rennie landscape fall 2022
To our rennie landscape readers, Thanks for picking up this Fall 2022 edition of our publication. We live in interesting times, don’t we? It seems for the past few years there hasn’t been a dull moment for our modestly- sized market here in the southwesternmost corner of Canada, buffeted as we have been by the effects of the onset of Covid, which transitioned to peak-Covid and then to Covid-ubiquity; by historically low rates that have rapidly transitioned to the highest in 15 years; by persistently under-control inflation that has run wild; and by home prices that spiked and are now moderating, settling in to some yet-to-be-determined equilibrium. As people return from their first real summer vacations in three years, the biggest question most of them are asking about our housing market here in Metro Vancouver is: what’s next? Perhaps more pointedly, many are wondering how much home prices might “correct”. To answer that, of course, we need to ask ourselves what we think about the strength of our labour market, as the prevalence of work and of strong incomes will go a long way to stabilizing our housing market, even during times of rising interest rates. Speaking of which, when the heck are rates going to peak? Of course, to answer that we need to ask ourselves when we think elevated consumer price inflation will ebb. There’s no easy response on this front, other than to say: watch the data. It’s what the Bank of Canada is doing, as the state of traditional and non-traditional economic indicators informs each decision they make regarding both their policy rate and longer-term rates via quantitative tightening. So, with the theme of watching the data in mind, we hope you enjoy this edition of the rennie landscape, which is filled with a load of what we think is interesting and useful data and insights aimed at helping us all better understand the complex world we live in.
Ryan Berlin DIRECTOR OF INTELLIGENCE & SENIOR ECONOMIST rberlin@rennie.com
Ryan Wyse SENIOR ANALYST, INTELLIGENCE rwyse@rennie.com
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contents
04
ECONOMY
16
RATES
24
CREDIT & DEBT
30
DEMOGRAPHICS
36
HOUSING
44
POLICY
48
KEY INSIGHTS
50
GET THE DATA
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economy
01. economy With seeming intention, unemployment rates across Canada have dived back down to their pre-pandemic levels—or lower—as labour markets have tightened.
WILL THE (NEAR-)RECORD-LOW RATES LAST?
Since the early part of the Covid pandemic, we’ve dealt with the tradeoffs of health and safety restrictions and the limits they imposed on economic activity. And while each individual province took its own path on Covid restrictions, they all, predictably, saw a spike in the unemployment rate in 2020. Looking back, the Canadian labour market was relatively healthy, with a 5.7% unemployment rate prior to the pandemic. Unemployment rates ranged from a high of 12.5% in Newfoundland and Labrador to a low of 4.6% in Quebec, with our own rate here in British Columbia at 5.2%. After the initial spike in unemployment in 2020, there’s been a steady decline over the past two years to the point where we’re now below our pre-pandemic unemployment rate.
And this isn't just nationally—it's also here in BC and in seven of the nine other provinces (only Manitoba and Ontario still sit above). More recently, the past year has shown a steady decline in unemployment in every single province. The Canadian unemployment rate, which reached an all-time low in June at 4.9%, now sits at 5.4%. In BC we’re enjoying the lowest unemployment rate in the nation at 4.8%, while only one province, Newfoundland and Labrador, is above 8% (at 10.5%). With virtually all remaining Covid restrictions having been lifted, the labour market is no longer being suppressed. Employment levels are once again responding to more traditional market forces, and as we move through the coming months, today’s near-record low unemployment rate will serve as a solid foundation for our housing market.
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economy
SNAP BACK TO REALITY, OH THERE GOES GRAVITY
14%
12.2%
12%
10.5%
10.3%
10%
9.4%
7.9%
8%
7.8%
7.7%
7.6% 7.6%
7.3%
7.1%
7.0%
6.2%
6%
5.7%
5.4%
5.4% 5.8% 5.3%
4.9% 4.8%
4%
2%
0%
CANADA NL
NS
NB
PEI
ON
AB
MB
SK
BC
AUGUST
AUGUST
DATA: MONTHLY, SEASONALLY-ADJUSTED UNEMPLOYMENT RATES, CANADA AND PROVINCES SOURCE: STATISTICS CANADA, TABLE 14-10-0287-01
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economy
ASYMPTOTIC GOODS AND SERVICES EMPLOYMENT While employment in British Columbia exceeded its pre-pandemic level many months ago, the number of jobs province-wide remains below its pre-pandemic trend.
