.

A PARTICIPATION RIBBON FOR THE CURRENT GENERATION

100%

90%

85%

88%

80%

70%

63%

67%

60%

50%

40%

37%

25%

30%

20%

10%

TO YEARS

YEARS & OVER

DATA: LABOUR FORCE PARTICIPATION & POPULATION BY AGE, ANNUAL, BRITISH COLUMBIA SOURCE: TABLE 14-10-0223-01 & 14-10-0326-01, STATISTICS CANADA

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economy

FEWER VACANCIES EXIST, BUT CHALLENGES PERSIST While job vacancies have been declining in Canada—a good thing— some sectors continue to struggle in their search for workers.

Job vacancies, which Statistics Canada first started tracking in 2015, have been persistently high the past two years, reaching an all-time high in May of last year at 1.04 million nationally. Notably, job vacancies were not declining alongside the unemployment rate in 2021 and 2022 as the labour market looked to find its footing. In the previous edition of the rennie landscape, we looked at how large numbers of job vacancies were contributing to higher offered wages and higher overall wage growth. Since then, the landscape of job vacancies has shifted nationally, but some issues persist. The total job vacancy rate in Canada declined substantially at the end of 2022, going from 5.6% in September to 4.2% in December. The total number of vacancies went from just under 1 million to 750,000 over the same period, a 24% decline. That this coincides with a decreasing unemployment rate over that period suggests that many of those jobs could have been filled and not just removed.

Many industries enjoyed substantial declines in their job vacancy rates, such as Accommodation and Food Services going from 10.0% to 6.6% or Construction 7.3% to 4.9%. In terms of the overall number of job vacancies, however, some sectors continue to see large numbers of jobs going unfilled. Even though the vacancy rate in Health Care declined to 6.2% from 6.6%, it now has the most total job vacancies, with close to 150,000 unfilled positions in a growing industry (remember that aging population?). The mismatch between workers and jobs appears to be subsiding to a degree, but not evenly across sectors. As Canada looks to bring more workers into its labour force through international migration (discussed later) there is a clear need to prioritize skill sets that are underrepresented in our current labour pool.

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economy

HEALTHCARE WORKERS WANTED—STAT

HEALTH CARE 148,895

ACCOMMODATION & FOOD SERVICE 89,845

MANUFACTURING 60,315

PRO. SCI & TECH 53,515

ADMIN & MGMT. 42,330

EDUCATION & PUBLIC ADMIN 38,925

TRANSP. & WARE. 29,670

TRADE 114,175

CONSTRUCTION 60,975

FINANCE, INSURANCE, REAL ESTATE 39,620

OTHER 29,500

ARTS, ENT. & CULTURE 27,280

RESOURCE 17,845

SOURCE: TABLE 14-10-0372-01, STATISTICS CANADA DATA: NUMBER OF JOB VACANCIES BY SECTOR, MONTHLY, CANADA

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economy

WHERE YOU WORK DEPENDS ON WHAT YOU DO Given all the discussion around remote work and hybrid workplaces, one might think that the majority of workers today enjoy at least a degree of flexibility in where they do their work. But according to a survey from Statistics Canada of workers and where they anticipated working in the first quarter of 2023, the

and Food Services. On the other end of the work spectrum, workers who expect to be exclusively remote range from a low of 0.2% in Manufacturing to a high of 29% in Information and Cultural Industries. Further, of the 16 sector classifications from Statistics Canada only Finance, Information and Cultural Industries, and Professional, Scientific and Technical Services have less than 50% of their workers who expect to be on-site exclusively. Of those three, some form of hybrid is expected for the majority of Finance workers, while the other two are split evenly between on-site, hybrid, and remote. As our workplaces continue to evolve alongside technological advances, the way in which we do our jobs will evolve too, but at least for the time being, remote and hybrid work represent a growing minority of jobs.

majority of workers both in British Columbia and in Canada still work exclusively on-site. Overall, 64% of Canadian workers anticipate working on-site, with slightly fewer at 60% in BC. This is followed by 16% of workers in BC who anticipate being on-site for most hours, followed by 9% split evenly, 6% who are majority remote, and 10% exclusively remote. This of course, only tells part of the story as there is understandably a wide variation among industries. Those who expect to work exclusively on-site range from a low of 34% in Finance to a high of 82% in Accommodation

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economy

The future of both the workplace and working from home remain hotly-debated—though for many, working from home simply isn't an option.

