rennie_landscape_Spring_2020

spring 2020

rennie.com

Dear Reader,

Welcome to the fifth edition of the rennie landscape, and the first of 2020--a year that will be talked about for generations to come. From the beginning of January through to mid-March, Metro Vancouver’s housing market continued along an upward trajectory that established itself midway through 2019. The regional labour market was strong, unemployment was near historic lows, and wages were rising; households were spending and homes were selling based on a re-emergence of consumer confidence. All of this changed over the course of two short weeks. Much like the financial crisis of 2008/09 showed us, the emergence of a global pandemic has underscored the extent to which our modern world is interconnected. As there was no underlying crisis of confidence or of finance that precipitated the worldwide economic shutdown we are currently enduring, there similarly is no blueprint for managing it. The downturn could last for weeks or months, and the precise path to recovery is uncertain. In short, there are many things we currently do not know. As humans, we do a reasonably good job at measuring and managing risk but we find it much more difficult to measure and manage uncertainty. Despite these increasingly uncertain times, rennie continues to be guided by data, whether that means monitoring changes in the myriad macroeconomic factors that typically form the basis of the following pages of the rennie landscape, or now the day-to-day changes in stock markets, interest rates, exchange rates, and oil prices. Regardless of what data we are following, our goal is the same: to better understand what it means for all of us. For now, the legacy of 2020 as it relates to our global community, our national economy, and our local housing market has yet to be determined. As our path to recovery becomes clearer over the course of the coming weeks and months, we will remain as committed as ever to tracking the most relevant and current data as part of subsequent editions of the landscape and our other publications. As always--and perhaps especially now--please do not hesitate to be in touch with any questions, comments, or ideas. We are all in this together.

Thank you,

Ryan Berlin SENIOR ECONOMIST intel@rennie.com

Andrew Ramlo VP, INTELLIGENCE aramlo@rennie.com

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contents

ECONOMY

RATES

CREDIT & DEBT

DEMOGRAPHICS

HOUSING

POLICY

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economy

01. economy The expansion of Metro Vancouver’s job base waned towards the end of 2019, setting the stage for what is likely to be modest growth in 2020.

JOB GROWTH: QUICK OUT OF THE GATE, THEN SLOWING FOR 6 MONTHS STRAIGHT

The late spring and summer months of 2019 were heady times for job growth in Metro Vancouver, with the annualized pace of expansion peaking at 6.4% in July of last year. That was almost three times the rate experienced nationally (2.2%) and two-thirds faster than growth in Toronto (3.9%). At the region’s peak Vancouver was adding jobs at an annual rate of 89,800, which accounted for almost one-quarter of job growth nation-wide. However, as 2019 wore on, Metro Vancouver’s job market became more sluggish, with growth clocking in at a mere 0.6% by the time January 2020 rolled around. Interestingly, the slowdown appears to have been led by the region’s goods- producing sectors—namely construction and manufacturing. This is an intriguing finding

because other data sources have indicated that residential and non-residential construction activity has remained solid. As such, expect a rebound in construction (and other) job growth in 2020. Having said that, the region is unlikely to sustain early- 2019’s annualized job growth of 5-6% through the rest of 2020 given constraints on labour (which has kept a lid on the unemployment rate) and what is again shaping up to be an increasingly uncertain global economic landscape. On the other hand, the region’s labour market remains dynamic, with job vacancies elevated, the construction pipeline remaining full, and new office/tech employment coming soon to a tower near you. Insofar as Metro Vancouver’s resale and pre-sale markets are concerned, this would be a welcome trend.

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economy

JOB GROWTH SLIPS IN VANCOUVER

7.1%

5.2%

3.4%

1.5%

0.6%0.6%

0.2%

-2%

-4%

-6%

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: PAST 12-MONTH CHANGE IN TOTAL JOBS, 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED

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economy

FOUND WORK? IT’S A FULL-TIME JOB, PROB A slowing rate of job growth in Metro Vancouver masks what most would consider to be a positive compositional change: healthy growth in full-time work.

Changes in part-time employment have both voluntary and non-voluntary origins. Some people are forced to choose part- time work when full-time alternatives are not available to them or when life presents unexpected challenges. Meanwhile, others prefer part-time employment so they can spend more time in school, with their families, or pursuing their favourite hobby. From purely an economic/productivity perspective, there tends to be a bias in favour of full-time work, associated as it is withmore

permanent jobs and more hours worked than its part-time counterpart. Good news then that despite the slowdown in employment growth in Metro Vancouver through the end of 2019 and into early 2020, full-time employment expanded by close to 30,000 jobs on a year-over-year basis. While this has been contrasted by a net loss of 15,500 part-time positions regionally (compared to historical year-over-year growth), signs are pointing to broader-based employment gains through the remainder of 2020.

FULL-TIME JOB GROWTH NOT A PART-TIME TREND

40k

30.5k

30k

28.4k

24.9k

20k

10.3k

10k

8.2k

-10k

-15.5k

-20k

PREVIOUS YR AVG

PREVIOUS YEAR

PAST YEAR

PARTTIME

FULLTIME

DATA: PAST 12-MONTH CHANGE IN JOBS, 3-MONTH MOVING AVERAGE, UNADJUSTED FOR SEASONALITY

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

THE UNEMPLOYMENT RATE: HOW LOW CAN WE GO? MAYBE NOW WE KNOW The regional unemployment rate continues to flirtwith its historical low and shows no signs of deviating from the range of 4-5%.