By June 2021, employment in British Columbia had, in a sense, recovered from the crater caused by the pandemic. Specifically, the province’s employment base consistently exceeded 2.64 million jobs (the scale of employment in February 2020) each month thereafter, with the number of jobs generally growing from month-to-month since then. This isn’t the whole story, however. Two observations are worth noting as they relate to high-level employment trends in BC. The first is that total employment has not fully gotten back on track since the pandemic— and by that we mean, it hasn't achieved the
pre-pandemic trend in job counts that we would have seen in the absence of the pandemic (and all else being equal). In aggregate, service sector employment is still 86,000 jobs (4%) below trend as of August 2022, while goods sector employment is lagging by 31,000 jobs (6%). The second takeaway from the most recent data is the retreat in employment we saw in August, with there being 28,000 fewer jobs province-wide (on a seasonally-adjusted basis) than in July. Whether this is merely a blip or the beginning of a new trend deserves watching in the coming months.
ON THE MEND, BUT STILL OFF-TREND: PART I
2,500
1,000
pandemic begins EARLY
900
2,000
800
services job gap -86,000
700
1,500
600
500
goods job gap -31,000
1,000
400
300
500
200
100
0
0
ACTUAL EMPLOYMENT, SERVICES LEFT AXIS
ACTUAL EMPLOYMENT, GOODS RIGHT AXIS
PROJECTED EMPLOYMENT
DATA: EMPLOYMENT BY INDUSTRY, MONTHLY, SEASONALLY-ADJUSTED, BRITISH COLUMBIA
SOURCE: STATISTICS CANADA. TABLE 14-10-0355-01
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economy
MORE OPENINGS THAN JOB SEEKERS The overall number of vacant jobs has been persistently high in BC and Canada of late, as unemployment rate declines.
Our understanding of the landscape of job vacancies in Canada is relatively nascent, with Statistics Canada only first collecting and publishing quarterly data back in 2015, and monthly data in 2020. In this section we consider the latest monthly data, while in the following section we examine the most recent quarterly numbers. As of June 2022, both Canada and BC are experiencing both a record-high number of vacant positions and an all-time high job vacancy rate.
Nationally, the job vacancy rate is up to 5.9%, compared with 4.9% a year earlier while in British Columbia it’s reached 7.1%, up from 6.0%. With job vacancy up, and the unemployment rate down, there are now more vacant jobs in Canada than unemployed persons in the labour force: here in British Columbia, there are about 4 vacant jobs for every 3 unemployed persons in the labour force. This lack of correspondence between the number of available jobs and the number of job seekers (not to mention existing skills mismatches) means employers will likely have to either wait longer to expand their workforces at their desired pace or offer further incentives to fill roles—or both.
THERE AREN’T ENOUGH WORKERS
1.60
1.40
1.35
1.20
1.03
1.00
0.80
0.75
0.60
0.52
0.40
0.20
0.00
CANADA
BRITISH COLUMBIA
JUNE
JUNE
DATA: RATIO OF JOB VACANCIES TO NUMBER OF UNEMPLOYED PERSONS SOURCE: TABLE 14-10-0371-01 & 14-10-0287-01, STATISTICS CANADA
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economy
AN OFFER YOU CAN REFUSE—IF YOU’RE THERE TO REFUSE IT The persistence of past unfilled jobs has, in many industries, yielded increases in offered wages. It doesn’t seem to be helping.