REFLECTING THE PAST IN THE FUTURE OF WORK

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

ONSITE EXCLUSIVE

ONSITE MAJORITY

REMOTE MAJORITY

REMOTE EXCLUSIVE

EQUAL ONSITEREMOTE

DATA: PERCENTAGE OF WORKFORCE ANTICIPATED TO WORK ON-SITE OR REMOTELY NEXT THREE MONTHS, BRITISH COLUMBIA

SOURCE: TABLE 33-10-0658-01, STATISTICS CANADA

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economy

NOT ALL RECESSIONS ARE CREATED EQUAL For all the recent discussion around a potential looming recession in Canada, it's mostly neither here nor there.

Are we headed for a recession? That’s a frequently posed question in today’s high inflation and high interest rate environment. It’s a fair question as GDP growth slows and uncertainty looms, but from the perspective of your authors, whether or not we’re in a recession isn’t all that meaningful in understanding the state of our economy. Consider the last three recessions we experienced in Canada, most recently in 2020 as we shut our economy down in myriad ways in order to deal with a once-in-a-century pandemic. That recession was characterized by a huge spike in unemployment but paired with unprecedented government spending and dovish monetary policy. As a result, it was relatively short-lived and followed by a ramp up in economic activity and job growth. Back in 2008 and 2009 we had the Great Recession, which was spurred by a financial crisis originating in the US, before spreading globally. This recession lasted longer, and recovery was much slower as the response was defined much more by austerity measures.

But in between those two, we had another recession in Canada in 2015. You’ll be forgiven if you don’t even remember it, as BC was hardly impacted at all. This recession was driven mostly by falling energy prices and reduced output, particularly in Alberta. For the most recent quarter, GDP growth in Canada was 0.01%, which is technically positive and means we aren’t yet in the beginnings of a recession. It is certainly possible that Q1 and Q2 2023 will bring negative GDP growth resulting in a recession, but that says nothing about the severity or potential duration. To gain a better understanding of how the economy is faring for most people, might we humbly suggest looking at the labour market, explored in previous sections, as a better starting point. Certainly, insofar as our housing market here in Metro Vancouver is concerned, outcomes in the job market are more relevant than trends in the value of goods and services produced.

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economy

OPINIONS ABOUND: GDP UP, OR GDP DOWN?

10%

0.01%

-5%

-10%

-15%

QUARTERLY CHANGE IN REAL GDP

RECESSIONS

SOURCE: TABLE 36-10-0104-01, STATISTICS CANADA DATA: QUARTERLY, CANADA

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economy

PUTTING HOME PRICE DECLINES IN PERSPECTIVE Our rising and high interest rate environment has caused home values to decline over the past year, but context is important.

Home prices have been on a rollercoaster ride for the past three years. Spurred by ultra low interest rates and households with extra savings in their pockets, home prices rose sharply from late 2020 to early 2022, before peaking as interest rates started their own meteoric rise. The fact is, while home prices declined in 2022 (by 9.2% in Greater Vancouver and 19.4% in the Fraser Valley) they still sit well above their pre-pandemic values. But it’s not just home prices that ran up in value before pulling back in 2022.

The S&P 500 declined by a modest 4.6% last year, while Bitcoin dropped 37.3%, and crude oil by 38.2%. Meanwhile, yields on the one investment considered risk-free, the Government of Canada five year bond, nearly doubled last year. Last year was, in part, a recalibration of asset values. Loose monetary policy, including low interest rates and fiscal supports drove asset values up, followed by a tightening of monetary policy which reined them back.

WHAT GOES UP SOMETIMES DOES, INDEED, COME DOWN

120%

97.8%

100%

80%

60%

40%

18.8%

20%

12.2%

11.7%

7.7% 7.8%

6.6%

4.9%

4.4%

1.4%

-4.6%

-9.2%

-10.8%

-20%

-19.4%

-37.3%

-38.2%

-40%

-60%

WTI CRUDE BITCOIN

FVREB BENCHMARK

GOLD

REBGV BENCHMARK

S&P CADUSD

YR GOC BOND YIELD

PAST YEAR CHANGE

AVERAGE ANNUAL CHANGE, PAST YEARS

DATA: YEAR-OVER-YEAR ASSET PRICE CHANGES SOURCE: VARIOUS

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economy

LACKING APPRECIATION Asset prices have declined across a variety of markets over the past year after big gains in 2021. ›

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rates

02. rates Interest rates are at their highest point since 2008, while inflation has started to decline. The big question now is, when will rates follow?