Unemployment in Canada has never been so good: the country’s 5.7% unemployment rate as of January 2020 remains in close proximity to the all-time floor of 5.6% achieved in six separate months in 2019. Of course, the national unemployment rate is merely a reflection of the complex labour market dynamics seen in regions throughout the country—particularly in urban areas where most people live and most jobs exist.

Given the trend seen Canada-wide, perhaps it’s not so surprising that some of the country’s largest markets continue to experience full employment and near- historically-low unemployment rates, including Toronto (5.5%) and more specifically, Vancouver (4.5%). It would be a stretch to expect sub-4% unemployment on the West Coast over any prolonged period of time, but with an aging population, slow labour force growth, and robust population growth, signs point to unemployment remaining lower for longer.

VANCOUVER’S NEW EQUILIBRIUM UNEMPLOYMENT RATE?

12.0%

10.0%

8.2%

8.0%

7.2%

6.0%

5.5% 5.7% 4.5%

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

EDMONTON CALGARY

TORONTO

VANCOUVER

CANADA

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

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economy

DISCOURAGED WORKER RATE: WE DO PORTEND A POSITIVE TREND The unemployment rate is good at measuring how well those looking for work find it. But what about those who don’t? On this, the data is reassuring.

As with part-time work, the majority of those not in the labour force, such as retirees, have chosen not to be. Indeed, in British Columbia in 2019, 97% of those who were of working age but were not in the provincial workforce had chosen not to work for a multitude of reasons. For the other 3% who were not in the labour force, the reasons were varied, from being in school, suffering from an illness, or caring for family members. For most people in these categories, the reason for not being in the workforce can be seen as transitory, with a return to work expected at some point in the future. Having said that, there is another group— discouraged workers, or those who have given

up looking for work because they have been unsuccessful for a prolonged period of time— for which being out of the labour force is not necessarily temporary. These individuals are not captured in the unemployment rate, so it is important to consider them as part of a more holistic temperature-taking of the labour market. The good news is that in BC, the discouraged worker rate (discouraged individuals as a share of those not in the workforce), remains at an all-time low of 0.05%. This is considerably lower than Canada’s 0.18%, and down from its five-year peak of 0.19% in early 2016. With labour market conditions remaining tight, the number of discouraged workers is likely to remain minimal.

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economy

ENCOURAGED BY THE LACK OF DISCOURAGED WORKERS

0.40%

0.35%

0.30%

0.25%

0.22%

0.20%

0.18%

0.15%

0.14%

0.10%

0.05%

0.0%

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

ONTARIO

ALBERTA

BRITISH COLUMBIA

CANADA

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: SHARE OF DISCOURAGED WORKERS NOT IN LABOUR FORCE, UNADJUSTED FOR SEASONALITY

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economy

THANK GOODNESS BC DOESN’T HAVE A VACANT JOB TAX Across Canada, there are currently 562,910 jobs that employers would like to have filled but remain vacant; this amounts to 3.3% of all filled and unfilled jobs (combined), a proportion that has remained constant over the past year.

rate of growth, it would take nine years for these vacancies to be filled. Of course, just as with the unemployment rate, the equilibrium job vacancy rate is not zero, but rather something likely close to 3%. Even so, that still equates tomore than 25,000 jobs that could, or should, be filled under normal conditions. While this does signal that employers remain positive about hiring and, by extension, future economic prospects, it begs the question of whether automation over the longer-term could be more of an economic saviour than a job slayer. This is underscored by the fact that one-third of current vacancies are in retail and accommodation/food services—sectors that are ripe for an increased automation presence in the coming years.

BritishColumbiaaccountsforalmostone-fifth of these vacancies, with 106,260 of its own, which translates to a vacancy rate of 4.5%. Though this is down from 4.8% compared to one year earlier, it remains the highest of any province. This brings us to Metro Vancouver, whose labour challenges have beenwell-documented in this publication and in others. Overall, the region faces a 4.7% job vacancy rate, which is the highest in the country and is the result of 72,475 positions that are unfilled. To put this in perspective, at the most recent annualized

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economy

The Lower Mainland’s elevated job vacancy rate is good for workers, but not so for employers. Is there a silver lining?

HELP WANTED: 72,745 JOBS UP FOR GRABS

6.0%

5.1%

5.0%

4.8%

4.7%

4.5%

4.0%

3.3% 3.3%

3.1% 3.1%

3.0%

2.8% 2.7%

2.7%

2.3%

2.0%

1.0%

0.0%

EDMONTON

CALGARY

TORONTO

CANADA

BRITISH COLUMBIA

VANCOUVER

Q JOB VACANCIES

16,170

20,850

101,345

562,910

106,260

72,475

SOURCE: JOB VACANCY AND WAGE SURVEY, STATISTICS CANADA DATA: SHARE OF ALL JOBS THAT ARE UNFILLED

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economy

MAKING HAY WHILE THE SUN SHINES IN RAINY BRITISH COLUMBIA The feel-good story of 2019 was the one about wage growth, which has been robust from east to west and for all the rest (mostly).