It’s no secret that as Canada’s labour markets have tightened over the past few years (the Covid blip notwithstanding), job vacancies have risen. Indeed, the national job vacancy rate—calculated as the proportion of unfilled positions as a share of all positions, both filled and unfilled—reached a new quarterly high in Q2 2022, at 5.9% (up from 5.2% in Q1 and the previous high of 5.4% in Q3 2021). In British Columbia the most recent figure is a whopping 6.8%—higher than the national average and greater than the rate in the province’s largest metro area of Vancouver (6.5%). This reality can be viewed in both a positive and a negative light: on the one hand, a high vacancy rate signals that companies want to hire and, presumably, grow; on the other hand, a persistently elevated job vacancy rate means we are leaving economic growth on the table—production and incomes that could otherwise be realized are not.
The job vacancy challenge in BC (and across Canada) is pan-sector in its nature. The highest job vacancy rates we are seeing today are in construction (10.6%) and accommodation and food services (12.2%). These sectors have also seen their job vacancy rates rise considerably over the past year: by 3.2 percentage points in the former and by 2.4 in the latter. In turn, these high and rising vacancy rates have yielded increasing wages on offer, as employers become increasingly desperate for workers. In BC’s construction sector, average offered wages have risen by 10.0% over the past year (to $28.65/hour), while in accommodation and food they’ve
risen by 8.0% (to $17.60/hour). Rising wages represent a valid and
market-driven inducement to expanding the workforce; however, with a provincial unemployment rate of 4.8%, our best bet for filling these roles is increased in-migration (more on that later).
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economy
STICKING TO THE CARROT: HIGHER WAGES & THEIR MERIT
35%
PRO SCI TECH SERVICES
30%
25%
MINING OIL GAS
20%
OTHER SERVICES
15%
ACCOMMODATION & FOOD SERVICES
WHOLESALE
MANUFACTURING
REAL ESTATE
10%
AGRI FISH FORESTRY
CONSTRUCTION
5%
RETAIL
UTILITIES
EDUCATION
0%
FINANCE & INSURANCE
-5%
ARTS & REC
-10%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
JOB VACANCY RATE, YEAR OVER YEAR CHANGE PERCENTAGE POINT
SOURCE: STATISTICS CANADA. TABLE 14-10-0223-01 & 14-10-0326-01 DATA: JOB VACANCY RATE & AVERAGE OFFERED HOURLY WAGES, QUARTERLY, BRITISH COLUMBIA
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economy
WORKING FROM WHERE? Of the many things we’ve learned over the past two and a half years, one is that the traditional workplace has evolved. Many of us were forced to adapt our practices and work from home, in makeshift office set-ups, as the world changed around us. As restrictions were lifted and the cliched “back-to-normal” appearing ever-closer, there has been a healthy debate over what a return to the office would look like. For some, a home should just be a home, for others the home is the preferred workspace; and for others still the home is one part of the flexibility of a hybrid system. And while there likely won’t be a consensus anytime soon, the majority of Canadians are already back to their pre-Covid places of work (whether they were able to work from home or not).
Nationally, 57% of workers are not currently able to work from home at all, with the remaining split evenly between being able to work up to a few days per week at home and those able to work almost every workday at home. There is, however, a sizeable geographic variation at hand, with 52% of respondents in British Columbia and Ontario not able to work from home versus 73% in Manitoba/Saskatchewan and Atlantic Canada. Issues of housing affordability may be at play here, as employers in Vancouver and Toronto offer their employees more flexibility in where they work and therefore have more flexibility in where they live. Or perhaps the tighter labour market in BC has employers offering more incentives to their employees than their counterparts in other provinces. Whatever the reasons, the place-of-work conversation will continue to be had in offices and in homes for the foreseeable future.
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economy
Working from home is for many, but not all. Our ongoing transition into a new epoch of work and workplaces will have implications for, and be impacted by, office space, technology, and corporate culture.