INTEREST-ING TIMES AHEAD

Much of 2022 will be defined by runaway inflation around the world and central banks’ responses to it. Dovish monetary policy, fiscal stimulus, supply chain disruptions, war and economic sanctions, and climate events all contributed to inflationary pressures both in Canada and abroad. Here in Canada, we entered last year with an inflation rate of 4.8% and watched it increase rapidly before peaking at 8.1% in June. The Bank of Canada’s response to inflation began in March 2022, when it embarked on the first of eight consecutive increases to its policy rate. Headline inflation has most recently dropped to 5.2%, as of February, and is expected to decline further. Given the rapid run-up in prices in the early part of 2022, base year effects mean that overall inflation is likely to fall in the coming months whether price pressures continue to ease or not.

The Bank of Canada has indicated that inflation is on a path to reach its target range of 1%-3% by the middle of 2023 and believes that its monetary policy interventions are working. With this in mind, the bank has opted to hold its policy rate at 4.5% at its most recent meeting in March, while continuing to engage in quantitative tightening (which is the selling of government bonds by the central bank and seeks to put upward pressure on bond yields and in-turn fixed mortgage rates). As we move through 2023, if inflation continues on its downward trajectory, it is likely that the Bank of Canada will not raise interest rates again. They will, however, need to see inflation firmly back within their target range for a period of time before they consider lowering interest rates.

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rates

IT’S ALWAYS DARKEST BEFORE THE DAWN

9.0%

8.0%

7.0%

6.0%

5.25% 3.54% 4.59% 4.50%

5.0%

4.0%

3.0%

2.0%

1.0%

-1.0%

BOC POLICY INTEREST RATE

YEAR GOC BOND YIELD

AVG DISCOUNTED YR FIXED MORTGAGE RATE

ANNUAL CONSUMER PRICE INFLATION

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

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rates

UNPACKING THE BASKET As in most of our own household budgets, the cost of shelter is the single largest line item in the CPI. It contributes to inflation in ways that are both diverse and significant.

Inflation is commonly understood as a single number, expressed as a percentage, representing the change in prices from one year to the next. The way in which that number is derived by Statistics Canada is through the Consumer Price Index (CPI) which uses a “basket” of goods and services that seeks to represent the average consumer’s household spending. The basket of goods and services is weighted in order to allocate greater significance to those goods and services that represent a greater share of household spending (things like shelter, food, and transportation) while placing less significance on things households spend less on (think clothing, alcoholic beverages, and health care). Shelter cost, at 30%, is the single largest component of the CPI and as such carries the biggest influence on inflation of any of the categories. Shelter itself, however,

can be broken down further into three categories, which each have their own sub-categories, and their own changing values over time. To understand how shelter factors into inflation, one cannot simply look at housing prices, or rents, or interest rates because there are far more influencing factors at play. Looking at the most recent month of inflation data, where the headline rate was 5.2%, shelter costs increased 6.1% over the same period. That breakdown of the shelter components show wildly different results with rent increasing 5.4% year-over-year, mortgage interest up 23.9%, and electricity down 2.3% to name a few. As we move through 2023 and with inflation expected to continue on its downward trajectory, shelter will continue to play an outsized role, and parsing its contribution will take nuance.

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rates

NO SHELTER IN THE CPI FROM RISING HOUSING COSTS

RENT

RENTED ACCOMMODATIONS

TENANTS’ INSURANCE PROGRAM TENANTS’ MAINTENANCEREPAIRSOTHER MORTGAGE INTEREST RATE

HOMEOWNERS’ REPLACEMENT COST

OWNED ACCOMMODATIONS

PROPERTY TAXES & OTHER CHARGES HOMEOWNERS’ HOME & MORTGAGE INSURANCE HOMEOWNERS’ MAINTENANCE & REPAIRS

OTHER OWNED ACCOMMODATION EXPENSES

ELECTRICITY WATER NATURAL GAS FUEL OIL & OTHER FUELS

WATER, FUEL & ELECTRICITY

DATA: BASKET WEIGHTS OF THE CONSUMER PRICE INDEX, CANADA, 2021

SOURCE: TABLE 18-10–0007-01, STATISTICS CANADA

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rates

With fixed mortgage rates still elevated, a growing number of borrowers are facing expensive renewals. The stress test suggests they can manage.