The continuedmarriage of constrained labour supply and elevated labour demand across Canada and in BC continues to yield robust wage growth. For Canada, the past year saw the median weekly wage rate for full-time positions rise by 5.0%—or almost 2.5 times the previous five-year average rate of 2.1%. This rate of wage increase nationally reflects an uneven landscape of rising purchasing power across Canada’s provinces and territories. Of note is that Alberta, while experiencing wage growth over the past year, saw an increase of only 2.8% (though this was still higher than the 2.3% annual rate of increase from the previous five years), while Ontario lead the country with an objectively whopping 7.7% increase. So, what of BC? The province itself was no slouch, registering wage growth of 6.8% most recently, which is 183% faster than the

average annual experience of the prior five years. Furthermore, with consumer price inflation remaining in check—for Canada as whole the latest data show an inflation rate just slightly above the midpoint of the Bank of Canada’s target range, coming in at 2.4%—real(i.e.inflation-adjusted)wageshave also been growing. On average in Canada real wages were up 2.6% over the past year, while in BC they were up 4.4%. Combined with low (and once again falling) interest rates, these rising real incomes help to support the economy broadly and housing markets more specifically, making it easier at the margin for those looking to buy to do so, and for those who already rent or own to continue to afford their payments (this, in turn, helps to explain Metro Vancouver’s continued low mortgage arrears rate and rental vacancy rate).

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economy

RESILIENT WAGES POST GROWTH FOR THE AGES

9.0%

8.0%

7.7%

7.0%

6.8%

6.0%

5.0%

4.0%

3.0%

2.8%

2.4%

2.3%

2.1%

2.0%

1.0%

0.0%

CANADA

ONTARIO

ALBERTA

BRITISH COLUMBIA

MED.WEEKLY WAGE FULL TIME

$1,050

$1,077

$1,192

$1,088

Q Q ANNUAL AVERAGE

Q Q

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: MEDIAN WEEKLY WAGES FOR FULL-TIME JOBS, SEASONALLY-UNADJUSTED

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economy

THE (RE)TAIL-END OF A PROLONGED CONSUMER SPENDING SPLURGE? The bricks and mortar retail model has recently been facing challenges on multiple fronts, from online shopping to lower home values.

While it has long been established that online retailing is taking an ever-larger piece of the consumer spending pie, it continues to be debated whether digital storefronts will be the death knell of physical ones. When looking at retail spending per capita in major markets in Canada—and especially in Metro Vancouver—it seems clear that the retailspendingbonanzathatcharacterizedthe post-2009 period has been put in a holding pattern, at least since mid-2017.

Because retail spending data do not account for sales to online merchants, the increased propensity of consumers to shop on the internet seems a plausible explanation for slowing per capita spending values. However, through the wealth effect, softened home values also play a role, discouraging spending at the margin. With Vancouver’s housing market clearly following a new (upward) trajectory, do not be surprised if the retail spending data tell a different story in the months to come.

PER CAPITA RETAIL SALES CONTINUE TO FLAG

$1,700

$1,600

$1,482 $1,487 $1,474

$1,500

$1,400

$1,300

$1,200

$1,100

$1,000

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 2019

MONTREAL

TORONTO

VANCOUVER

DATA: MONTHLY RETAIL SALES VALUES PER 1,000 RESIDENTS AGED 15+, SEASONALLY-ADJUSTED

SOURCE: LABOUR FORCE SURVEY & RETAIL TRADE SURVEY, STATISTICS CANADA

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economy

REELING RETAIL Bricks and mortar retailers in Metro Vancouver continue to feel the pinch from online competition and the after-effects of a sluggish housing market. ›

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rates

02. rates

You can officially stick a fork in the period of monetary tightening that lasted from mid-2017 through 2018, with the cost of borrowing now falling fast.

THE 5-YEAR GOVERNMENT BOND YIELD: A RATE OF INTEREST

Typically, a growing economy is complemented by rising prices and predictably-increasing (or higher-than- average) interest rates. What is historically unusual, but the de facto new norm, is that despite Canada’s economy having been growing almost uninterruptedly since the trough of the 2009 recession— accompanied as you might expect by consistent, within-target inflation—interest rate inertia is to the downside. This applies to both the short-term and long-term variety, whether policy-based or market-determined. The key features of our recent economic experience are that 1) our economy’s potential growth path is much lower than it was in past decades (due in part to an aging population and a lack of sustained productivity gains), and 2) there is a great deal more uncertainty about what the future holds for both the national and the global economy, largely due to the evolving global health crisis.

Indeed, the emerging response to the spread of the coronavirus, combined with concerns about oil supply disruptions, and the impacts of trade wars (and real wars), is creating a flight to safety in the part of investors. In other words, bond markets are attracting significant capital inflows, which is serving to bid up bond prices and thus push down bond yields. Lower-yielding government bonds mean cheaper fixed-rate mortgages, which will stimulate housing markets across Canada (including, or maybe especially, in Metro Vancouver). The Bank of Canada has already lowered its trend-setting short-term policy rate in an effort to avoid recessionary conditions later this year. Now, with the economy’s path forward being uncertain, we are certain that even-lower bond yields—and hencemortgage rates—will be achieved in 2020.