HI HO, HI HO, IT’S BACK TO WORK (AT THE OFFICE) WE GO
100%
11%
15%
18%
19%
21%
90%
24%
24%
15%
80%
12%
22%
70%
22%
22%
23%
23%
60%
50%
40%
73%
73%
60%
59%
57%
30%
52%
52%
20%
10%
0%
CANADA
BC
ON
QC
AB
MB SK
ATL PROVS
NO YES A FEW DAYS WEEK
YES EVERY OR ALMOST EVERY WORKDAY
SOURCE: LEGER, BACK TO WORK SURVEY HTTPS://LEGER360.COM/SURVEYS/LEGERS-NORTH-AMERICAN-TRACKER-AUGUST-11-2022/ DATA: DOES YOUR JOB CURRENTLY ALLOW YOU TO WORK FROM HOME? RESPONSES
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economy
RE-VISITING THE DATA ON VISITOR COUNTS TO CANADA After 14 months of almost non-existent visitor flows to Canada, the border has recently been opening up. How far have we come?
As a small, open economy, Canada and its regions depend on international trade to help support and increase our collective prosperity. This applies not just to international transactions in products—the traditional import of processors from China and export of oil to the United States, for example—but also to the movement of people. In this case, we’re looking at visitors to Canada (tourists and business travellers). Visitor volumes are quite seasonal, so when considering monthly data like we are here, it’s useful to consider how numbers have changed over time for a specific month. (As the most recent data is from June 2022, we’ll look at June here.) During the depths of the pandemic, when Canada’s international borders were virtually closed, there were only 27,300 visitors to the Vancouver Coast and Mountains region (this includes both day-trips and multi-night stays
to the area covering the Lower Mainland, Sunshine Coast, and Vancouver Island) in June 2020 and just shy of 36,000 in June 2021. For context, there were 814,200 visitors in June 2019, and we averaged 696,900 visitors in each June between 2014 and 2018. Notably, visitors counts have risen fairly consistently on a monthly basis since June 2021, reaching 452,600 in June of this year— though this is still 44% below June 2019’s volume and 35% lower than the previous five-year June average. The good news is that visitor counts to this region seem to have room to run, and as they expand back toward historical norms in the coming year, we will reap the economic benefit of increased spending within our local economy, particularly in accommodation and food services, transportation, and recreation. We’ll just have to figure out a way to fill all those job vacancies…
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economy
ON THE MEND, BUT STILL OFF-TREND: PART II
1,200,000
JUNE 696,897 average number of visitors
1,000,000
814,190
800,000
600,000
452,564
400,000
200,000
35,966
27,285
0
VISITORS IN MONTH OF JUNE
SOURCE: STATISTICS CANADA. TABLE 24-10-0055-01 DATA: NON-RESIDENT VISITORS ENTERING VANCOUVER COAST & MOUNTAINS, MONTHLY
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economy
THE GLOBAL CHALLENGE OF HIGH INFLATION It’s easy to frame inflation as a uniquely domestic challenge, with the usual cast of characters to blame for its emergence and persistence, but that would be wrong.
Different countries had different economic responses to the emergence and spread of Covid in those early, uncertain days in 2020. In some places, little to no financial support was provided and instead, the focus was on lockdowns. Elsewhere, such as here in Canada, a blended approach of an early lockdown, ongoing social-distancing policies, and heavy subsidies for households and businesses was adopted. As someone put it early on in the pandemic, it’s a lot easier to fill the economic crater created by Covid with water (vis-a-vis financial support) and have people row across to the other side than to have them arduously climb down one side and make their way
across the crater only eventually to have to figure out how to climb back out again. Whatever the approach, a globally-integrated economy has meant that these policies, along with supply chain issues and a war in Europe, have conspired to yield high inflation everywhere. Here in Canada we’re dealing with an inflation rate of 7%—but we're really only middle of the pack when compared to other G7+ nations. Clearly, the current challenge of inflation is unique to nowhere and will require a coordinated international effort to bring it down again.
INFLATION FRUSTRATIONS FOR ALL OF THE NATIONS
10.0%
9.0%
8.8%
8.5%
8.2%
8.0%
7.0%
7.8% 7.9%
8.0%
7.5%
7.0%
6.1% 6.3%
6.0%
5.8%
5.0%
4.0%
3.4%
3.0%
2.7%
2.0%
1.0%
0.0%
DATA: CONSUMER PRICE GROWTH, YEAR-OVER-YEAR, SELECTED COUNTRIES SOURCE: OECD
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economy
DIFFERENT BUT THE SAME Unlike Celine Dion in that it is not uniquely Canadian, but like her in that it is a global phenomenon, an elevated rate of price inflation is being seen both here at home and abroad. ›
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rates
02. rates
Inflation and interest rates are both up—way up, egad!— with their near-term trajectory still uncertain.