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rates

STICKER SHOCK: RENEWING AT HIGHER RATES The majority of Canadian borrowers choose fixed-rate mortgages, with a strong preference for the five year fixed product (more on this trend later). These borrowers have been

years ago, so renewers are faced with higher interest costs at renewal. The average today is 4.80% compared with 2.99% five years ago, meaning the average renewer faces an additional 1.81 percentage points on their next mortgage, ouch. But the good news is that they were likely stress-tested to 4.99% five years ago, and could have afforded that rate back then. Add in that incomes have risen over the past five years while mortgage balances have been paid down and today’s renewers are, in aggregate, able to handle their new rates.

sheltered from rising rates in the short term, only being exposed upon renewal. For these renewers, the pace of discounted fixed rate increases from below 2% to around 5% isn’t particularly relevant. What matters more is the difference between the rate they’re paying now and the new rate at renewal. Today’s discounted fixed rates are undoubtedly higher than they were five

RENEWING OUR INTEREST IN FIXED MORTGAGE RATES

6.0%

5.0%

4.80% 4.99%

4.0%

3.0%

2.99%

2.0%

1.81%

1.0%

0.0%

-1.0%

-2.0%

RENEWAL

ORIGIN.

RENEWAL DIFFERENTIAL

ORIGINATING RATE ADJ. FOR STRESS TEST

RENEWED FROM

RENEWED AT

DATA: AVERAGE DISCOUNTED 5-YEAR FIXED MORTGAGE RATES, MONTHLY, CANADA

SOURCE: RATEHUB

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rates

PESSIMISM ABOUNDS AMONG CONSUMERS The inflation expectations of businesses and consumers is something the Bank of Canada watches closely—and the latter's are stubbornly high.

Inflation expectations are one of many metrics that the Bank of Canada keeps an eye on, as it matters to actual inflation. If consumers and businesses expect high inflation to persist, they will be more willing to spend more—and that can actually contribute further to inflation. In the most recent surveys of consumers and businesses, we see an interesting divergence in their responses on future inflation. The median consumer thinks high inflation will persist through 2023 at 7.2%, while the average business expects some declines to 4.5%. We should note here that

the Bank of Canada expects inflation to return to 3% by the middle of 2023 while your authors believe we could be back within the 1%-3% target range a little sooner than that. Looking two years out, consumers, on average, continue to see stubbornly high inflation above 5% while businesses expect it to come back to 3% and the Bank of Canada expects to return inflation to its 2% target by the end of 2024. These results show an ongoing challenge the Bank faces in taming inflation and in getting expectations (and behaviour) in line with its target.

UNREALISTIC EXPECTATIONS?

8.0%

7.2%

7.0%

6.0%

5.1%

5.0%

4.5%

4.0%

3.1%

3.0%

2.4%

2.0%

1.0%

0.0%

YEAR AHEAD

YEARS AHEAD

CONSUMERS’ CPI INFLATION EXPECTATIONS

BUSINESSES’ CPI INFLATION EXPECTATIONS

SOURCE: BANK OF CANADA DATA: INFLATION EXPECTATIONS OF BUSINESSES (JAN 2023) AND CONSUMERS (Q4 2022)

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rates

DIFFERING OPINIONS Consumers and businesses have substantially different expectations on inflation. ›

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credit and debt

03. credit & debt New debt is shrinking in Canada, which is exactly what the Bank of Canada is aiming for with higher interest rates.

FOLLOWING THE BANKER’S ORDERS

As we noted earlier, the Bank of Canada’s response to fighting inflation has been to raise its policy rate and engage in quantitative tightening, which has the effect of increasing interest rates. The goal is to disincentivize borrowing (and spending) and incentivize saving, essentially reversing the goal from its earlier period of low interest rates and quantitative easing that sought to stimulate economic activity. And when it comes to taking on new debt, Canadians have adjusted their behaviour recently. After taking on increasingly larger volumes of debt from Q3 2020 though Q1 2022, that trend has reversed course, with credit extended in the most recent quarter totalling just $19 billion, 60% less than the same period in 2021. For the full year in 2022, Canadians added $138 billion debt, which was 26% less than the $186 billion added in 2021.

Mortgage debt typically makes up the largest share of household credit, and in the most recent quarter that was once again the case, with 80% of new credit extended being in the form of mortgages. New mortgage debt, however, was 65% less in the last quarter than in the same quarter last year, as higher interest rates were likely contributing to the amount of borrowing Canadians were taking part in. Consumer credit, on the other hand, has been increasing of late. Canadians added nearly $3 billion in the last quarter, 37% more than the previous year. Since consumer credit often carries significantly higher interest rates, this will be something to monitor. Overall, Canadians will not be impacted uniformly by high interest rates. Those with fixed-rate mortgages (as discussed earlier) might be in a better position than they first appear, while in the following sections we’ll explore some of the risks associated with variable mortgage rates.

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credit and debt

IS LESS BORROWING A SIGN OF DURESS—OR PROGRESS?