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rates

GALE FORCE INTEREST RATE TAILWINDS ARE NOW BLOWING

5.00%

4.50%

4.08%

4.00%

3.50%

3.00%

2.50%

2.40%

2.00%

1.50%

1.25% 0.88%

1.00%

0.50%

0.00%

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

BOC OVERNIGHT TARGET RATE YR GOC BENCHMARK BOND YIELD

YR CONVENTIONAL MORTGAGE

CANADIAN CPI INFLATION

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

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rates

KEY BANK OF CANADA INDICATOR RATCHETS UP The Bank of Canada faces conflicting data as it weighs the benefits of lowering rates or maintaining the status quo: an uncertain economy with rising prices.

Canada’s central bank has a narrow mandate: tomanage the country’s money supply and, in doing so,maintain a stable price environment. Should the prices of things such as gasoline, lettuce, tank tops, and sofas rise too quickly, the Bank may act to quell further increases by raising interest rates and incentivizing saving (as opposed to spending) at the margin. Conversely, when prices show signs of stagnation or decline, the Bank will lower rates to incentivize spending (at the expense of saving). With this in mind, it is noteworthy that the latest year-over-year consumer price data show the annualized inflation rate rising to 2.4%—well within the Bank’s 1%-3% target

range, but substantially higher than the previous year’s 1.4% increase. In Metro Vancouver, prices have most recently been rising at a similar pace— 2.2%—though they have abated somewhat from the previous year (when inflation registered at 2.3%). Some of this can be chalked up to relatively lower housing costs, as well as to cheaper gasoline—implying that it also might not last. With the region’s housing market heating up again, and gas prices recently creeping upwards, inflation could accelerate through the latter half of 2020. (Good thing then that wages are expected to rise faster.)

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rates

CONSUMER PRICES: UP, UP...BUT NOT AWAY

3.0%

2.8%

2.7%

2.5%

2.4%

2.3%

2.2%

2.0%

1.8%

1.6%

1.5%

1.4%

1.2%

1.0%

0.5%

0.0%

CALGARY

EDMONTON

VANCOUVER

CANADA

TORONTO

Q Q

DATA: PAST 12-MONTH CHANGE IN CONSUMER PRICE INDEX

SOURCE: STATISTICS CANADA

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rates

In their continued flight from risk, edgy investors are driving government bond yields ever lower — in some cases, into negative territory.

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rates

10-YEAR GOVERNMENT BOND YIELDS: THE CHEAP GET CHEAPER What would you think if someone proposed that in exchange for you giving them $100,

While not as mind-bending as in Europe, long-term government bond yields across the globe remain historically low, with Canada’s yielding 1.4%. This is in line with Hong Kong and slightly below the US, but much lower than China’s seemingly ostentatious 2.6% yield. The common thread that runs through these countries and others is that yields have fallen significantly in the past year. Look for this to continue in the year ahead.

they would give you back $99.60 in ten years. Sound like a raw deal? For millions of investors around the world, this is just par for the course in today’s world of uncertain economic growth. This example illustrates the current yield on 10-year Euro Area government bonds, which has fallen by 53 basis points over the past year as investors have increasingly sought refuge from risk.

GOVERNMENT BOND YIELDS: LOW AND FALLING

3.0%

2.6%

2.5%

2.0%

1.6%

1.5%

1.4%

1.0%

0.7%

0.5%

0.0%

-0.4%

0.5%

EURO AREA JAPAN BRITAIN CANADA

USA

KOREA

CHINA

YR CHANGE BASIS POINTS

-53

-8

-50

-53

-38

-109

-44

-28

YR GOVT BOND YIELD

DATA: 10-YEAR GOVERNMENT BOND YIELDS

SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT (OECD)

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rates

IT’S NOT THE NEW NORMAL, BUT THE YIELD CURVE REMAINS INVERTED Long-term interest rates are supposed to be higher than short-term ones. This begs the questionofwhyCanada’s interest rate landscape remains flipped on its head.

When the inverted yield curve was introduced as an indicator we were watching in the Q3 2019 rennie landscape, there was not the expectation that it would also feature in the following editions. Yet, here we are. To succinctly recap, when longer-term interest rates fall below their short-term counterparts historical experience suggests that recessionary conditions may not be far off. Curious then that Canada’s yield curve has remained inverted for the past nine months

while the national economy has continued to grow (albeit at a relatively slow pace). The expectation is that short-term rates will fall in the near-term, thereby “normalizing” the yield curve. This process would be Central Bank-led, with policy rates being pushed down to stimulate economic activity and head off a recession. In this context, one might choose to view the currently-inverted yield curve in the same way as the annual Perseid meteor shower: with fascination but no fear that disaster looms.

THE PESKY YIELD CURVE INVERSION PERSISTS

5.00%

4.00%

3.00%

2.00%

+1.21%

1.00%

0.00%

-0.33%

-1.00%

-2.00%

-3.00%

-4.00%

INTEREST RATE DIFFERENTIAL

LONGRUN AVERAGE

SOURCE: STATISTICS CANADA DATA: CANADIAN 10-YEAR GOVERNMENT BOND YIELD MINUS 3-MONTH TREASURY BILL

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rates

INVERTED LOGIC Investors and economic prognosticators appear to be growing accustomed to the increasingly warped world of interest rates. ›

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credit and debt

03. credit & debt Canadians’ cost of servicing their debt is rising. Is there relief in sight?