INTEREST RATES AND INFLATION: A SNEAK-PEAK
When governments and central banks around the world threw varying degrees of financial support to households and businesses in the early days of the pandemic, some people foresaw elevated inflation down the road as a natural consequence. Other people (including your authors), predicted a continuation of stable inflation. In hindsight, it’s easy to conclude that we all should have seen our currently-high inflation environment coming. So what actually happened? The truth is, a lot happened—and much of it was unpredictable in 2020. Certainly, historically dovish monetary policy and unprecedented fiscal interventions created an economic environment ripe for spending. However, what has led to the ongoing and elevated inflation challenge has been the nature of expenditures over the past 18 months (too much money chasing too few goods), ongoing supply chain issues both domestically in Canada and abroad, and a commodity price crunch ushered in by the
war in Ukraine earlier this year. These (for the most part) unpredicted, and unpredictable, dynamics have fueled a consumer price landscape that has yielded a Canadian inflation rate of 7.0% in August 2022—almost quadruple the Bank of Canada’s desired rate of 2%, and well outside its 1-3% bounds. The Bank of Canada has now, as of early September, raised its policy rate to 3.25%, the highest it’s been since 2008. This has, in turn, led to an increase in many interest rates, including bank prime rates, rates on lines of credit (including HELOCs), and variable rate mortgages. Notably, five-year Canadian government bond yields are not blindly marching upwards; in fact, they have fluctuated recently. This suggests that markets feel the Bank of Canada will get inflation under control in the near term, and with it bringing some relief to borrowers across the country.
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rates
NOT OUT OF THE WOODS YET
9.0%
pandemic begins EARLY
8.0%
7.0%
7.01%
6.0%
5.0%
4.50%
4.0%
3.34%
3.0%
2.50%
2.0%
1.0%
0%
-1.0%
BOC POLICY INTEREST RATE
YEAR GOC BOND YIELD
AVERAGE DISCOUNTED YEAR FIXED 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
A LITTLE LESS OF THIS, A LITTLE MORE OF THAT As consumer spending evolves, so too does the mix of items that the Consumer Price Index comprises as a means to more accurately reflect the day-to-day price changes affecting Canadians.
Underlying the headline-news-making “inflation” statistic is the Consumer Price Index (CPI), which is constructed by Statistics Canada using a representative “basket” of goods and services with varying weights. Ultimately it is the month-to-month changes in the prices of these goods and services, filtered through their respective weights within the basket, that conspire to yield a singular CPI figure on which we calculate the rate of inflation. That each good and service has its own weighting within the CPI is important: for example, because Canadians tend to spend more of their budget on gasoline than on milk, a 10% increase in gasoline prices should—and does—have a greater impact on the CPI (and on inflation) than a 10% increase in milk prices. Between 2015 and 2021 there have been some notable changes in the CPI basket weights. Of those that increased over the past six years, the largest change was in shelter,
which now accounts for almost 30% of the CPI calculation. The rising cost of housing— both ownership and rental—is well documented and thusly reflected in the changing basket weights. Other categories seeing increased weighting include household operations, furnishings and equipment, and alcohol, tobacco, and cannabis (a 2020 lockdown effect?). The weights of all remaining high-level goods and services categories decreased from 2015 to 2021, with the largest decline coming to transportation (which fell from 19.7% to 16.9%). Interestingly, this diminished weighting comes even as the gasoline portion of the transportation category has expanded. As we consider the path ahead for inflation, the composition of the CPI is helpful to understand, with shelter costs playing a more elevated role in the determination of overall inflation—and Bank of Canada interest rate policy—than ever before.
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rates
HEY, WHAT’S IN THE BASKET?