$80

400%

350%

$70

300%

$60

250%

$50

200%

$40

150%

$30

100%

$20

50%

$10

-50%

-$10

-100%

-$20

-150%

-$30

Q1 Q2 Q3 Q4

Q1 Q2

Q1 Q2 Q3 Q4

Q2 Q3 Q4 Q3 Q4 Q1

YEAROVERYEAR % CHANGE

MORTGAGES

NONMORTGAGE LOANS

CONSUMER CREDIT

SOURCE: STATISTICS CANADA, TABLE 36-10-0579-01 DATA: NET NEW HOUSEHOLD CREDIT BY TYPE, QUARTERLY, CANADA

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credit and debt

A NOT-SO-OUTSTANDING CURRENT TREND: VARIABLE IS A POPULAR WAY TO LEND Unlike their fixed-rate peers, variable-rate mortgage holders continue to be directly impacted by the Bank of Canada's relentless assault on inflation.

In the last edition of the rennie landscape we explored the changing dynamics of new mortgage funds advanced and how much of new mortgage funds were going to fixed mortgages versus variable. We noted that not only was the amount of new mortgage debt increasing, but the share of that debt subject to variable rates was growing. Now that interest rates are higher, and new funds advanced are lower, we turn our attention to the current level of outstanding mortgage funds to see how much debt Canadian mortgage holders have overall.

As of the end of 2022, Canadians held an astounding $1.5 trillion (yes with a T!) in outstanding residential mortgages. That’s up 44% from the $1.0 trillion Canadians owed on their mortgages at the beginning of 2017. What’s more, the share of those funds dedicated to variable-rate mortgages has increased to 1 in 3 (from 1 in 4). All of these borrowers are feeling a direct impact from interest rate increases and are being forced to deal with higher interest costs today (or perhaps not, as we’ll explore later).

RATES AREN’T THE ONLY INCREASING MORTGAGE VARIABLE

$1.8

DECEMBER : 34% variable-rate mortgages

$1.6

$1.4

JANUARY : 25% variable-rate mortgages

$1.2

$1.0

$0.8

$0.6

$0.4

$0.2

FIXED RATE YEARS

VARIABLE RATE

SOURCE: STATISTICS CANADA, TABLE 10-10-0006-01 DATA: MORTGAGE FUNDS OUTSTANDING BY TYPE, MONTHLY, CANADA

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credit and debt

KEEPING UP WITH OUR DEBTS While debt-service ratios have increased in response to high interest rates, they remain lower than their pre-pandemic levels.

A good measure of how well households can afford their debt loads is the debt service ratio (DSR), which calculates the proportion of disposable income that is spent paying back loans. Interest rates are an important factor impacting DSR’s, when rates rise and borrowing becomes more expensive so does the cost of servicing debt. So it should come as no surprise that DSR’s have been increasing of late, with the total measure up to 14.33%. And while this is the highest it's been for more than two years, it’s still lower than it was in Q1 2020 at the

beginning of the pandemic, and lower than every single quarter in the two years prior. The mortgage DSR continues to climb, and it’s now at its highest point ever at 7.66% (the data go back to 1990), but this is offset by a lower non-mortgage DSR which has increased marginally but is still relatively low, from a historical perspective, at 6.67%. When you pair the DSR data with the mortgage arrears rate, which is a lagging indicator but still a useful one, these traditional debt measures indicate that Canadians, as a whole, are managing their debt loads relatively well.

DEBT SERVICE AND ARREARS ARE, IN PART, ALLAYING SOME FEARS

16%

0.8%

14.33%

14%

12%

0.6%

10%

0.4%

7.66%

4.25% 6.67%

0.2%

arrears rate 0.15%

0.0%

NONMORTGAGE DSR MORTGAGE DSR

TOTAL DSR

BOC POLICY INTEREST RATE

SOURCE: STATISTICS CANADA, TABLE 11-10-0065-01. CANADIAN BANKERS ASSOCIATION DATA: PROPORTION OF DISPOSABLE INCOME GOING TO DEBT SERVICE & MORTGAGE ARREARS RATE, CANADA

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credit and debt

NOT KEEPING UP WITH OUR DEBTS

Variable-rate borrowers at some Canadian financial institutions maintain fixed payments even as their monthly interest costs balloon— with implications for those borrowers and the broader market.