WANNA BET? FALLING RATES BUT RISING DEBT

As a general rule, when the price of something falls, we buy more of it—and this applies no more or less to money. We do not often think of it in these terms, but the price of money is not the value indicated on the face of a coin or the front of a bill; instead, it is the rate of interest one is charged (charges) to borrow (lend) it. Viewed this way, it’s easy to understand why debt levels in Canada (and around the world) have been rising for so many years: quite simply, it is because the price of money has been falling. Amazingly (in this case spoken without the typical positive inflection associated with the word), interest rates continue to fall after seemingly having reached what felt most certainly like some sort of floor over the past couple of years. Of course, this has much to do with the persistence of economic uncertainty here in Canada and globally, which is incentivizing investors to seek safer “bets” such as government bonds. This is having the effect of pushing bond prices up and yields (interest rates) down.

This trend in falling rates will continue. The bigger question is: how much more debt will Canadians take on? This will determine whether current debt service ratios (DSRs, or the proportion of income devoted to principal repayments and interest payments) continue to increase as they have been for the past decade, or whether they will plateau (a decline is unlikely). Currently, Canada’s mortgage DSR is 6.75%, which is below its 1991 peak of 6.89%, but just barely. The non-mortgage DSR, at 8.23%, is only 6% below its 2007 peak, making the most recent total DSR of 14.96% an all-time high. We should care about trends in these measures because they hint at the potential risks associated with negative economic shocks and/or rising interest rates. In our current context the former is of relevance, while the latter is not.

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credit and debt

DEBT SERVICE RATIOS CONTINUE TO RISE

ATPEAK % ABOVETROUGH

16.00%

14.87

14.96

14.00%

12.00%

10.59

10.00%

% BELOWPEAK % ABOVETROUGH

8.75

8.23 6.74

8.00%

6.89

6.00%

% BELOWPEAK % ABOVETROUGH

5.07

4.00%

4.34

2.00%

1.75

0.0%

Q Q

NONMORTGAGE DEBT

MORTGAGE DEBT

TOTAL DEBT

BOC TARGET RATE

SOURCE: STATISTICS CANADA DATA: PROPORTION OF INCOME SPENT ON PRINCIPAL AND INTEREST PAYMENTS

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credit and debt

WE MAY NOT HAVE THEIR K-POP, BUT WE HAVE THEIR DEBT LEVELS In a global context, Canadians are borrowing with the best of them. However, with interest rates and unemployment rates low, the situation is tenable.

Money is cheap, and Canada’s debt service ratios have been rising for many years. In large part this trend reflects falling interest rates, but it is not without significance that Canada has enjoyed one of its longest (almost) uninterrupted runs of economic expansion in history since the market bottomed-out in 2009. Such is Canada’s current situation that our collectivedebt level, expressedas apercentage of net after-tax income, is at 181.8% (in other words, it would take almost two years to pay

off all existing household debt if every cent of Canadians’ after-tax income was put towards debt repayment, interest notwithstanding). Compared to other rich, industrialized countries, Canada's debt load is significant, behind only South Korea’s at 184.2%. It took a painful economic reckoning for the United States to get its financial house in order (its current debt-to-income ratio is a more modest 108.7%). Canadian households will need to act prudently, and maybe get a bit lucky, to avoid a similar fate.

CANADIAN HOUSEHOLD DEBT LEVELS ARE VERY HIGH

200%

184.2 184.2

181.8 181.8

180%

160%

147.5

143.6

140%

120.7 120.7

120%

95.3 118.4 94.8

107.3 117.1 102.3

108.7

102.9

100%

86.8 91.1

94.3

80%

68.6

60%

40%

38.4

20%

ITALY

GERMANY

JAPAN

USA

FRANCE

CANADA

KOREA

MINIMUM LATEST

MAXIMUM

SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT (OECD) DATA: HOUSEHOLD DEBT AS A SHARE OF NET AFTER-TAX INCOME, 1995-2018

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credit and debt

TIME TO GIVE US SOME CREDIT—WE WEREN’T GETTING IT FOR A WHILE Canada enjoyed two years of slowing growth in mortgage and consumer credit; those days appear to be over for now.

Rates of growth in residential mortgage and consumer (non-mortgage, non-business) credit have been consistently positive in Canada over the past five years, meaning that overall debt has increased. That mortgage and consumer credit has been rising faster than population growth also means per capita debt has been rising. Having said that, the pace of mortgage and consumer credit growth across Canada slowed betweenmid-2017 and the end of 2018, and the period during which the Bank of Canada raised

its key lending rate five times, longer-term interest rates (including onmortgages) marched upwards, and financial institutions tightened their belts—at least insofar as lending was concerned. Most recently, the pace of bothmortgage and consumer credit has begun to rise again. The rate of mortgage credit growth in particular, at 4.9% currently, is a metric to watch, particularly in its capacity as both a driver to, and indicator of, housing market changes.

GROWTH IN MORTGAGE CREDIT RISING, CONSUMER CREDIT SLOWING

7.0%

6.0%

5.0%

4.90%

4.0%

3.0%

2.42%

2.0%

1.0%

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0.0%

CONSUMER CREDIT

RESIDENTIAL MORTGAGE CREDIT

SOURCE: BANK OF CANADA DATA: YEAR-OVER-YEAR CHANGE IN CREDIT

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credit and debt

WHEN BORING IS GOOD: YAWNING OVER LOW ARREARS RATES

With the exception of Alberta, mortgage delinquency rates across Canada are low and stable. Leading the way is British Columbia.