2021
4.6%
9.3%
CLOTHING
16.9%
TRANSPORTATION
4.6%
5%
HEALTH & PERSONAL
19.7%
10.9%
4.3%
RECREATION & EDUCATION
2.6%
5.4%
2015
15.9%
ALCOHOL, TOBACCO & CANNABIS
16.2%
13%
FOOD
14.5%
27.2%
SHELTER
HH OPS & FURNISHINGS
29.8%
DATA: BASKET WEIGHTS OF THE CONSUMER PRICE INDEX, CANADA
SOURCE: STATISTICS CANADA. TABLE 18-10–0007-01
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rates
As inflation has risen in Canada, so have inflation expectations—something the Bank of Canada is keeping an eye on.
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rates
PRICES WILL RISE BY MORE THAN BEFORE Inflation expectations—that is, the extent to which households, businesses, and governments think prices will rise in the future—can be a self-fulfilling prophecy. If everyone thinks that everything will be 5% more expensive next year, for example, then employees will ask for, and get, 5% raises; firms will raise their prices by 5%; and everyone will ultimately spend 5% more. Consequently, the Bank of Canada monitors not only year-over-year headline inflation, but other measures of price changes (including trim, common, and median inflation) and, yes, expectations of future inflation.
According to a survey of Canadian businesses, inflation expectations of 3% or more for the next two years have more than doubled in the past 12 months from 35% to 78%. That an overwhelming majority of Canadian firms expect higher inflation over the next two years than they did just two years ago is notable and signals an increased risk of inflation becoming entrenched. This is yet another indication that the Bank of Canada will pursue hawkish monetary policy though increasing interest rates and quantitative tightening in the coming months.
LOFTIER EXPECTATIONS
80%
78%
70%
60%
53%
50%
37%
40%
30%
20%
10%
0%
<1
1-2
2-3
3+
ANNUAL CPI INFLATION RATE EXPECTATION, NEXT TWO YEARS
Q
Q
Q
SOURCE: BANK OF CANADA, BUSINESS OUTLOOK SURVEY DATA: 2-YEAR INFLATION EXPECTATIONS, CANADA
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rates
THOUGH HIGHER RATES ARE HERE, THE STRESS TEST SHOULD ALLAY SOME FEAR As higher fixed mortgage rates have come to dominate the borrowing landscape, mortgage renewers are facing elevated costs. To what end should we worry?
Oh come on, admit it: at some point in time you’ve frowned, shaken your head, and muttered to yourself: “stupid stress test”. In our previously-stable, pre-pandemic economy, the mortgage stress test—whereby new borrowers or those re-financing were qualified for their mortgage using either an elevated benchmark interest rate or one that was two percentage points higher than their would-be contract rate, whichever was higher—seemed overly-burdensome. However, with fixed five-year mortgage rates having recently risen by 2-3 percentage points, the application of the stress test five years ago shows that the majority of households
renewing today are able to afford their (more expensive) mortgages.
As an example, a household renewing today at 4.24% would be concluding a contract with a rate of 2.24%; as they would have been stress-tested five years ago at 2.24% + 2%, in this scenario the new rate is affordable, all else being equal (including ignoring the fact that household incomes rose over the past years). Looking ahead, higher rates will be painful for some, but with stress-tested rates rising up to 5% for renewing borrowers, that oft-maligned risk mitigation tool seems to be doing its job.
READY TO RENEW, BUT AT WHAT COST?
6.0%
TODAY
5.0%
projected rate
4.0%
3.0%
2.0%
projected rate change
1.0%
stress-tested at 4.24% 2.24% ORIGINATING RATE 4.24% RENEWAL RATE renewal - originating rate=2.00%
0.0%
-1.0%
-2.0%
RENEWAL
ORIGIN.
RENEWAL DIFFERENTIAL
ORIGINATING RATE ADJ. FOR STRESS TEST
RENEWING IN...
ORIGINATING IN...
SOURCE: RATEHUB DATA: AVERAGE DISCOUNTED 5-YEAR FIXED RATES, MONTHLY, CANADA
22
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rates
RENEWAL STICKER SHOCK The recent and rapid rise in borrowing costs means that some homeowners will be facing higher monthly payments despite years of paying down their outstanding balances. ›
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credit and debt
03. credit & debt Household debt is swelling in Canada, alongside rising interest rates. And it’s not just mortgage debt that’s growing, consumer credit is too.