One product offered by some Canadian banks is a variable-rate mortgage with a fixed payment option that is not subject to a trigger rate, meaning that when interest rates change the payment stays the same, but the amount of that payment that gets dedicated to interest changes. In other words, if a variable mortgage rate increases to the point where the borrower's payment no longer covers the interest owed, the lender—keeping the borrower's payment constant—will add the unpaid interest back into the borrower's principal (the mortgage balance). These mortgages now have an infinite amortization, with the balance of the loan increasing up

until the time the current mortgage contract comes up for renewal. One Canadian chartered bank currently carries $52 billion in variable-rate mortgages that have fixed payments that are not covering interest costs—equal to more than 70% of that bank's variable-rate mortgage book. By not increasing their payments today, these borrowers are kicking the can down the road to when their terms expire, at which point they will be faced with either increased payments, a need to sell assets or take on additional debt to pay down their principal— or the worst-case scenario sell their home.

TO INFINITY (AMORTIZATION) AND BEYOND

60%

53%

50%

of variable-rate mortgage payments are interest only 72%

40%

35%

31%

30%

27%

20%

17%

13%

10%

1% 1%

>35

0-5

>5-10

>10-15

>15-20

>20-25

>25-30

>30-35

AMORTIZATION PERIOD YEARS

CONTRACTUAL PAYMENT BASIS

CURRENT CUSTOMER PAYMENT BASIS

DATA: AMORTIZATION PROFILE OF CANADIAN RESIDENTIAL MORTGAGES

SOURCE: CIBC REPORT TO SHAREHOLDERS, Q1 2023

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credit and debt

KICKING THE CAN DOWN THE ROAD A growing share of variable-rate mortgage holders are not covering their interest payments, and will need to pay the piper come renewal time. ›

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demographics

04. demographics

As a result of elevated international migration in support of our economy, Canada and British Columbia are growing their populations at a pace never before seen.

ONE MILLION ADDITIONS (YEAH, THAT'S A LOT)

Remember that aging labour force discussed earlier? Well the federal government’s plan to grow the working age population is primarily through international migration. The latest revised immigration targets plan to add 465,000 new permanent resident additions in 2023, growing up to 500,000 in 2025. And while this is an important piece of the puzzle it doesn’t tell the whole story when it comes to the record-setting population growth in Canada in 2022. Last year’s immigration target was 431,645 new permanent residents, which was marginally exceeded. Meanwhile, Canada’s net international migration for 2022 added up to more than 1 millions people, an all- time record. The difference lies in temporary permits: temporary foreign workers, study permits, and the international mobility program. These temporary permit holders are a major source of population growth

in Canada and BC, and their respective labour forces. Many of them also convert to permanent residents down the line. Here in BC, net international migration accounted for more than all of the population growth last year. The natural increase was negative last year, as deaths exceeded births, which is a trend that may continue as our population ages. Net domestic migration slowed through the year and turned negative in the second half. Interprovincial migration is cyclical in nature, and after BC welcomed more domestic migration than any other province for two years this is likely not to be a major source of growth in 2023. Instead, look for Canada to welcome newcomers at a world-leading rate, and for BC to capture more than its share in the months and years ahead, as we explore further in the next sections.

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demographics

GROWTH SPURTS

1,200,000

1,050,110

1,007,557

1,000,000

800,000

600,000

400,000

200,000

150,783

147,540

42,553

481

-3,724

-200,000

POPULATION CHANGE NATURAL INCREASE

NET DOMESTIC MIGRATION

NET INTERNATIONAL MIGRATION

BRITISH COLUMBIA CANADA

SOURCE: QUARTERLY DEMOGRAPHIC STATISTICS, STATISTICS CANADA DATA: TOTAL POPULATION AND COMPONENTS OF POPULATION CHANGE, 2022, BRITISH COLUMBIA & CANADA

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demographics

NEXT STOP: CANADA

Canada's immigration strategy will ensure it continues to grow at a pace unlike any other country's on earth for years to come.

Most of the developed countries in the world are faced with aging populations, and many of those are also faced with declining natural changes in population, that is deaths exceeding births. Of the 14 countries shown here, seven are faced with declining populations over the next 20 years as the decrease in natural population is not projected to be offset by net migration. Of the remaining seven countries, only India and South Africa are projected to grow through natural increase by more than 10% of their current populations over the next 20 years. With the exception of China and India, however, all of these countries are projected to have positive net migration, that is more people moving in than moving out. Of those countries expected to add through net migration over the next 20 years, they range from a low of 76,000 in Brazil to a high of 21.5 million in the US. When compared to their relative size, however, one nation stands out: Canada.