When homeowners begin defaulting on their mortgage payments, the horse will have already escaped from the barn, so to speak; at such a juncture, the economy’s downward trajectory is assured. Blessed be the trend, then, in British Columbia’s mortgage arrears rate (measuring the proportion of outstanding mortgages whose payments are behind by three or more months). Not only is BC’s arrears rate the lowest in Canada, at 0.09%—meaning only nine out of every 10,000 mortgages in

arrears—it has remained virtually unchanged over the past three years. The ability to make mortgage payments, mostly ensured through the earning of income, itself a function of the existence of employment, tracks closely with the unemployment rate. In BC, unemployment continues to trend at historically low levels (as in Canada as a whole), and with the province’s labour market expected to continue favouring workers over the coming year, BC’s mortgage market looks to be on a solid footing.

BC’S ARREARS LOWER THAN OUR PEERS’

0.60%

0.50%

0.40%

0.30%

0.23%

0.20%

0.14%

0.10%

0.09%

0.00% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Q2 Q3 Q4 Q1

Q3 Q2 Q1

CANADA

ONTARIO ALBERTA

BRITISH COLUMBIA

SOURCE: CANADIAN BANKERS’ ASSOCIATION & LABOUR FORCE SURVEY, STATISTICS CANADA DATA: PROPORTION OF ALL OUTSTANDING MORTGAGES THREE OR MORE MONTHS IN ARREARS

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credit and debt

NO ARREARS FEARS With BC’s unemployment remaining historically low, home owners can afford their mortgages, and this doesn’t appear set to change any time soon. ›

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demographics

04. demographics

Population growth in Canada’s urban communities continues to outpace change in non-urban areas; creative land use decisions are required to accommodate it.

GROWTH IN CITIES AND TOWNS, WHILE RURAL SHARES GO DOWN

Modern day community planners would be pleased to know that while Canada’s population is growing faster than it ever has before, it is doing so largely within the confines of existing urban communities. This has the effect of mitigating a range of negative environmental impacts associated with growth, while also forcing cities to think more deeply about how people and homes are organized within their borders. In considering spatial growth patterns more specifically, 96% of the population additions nation-wide between 2017 and 2018 were realized within census metropolitan areas (groups of adjacent municipalities centred on a core of at least 100,000 people) or census agglomerations (urban areas with a core population of at least 10,000 people).

This is a greater share than the existing 84% of Canadians who lived in urban areas in 2018. BC has the second-highest provincial share of residents living inurban communities, at 89%, with 91% of recent year-over-year growth also being realized here. Expect this trend to further entrench itself over the coming years, with increasing shares of growth accruing to urban communities. In some provinces—including Saskatchewan and the group of Atlantic provinces— urban areas are already accounting for more than 100% of total growth, meaning rural communities in those parts of the country are beginning to shrink in their population counts.

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demographics

RURAL RETREAT? URBAN GROWTH LEADS THE WAY IN CANADA

140%

122%

120%

112%

100%

98%

97%

96%

91%

90% 91% 89%

84%

82%

81%

80%

72%

66%

62%

60%

48%

43%

40%

20%

ONTARIO BC

CANADA ALBERTA QUEBEC MANITOBA SASK.

ATLANTIC NORTH

GROWTH

URBAN POPULATION SHARE

SOURCE: DEMOGRAPHIC ESTIMATES COMPENDIUM, STATISTICS CANADA DATA: URBAN SHARE OF 2018 POPULATION AND 2017-18 POPULATION GROWTH

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demographics

REGIONAL POPULATION GROWTH: CITY TRENDS

Surrey led all BC municipalities in population growth in 2019 as it continues on its trajectory to become the province’s largest municipality within the next 15 years.

Together, Metro Vancouver’s two largest municipalities—Vancouver and Surrey— accounted for 65% of regional population growth in 2019, easily exceeding their collective 51% share of the region’s existing population. All the credit goes to Surrey for this, as it only accounts for 23% of Metro Vancouver’s population while it accommodated 42% of regional growth (Vancouver accounts for 28% of people but attracted only 24% of regional growth). Given Surrey’s large land base, and the fact that it is able to add larger homes that are themselves able to accommodate larger households (i.e. more people) than the city of Vancouver, this is largely unsurprising.

The extent of population growth in Surrey does take one aback, however, when the raw numbers are considered. For example, in adding 16,382 people between 2018 and 2019, Surrey added 1,365 people every month, or 45 people every day. Vancouver, in comparison, added only 9,185 people, or 765 people each month. This in turn was about three times more additions thanwere realized in Burnaby, the third-fastest growing city in the region, which added only 3,926 people. With significant land constraints in many parts of the region, including the city of Vancouver, the region’s ability to grow will increasingly rely on all municipalities to plan for continued growth and the complementary need for housing.