INDEBTED TO MORTGAGE CREDIT
It came as no surprise that Canadian households took on a historically large amount of debt during the pandemic; after all the Bank of Canada suppressed interest rates at all-time lows to encourage exactly that. Indeed, the low rate environment in 2020 and 2021 served to disincentivize saving and incentivize borrowing (and spending). What may be a little more surprising is that Canadians most recently piled on even more debt despite elevated (and rising) borrowing costs. Canadians added $180 billion to their total debt over the past four quarters up to Q2 2022, which was 8% higher than the previous four quarters when they added $167 billion. In fact, in the most recent quarter alone, Canadians took an additional $70 billion in debt, the second highest total ever recorded in Canada.
Mortgage debt continues to be the main driver in household credit (at 86% over the past four quarters) but that’s lower than the previous four quarters and the reason is the change in consumer credit. In the past four quarters, Canadians have added close to $25 billion in consumer credit, with close to $15 billion of that in the most recent quarter. In the previous four quarters, Canadians subtracted $9 billion in consumer credit as they actually paid down far more credit card debt than they added. With consumer credit usually carrying significantly higher interest rates, this will be something to keep an eye on. The following sections will explain why Canadians are more susceptible to interest rate increases than they may have been in the past, but even still it is not as alarming as it might seem. That said, there will be many in Canada who will be adjusting their budgets in order to service this ever-growing debt load.
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credit and debt
TAKING SOME CREDIT AS WE MORTGAGE THE PRESENT
$80
400%
350%
$70
300%
$60
250%
$50
200%
$40
150%
$30
100%
$20
50%
$10
0%
$0
-50%
-$10
-100%
-$20
-150%
-$30
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Q1 Q2
Q1 Q2 Q3 Q4
Q2 Q3 Q4 Q1
YEAR OVER YEAR % CHANGE
MORTGAGES
NON MORTGAGE LOANS
CONSUMER CREDIT
SOURCE: STATISTICS CANADA. TABLE 36-10-0579-01 DATA: CHANGE IN HOUSEHOLD DEBT BY TYPE, QUARTERLY, CANADA
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credit and debt
A CHANGING OF THE GUARD? Historically, Canadians have preferred the predictability and security of fixed rate mortgages, but with variable mortgages gaining momentum, rising rates may have greater ramifications.
Variable interest rates have always played a part in the Canadian economy, including on savings accounts, car loans, and home equity lines of credit. Variable interest rate mortgages, however, have historically made up a small proportion of the residential mortgage market. Entering the pandemic, variable rate mortgages accounted for 18% of all outstanding mortgage funds in Canada. That has now almost doubled to 33% today, as Canadians’ appetite for variable rate mortgages has grown of late. So far in 2022,
variable rate mortgage funds advanced in Canada have exceeded fixed rate mortgages (53% vs. 47% respectively) for the first time. With the majority of borrowers to-date in 2022 choosing to eschew the security of a fixed rate mortgage for the risks (and rewards) of a variable rate, it means that substantially more Canadians will feel the impacts of rising rates in the short term, instead of just at renewal time. With uncertainty around the magnitude and timing of future increases, how much this impacts those variable rate borrowers remains to be seen.
CANADIANS ARE FIXED ON VARIABLE RATES
$70
variable rate mortgages 49%
variable rate mortgages 20%
$60
$50
$40
$30
$20
$10
$0
FIXED RATE YEARS
FIXED RATE YEARS
VARIABLE RATE
SOURCE: STATISTICS CANADA. TABLE 10-10-0006-01 DATA: MORTGAGE FUNDS ADVANCED BY TYPE, MONTHLY, CANADA
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DON'T BE NERVOUS ABOUT DEBT SERVICE Not only have debt service ratios not spiked amid rising interest rates, rising debt loads, and increased variable rate exposure, they’re lower than they were six months ago.