While the US is projected to add four times as many migrants as Canada, it has ten times the population. So when compared to the current population, Canada is expected to add an additional 14% through net migration, whereas the US is only expected to add 6% more. When we combine the natural change with net migration, Canada is projected to grow the second most, adding 16% of its current population, after South Africa at 19%. On the other end of the spectrum, Japan is expected to lose 12% of its current population over the next 20 years. While this growth to Canada's population is welcome news for our labour force, ensuring an adequate housing supply for all will be a major challenge going forward.

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demographics

CANADIAN EXCEPTIONALISM

20%

2022-2042

15%

10%

-5%

-10%

-15%

-20%

NATURAL CHANGE % OF POPULATION

NET MIGRATION % OF POPULATION

SOURCE: UN DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS POPULATION DIVISION DATA: ESTIMATED POPULATION CHANGE 2022-2042—NATURAL AND MIGRATION

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demographics

BC PUNCHING ABOVE ITS WEIGHT

Newcomers to Canada are disproportionately choosing British Columbia as their ultimate destination, coming as they are for the mountains, the ocean, and the Canucks (we're kidding about the last one).

Since the majority of the permanent resident additions to Canada in the past two years have already been in the country with study or work permits, it’s worth exploring the data we have on permit-holders to better understand the flow of people into the country and, more specifically, into BC. And flow into BC they do, as the province attracted 20% of the permit holders in 2022, in spite of having 14% of Canada’s population. And here is where we could wax poetically

about the natural beauty of BC and boast about all this province has to offer. But consider the profile of these immigrants: temporary foreign workers, international students, and the international mobility program. These newcomers are, by and large, coming here to work and study. So the main drivers are likely the strong labour market referenced earlier along with an in-demand post-secondary education system. And this trend will serve our economy well going forward.

FOR WORK, FOR SCHOOL: GROWTH IN BC’S POPULATION POOL

60%

50%

ONTARIO

40%

30%

BRITISH COLUMBIA

20%

QUEBEC

10%

ALBERTA

10%

20%

30%

40%

50%

60%

% OF CANADA’S POPULATION,

SOURCE: STATISTICS CANADA, TABLE 17-10-0005-01. IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: POPULATION AND TEMPORARY PERMITS (STUDY, TFWP, IMP) ISSUED BY PROVINCE

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demographics

A BIGGER SLICE OF A GROWING PIE International migration to British Columbia is the single-biggest source of population growth for the province. ›

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housing

05. housing

While we often speak to the value of mortgage-free equity with a view to its impact on the market in the future, the truth is it's already having a significant impact.

A RUN ON THE BANK OF MOM AND DAD

In Metro Vancouver, 40% of principal residence homeowners are mortgage-free. It should be noted that this means no mortgage whatsoever, so this does not include those with 1% of their mortgage balance remaining, only clear-title. This adds up to about $400 billion in mortgage-free equity in our region, of which 53% is held by those aged 55-75, 25% by those 75+, and the remaining 23% by those 25-54. Among other things, this is an indication of why changes to interest rates don’t affect everyone equally and also of a deep pool of capital from which many are able to draw on when they need it. And while the amount of mortgage-free equity within our market has been consistently growing over time, there is also a portion of that equity which is released each year, either through the sale of a home or the addition of a mortgage. We can measure that release by examining the 75+ age group and tracking mortgage-free equity households that drop out of the census over time.

In the period from the 2011 census to the 2021 census, $48 billion in mortgage-free equity was released amongst homeowners aged 75+ in Metro Vancouver. That’s an average of almost $5 billion per year or $400 million per month of capital being freed up from homes. To put that into context, total MLS sales volume in 2022 in the Vancouver Region was roughly $53 billion, or $4.4 billion per month. We can’t track exactly where all the equity went, and it’s likely it wasn’t all redeployed back into the local real estate market, but it’s also likely that a significant amount of it was invested back into real estate and a good portion of that through the transfer of wealth to the next generation.

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housing

WHERE THERE’S A WILL THERE’S A WAY

$1 Trillion

$47.6 BILLION

$4.76 BILLION

$397 MILLION

$10 Billion

$100 Million

$1,000,000

$10,000

$100

TOTAL

ANNUAL AVERAGE

MONTHLY AVERAGE

NET VALUE OF MORTGAGEFREE EQUITY RELEASE,

SOURCE: STATISTICS CANADA, 2021 CENSUS DATA: MORTGAGE-FREE HOUSING EQUITY, METRO VANCOUVER

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housing

FEWER HOMES FOR MORE PEOPLE

New construction of purpose-built rental homes has been on the rise in Metro Vancouver, it's true; supply, however, is not keeping up with population growth.