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demographics

POPULATION GROWTH IN METRO VANCOUVER: THE BIGS GET BIGGER

POPULATION ADDITIONS

POPULATION

SURREY

16,382

584,526

VANCOUVER

9,185

685,885

BURNABY

3,926

253,007

RICHMOND

1,966

212,276

POPULATION

LANGLEY TOWNSHIP

1,925

130,924

NEW WESTMINSTER

1,631

79,737

COQUITLAM

1,003

149,894

ALL OTHER

394,382

3,023

SOURCE: MUNICIPAL POPULATION ESTIMATES, BC STATS DATA: TOTAL POPULATION AND POPULATION CHANGE ESTIMATES, BY MUNICIPALITY

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demographics

REGIONAL POPULATION GROWTH: AGE TRENDS

The Canadian population is getting older and Metro Vancouver is no exception; there are other demographic storylines worth following, however.

As Metro Vancouver is projected to grow by 193,751 people over the next decade, the region’s 65-plus segment is projected to expand by 44%. Notably, it is not in-migration driving the growth for this most senior of age groups, but rather the predictable process of baby boomers aging—something we have been tracking for many years now. While this will have some important implications for the region’s housing market—as many of these residents will choose a new housing form, change housing tenure (from owning to renting), transition into assisted living accommodation,

or move back in with their grown kids— so too will growth in other age segments. Specifically, the prime home-buying 25-34 and 35-44 year old groups are expected to grow by 24% and 25%, respectively, over the next decade, as they increase in size by 191,850 people. The collective goal will be to add enough housing, and enough diversity in the added housing, to accommodate the growing demand, as these next ten years help to shape the region’s housing market, including both ownership and rental, for many more years to come.

ROBUST GROWTH IN KEY VANCOUVER HOMEBUYER SEGMENTS

1.50

1.44

1.40

1.30

1.24 1.25

1.20

1.10

0.97 1.01

1.00

0.90

0.87

0.80

2019

2020

2021 2022

2023 2024 2025

2026

2027

2028

2029

CHANGE

SOURCE: DEMOGRAPHIC ESTIMATES COMPENDIUM, STATISTICS CANADA; PROJECTION MODEL, RENNIE DATA: INDEX OF POPULATION CHANGE BY AGE FOR METRO VANCOUVER (2019 = 1.00)

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demographics

AGE GROUP THINK More older residents and growth in the market entry cohort will create a new housing market dynamism. ›

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housing

05. housing

Residential construction activity shows no signs of slowing down as year-over-starts jump 10%.

HOUSING CONSTRUCTION RES-ILIENT IN METRO VANCOUVER

Many metros across Canada have for years struggled to cope with an imbalance between robust population growth (and the accompanyingmagnitudeof housingdemand) and constrained flows of new residential supply. In markets like Vancouver and Toronto, this has contributed to a high and rising price environment that has refocused conversations of housing affordability and availability on the range of issues related to getting more homes built. It is positive then that the pace of housing starts in Metro Vancouver increased in 2019 above the 23,404 starts in 2018. In initiating construction on 28,141 homes last year, starts increased by a not-insignificant 20% on a year-over-year basis to reach an all-time high: 2019’s starts were 0.8% higher than the previous high of 27,914.

At this pace, gross housing construction is in line with the needs associated with housing the region’s growing population, with an average of 25,000 to 30,000 homes required (before demolitions are accounted for) to accommodate population additions in the neighbourhood of 40,000 annually. As context, it is notable that the year-over- year increase in Metro Vancouver’s pace of construction is greater than in Calgary and Edmonton (which rose by 9% and 7%, respectively). Additionally, the 28,141 starts in Metro Vancouver in 2019 were only 8% below Toronto’s 30,462 starts, despite the population of Canada’s largest metro area being 141% larger than Metro Vancouver's. Over the course of 2020 starts are expected to remain elevated, though the medium- term outlook is for some moderation in new construction activity.

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housing

THE PACE OF RESIDENTIAL CONSTRUCTION PICKS UP

50,000

45,000

41,107

40,000

35,000

30,462

30,000

28,141

25,000

23,404

20,000

15,000

11,909

10,971

10,720

10,038

10,000

5,000

TORONTO

CALGARY

EDMONTON

VANCOUVER

-26%

20%

Q Q

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: NUMBER OF HOUSING STARTS (PERCENT CHANGE 2018/19)

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housing

LESS-URBAN COMMUNITIES OWNING RENTAL

Metro Vancouver may have achieved an all-time high in rental apartment completions in 2019, but the spatial distribution of these additions warrants comment.

Having been beating the rental housing drum for many years, taking issue with Metro Vancouver’s historical high of 5,590 purpose- built rental apartment additions in 2019 might come across as confusing or—worse— confused. So let’s start by emphasizing the macro-level positives of the increased pace of rental housing construction. First, 2019’s completions were 0.9% higher than the previous high of 5,540 achieved in 2018, which in turn was 31% above the previous high of 4,245 in 2017, which in turn was 40% above the previous high of 3,032 in 2016, which in turn was 4% above the previous high of 2,917 in 2015. In the 25 years before 2015, an average of only 1,189 rental apartments were completed across the region each year, even falling below 500 in the mid-2000s. That rental housing additions— and those of the purpose-built variety in particular—are elevated relative to the

historicalexperienceisapositivedevelopment inthecontextofaccommodatinganincreasing andincreasinglydiversepopulation,especially as it relates to affordability. That being said, while few would be surprised that the City of Vancouver finished more rental apartments in 2019 than any other municipality in the region (at 1,381), others may be that NewWestminster was second with 781—despite having a population only one-tenth the size of Vancouver's. Langley also featured prominently in the rental apartment additions picture, tallying 685 completions in 2019. Going forward, Richmond, the Tri-Cities, and the North Shore communities— which together account for one-quarter of the region's population but only one-fifth of rental apartment additions in 2019— need to do more.

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housing

ADDING RENTAL HOUSING WHERE IT’S NEEDED MOST?

VANCOUVER

NEW WEST 791

LANGLEY 685

SURREY 601

1,381

TRICITIES

NORTH VAN DISTRICT

DELTA 155

RICH MOND 155

473

BURNABY 686

281

NORTH VAN CITY 204

MR PM 61

WHITE ROCK 126

WEST VAN

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: RENTAL APARTMENT COMPLETIONS, 2019

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housing

As multi-family housing completions in Metro Vancouver rise in the coming years, will the number of unsold homes follow suit?

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housing

BUILT BUT NOT BOUGHT: MORE THAN A FEW BUT STILL NOT A LOT Regular readers of this publication will know that over the past year we have not only been tracking changes in the stock of completed and unsold condos across Metro Vancouver, but also trying to put the recent increases into a broader historical context. To summarize,

Whenprojecting future changes,many factors need to be considered, including the pace of resale and pre-sale activity, the flow of new homes being launched, and the magnitude of expected completions, based on current construction inventory. While there isn’t enough space on this page to expand on all of these factors, the region did set a new record- high for housing starts in 2019, so if the stock of built but unsold inventory is not to rise— or even decline—the demand side of the market will have to pick up steam in the next two years.

while the most recent estimate of 531 completed but unsold condos is double the average of 264 from the mid-2016 to mid-2018 period, it is significantly below the peak achieved in past market cycles, most recently 2,233 in January 2013.

HOW MANY EMPTY BOXES IN THE SKY?

3,500

3,000

2,500

2,000

STARTS FROM YEARS AGO...

1,500

1,000

...AFFECT TODAY’S BUILT & UNSOLD INVENTORY

500

BUILT & UNSOLD CONDO INVENTORY

CONDO STARTS, MO MOVING AVG.

SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: INVENTORY OF COMPLETED AND UNSOLD HOMES & CONDO STARTS

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housing

NOT A FOREIGN CONCEPT: FEW NON-CANADIANS BUYING HOMES IN VANCOUVER

Like job and population growth, interest rates, and the sporadic government interventions into our housing market, foreign buyers do play a role — though it continues to be small one.

The latest data on the magnitude of foreign purchases in Metro Vancouver, from December 2019, indicate that only 1.5% of all sales in that month were to non- Canadian citizens (57 of 3,750 sales). This is similar towhat was seen over the entire course of 2019, when there were 765 purchases by foreign buyers out of 48,428 total sales regionally, for a rate of 1.6%. In addition to the role of foreign buyers in Metro Vancouver’s residential real estate dynamic being minimal, foreign buyers are

almost entirely staying out of the Greater Victoria andFraserValleymarkets: therewere only 58 sales to foreign buyers in all of Greater Victoria in 2019, while the numbers are so small in the Valley that they are suppressed. The influence of foreign buyers has long been established to be minimal. We ought to be much more focused on the impact that other factors have on our market, like rising incomes, population growth, and macro- economic changes.

NO OFF-SHORE LOVE AFFAIR: VANCOUVER’S MIDDLING FOREIGN BUYER SHARE

3.2%

2.8%

1.9%

1.6% 1.6%

1.5%

1.4%

1.2%

n/a JAN

n/a APR

DEC

FEB

MAR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

Fraser Valley

0.0%

Victoria

1.6%

0.8%

1.0%

0.8%

SOURCE: BC MINISTRY OF FINANCE DATA: SHARE OF RESIDENTIAL SALES TO NON-CANADIAN CITIZENS (FOREIGN BUYERS)

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housing

LOCALLY-SOURCED Non-Canadian citizens play a minimal role in regional housing market activity. ›

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policy

INSURED MORTGAGE STRESS TEST CHANGE & A 2.7% PURCHASING POWER BUMP Effective April 6, 2020, the new minimum qualifying rate for insured mortgages will be the weekly median five-year fixed insured be able to qualify for a mortgage of almost $399,000 under the old rules and, with a 10% down payment, could afford a home worth approximately $443,000. The new rules 06. policy A long-awaited change to the mortgage stress test is introduced and new development cost charges have come to Metro Vancouver.

mortgage rate frommortgage insurance applications, plus 200 basis points. As such, the Bank of Canada’s benchmark rate will no longer factor into the stress test parameters governing insured mortgages. Canada’s Ministry of Finance has indicated that the new median weekly rate would currently be in the range of 4.89%, or 30 basis points below the Bank of Canada’s benchmark rate. So, rather than having to qualify for a mortgage at 5.19%, insured borrowers would have to qualify at 4.89%. In working through the mortgage calculation, a household with a $95,000 income would

would see this mortgage amount increase to $411,000 and, with the same down payment, this household could buy a home worth up to $455,000. Therefore, the overall result would be a 2.7% increase in purchasing power for this household, equivalent to the ability to borrow an additional $12,100, as a result of the modified stress test. The Office of the Superintendent of Financial Institutions is considering whether or not to apply the new stress test rules to uninsured mortgages, with a decision likely to be made in early-to mid-April 2020.

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