The past decade has brought an increase in the construction of purpose-built rental homes not seen since the 1970’s. Each of Canada's five largest markets have grown their rental stock since 2010, ranging from a 7% increase in Toronto to a 35% increase in Calgary, while here in Metro Vancouver the stock is 12% higher. While this is undoubtedly a positive for the supply of rental homes in these markets, it belies the longer term trends which saw declines in the rental stock in the decades prior. To wit, from 1990 until 2010, Metro Vancouver’s rental stock declined 7%, while Toronto was the only market which saw an increase over that period by a modest 2%. What’s more, of course, is the massive population growth experienced by each of these markets over the past decades. Since 1990 the population growth of Canada’s five largest markets has ranged from 24% in Montréal to 79% in Calgary, while we’ve grown by 43% here in Metro Vancouver.

The recent trend of purpose-built rental growth has not made up for the losses experienced over the past decades, or for the robust population growth. As such, when we look at rental homes per 10,000 people across each census metropolitan area, only Montréal has been growing its share since data was first collected there in 1998, up by 9%. The other major markets have all seen significant declines since 1990, with Metro Vancouver’s purpose-built rental stock per capita declining by 42%. The silver lining going forward is that purpose- built rental starts are up dramatically here in Metro Vancouver, with a record-setting 9,867 in 2022, 44% more than the previous high. That’s a step in the right direction, but we have a long way to go to catch up.

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housing

FALLING BEHIND ON RENT(AL HOMES)

1,600

1,422

1,400

1,288

1,200

929

1,000

748

800

727

600

690

579 501 424 327

400

200

VANCOUVER

TORONTO CALGARY

EDMONTON MONTRÉAL

SOURCE: CMHC & STATISTICS CANADA, TABLE 17-10-0135-01 DATA: PER CAPITA RENTAL APARTMENT STOCK BY CENSUS METROPOLITAN AREA

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housing

If you want some insight into when pre-sale market activity might pick up or slow down, look no further than resale prices.

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housing

PRE-SALE BUYERS LOOK FOR MORE VALUE The pre-sale market is one where developers share some of the risk and reward associated with development with their respective purchasers. And because buyers pay today, for a home to be delivered tomorrow, they want to see that values are increasing when they buy. So it makes sense then, that there is a strong correlation, and probably causation, between rising resale prices and pre-sale counts. This trend held true in 2015 and 2016 as rapidly rising resale prices lead to increased

pre-sale counts, and again from later 2020 to early 2022. The opposite is also true, when resale prices decline, pre-sale counts slow as well, as was most recently observed in the second half of 2022. In 2023, with interest rates elevated and a market struggling to stabilize, keeping an eye on resale prices is a reliable way to gauge when pre-sale activity will pick back up.

AS RESALE GOES, PRE-SALE FOLLOWS

0 3,000 2,000 1,000 4,000 5,000 6,000 8,000 7,000

12%

10%

-2%

-4%

-6%

PRESALE COUNTS

QUARTEROVERQUARTER BENCHMARK PRICE CHANGE CONDOS

SOURCE: REBGV, FVREB, & ZONDA URBAN DATA: QUARTERLY, METRO VANCOUVER

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housing

PULLING DEMAND FORWARD

Surprise! [said sarcastically] The share of foreign home buyers in Metro Vancouver rose in the last 6 months of 2022 in anticipation of the impending foreign buyer ban.

The federal government passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act AKA the foreign buyer ban on June 23, 2022. And while much has been noted about how few residential property transactions involve foreign buyers, along with the many noted exceptions to the ban, there are still some would-be buyers who are banned from purchasing in 2023. And with six months of lag time between the passage of the bill and its implementation, there was a window of opportunity for those subject to the ban to act.

Sure enough, we can see a sharp increase in the share of foreign buyer residential transactions in the second half of 2022, from 0.9% in June to 2.8% in December. We should note here that these are buyers subject to BC’s foreign buyer tax, and may include some buyers exempted from the ban, such as international students. Overall, the share of foreign buyers participating in Metro Vancouver’s residential real estate market was still quite low in the second half of 2022, but the increase that preceded the implementation of the ban is evident.

BUYER SHIFTS AS THE DRAWBRIDGE LIFTS

received Royal Assent FEDERAL FOREIGN BUYER BAN

5.2%

4.1%

2.8%

1.6%

0.9%

% OF RESIDENTIAL TRANSACTIONS WITH FOREIGN INVOLVEMENT

DATA: MONTHLY, METRO VANCOUVER

SOURCE: BC GOVERNMENT PROPERTY TRANSFER TAX DATABASE

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