The debt service ratio (DSR) is a measure of the proportion of disposable income that is spent paying back loans and is a good measure of how well households can afford their debt loads. Interest rates are one factor impacting DSRs: when rates rise borrowing becomes more expensive and a greater share of income is spent on debt. But other factors are at play, like wages: when people are earning higher wages, a smaller share of income is needed to service that debt (all else being equal).
The current DSR of 13.6% in the second quarter is up from the previous quarter, but less than the 13.7% ratio from six months ago, and well below the pre-pandemic high of 15.0%. The mortgage DSR, at 7.0% is also less than it was at the end of last year, in spite of quickly rising rates, though that’s still close to the 20-year high level of 7.2%. Though rising incomes will serve as a mitigating factor, rising interest rates in the coming months are sure to elevate these DSRs from current levels.
DON’T FRET OVER DEBT—AT LEAST, NOT YET
16%
15.01%
15.02%
14%
13.63%
12%
12.25%
11.71%
10%
8.74%
7.86%
8%
6.47% 5.24%
6.59% 7.04%
6.27%
6%
6.01%
4.50%
4%
1.75%
2%
2.00%
1.50%
0%
NON MORTGAGE DEBT
MORTGAGE DEBT
DEBT SERVICE RATIO
BOC TARGET RATE
SOURCE: STATISTICS CANADA. TABLE 11-10-0065-01 DATA: PROPORTION OF DISPOSABLE INCOME GOING TO DEBT SERVICE, QUARTERLY, CANADA
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PUNCTUAL PAYMENTS
Rising and high inflation and interest rates have not knocked borrowers off track from repaying their mortgages.
Housing affordability is an oft-discussed subject, usually in the context of how affordable homes are to purchase. But amid a rapidly changing environment, one where inflation is sky-high, more homeowners have variable rate mortgages, those rates are rising, and home values are softening, it's worth checking in on affordability for current homeowners. For that we can turn to the mortgage arrears rate, that is the share of mortgages that are
behind on payments by 90 days or more. While this data lags (as it takes three months to show up in the stats), we can see a clear trend of falling arrears, both in Canada and here in British Columbia. BC’s rate of 0.11%, ranks second in the country, well below the national rate of 0.16%. So while household budgets are being stretched this year, we can see that homeowners have—to this point—been staying on top of their mortgage payments.
IN BC, 11 OUT OF 10,000 MORTGAGE HOLDERS ARE LATE. THAT’S PRETTY GOOD!
0.6%
0.51%
0.5%
0.4%
0.35%
0.35%
0.3%
2022 national rate 0.16% from 0.19% in 2021
0.23%
0.23%
0.21%
0.2%
0.15% 0.15%
0.11%
0.1%
0.07%
0.0%
ON
BC
PEI
QC
MB
NB
NS
NL
AB
SK
Q
Q
DATA: SHARE OF MORTGAGES 3+ MONTHS IN ARREARS, QUARTERLY
SOURCE: CMHC & EQUIFAX CANADA
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HOMEOWNERS CAN AFFORD THEIR MORTGAGES In BC and across Canada, mortgage arrears rates are at or near all-time lows. This is an encouraging indicator of the health of our housing market—albeit a lagging one. ›
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demographics
04. demographics Residents on Canada’s best coast pay the most for their housing services. Is it too much? In some cases, yes.
THE OCEAN AND MOUNTAINS ARE NICE, BUT…
It would be disingenuous at best, and false at worst, to state an opposing view to that of housing being expensive—in some cases, VERY expensive—in British Columbia. And one need not only consider the level and rate of recent changes in (benchmark) home prices, especially in the Greater Vancouver and Fraser Valley board areas (which rose by 36% and 73% to $1.26 million and $1.20 million, respectively, during the 26 months to April 2022)—the proportion of income being spent on housing is also relatively high out west. More specifically, a higher share of households spend at least 30% of their gross income on housing in many metro areas in BC versus their counterparts throughout the country. While a threshold of 30% of income going to housing costs is generally considered the upper limit of what constitutes “affordable” housing, newly-released data from the 2021 Census show that more than 1 in 5 households (21%) actually exceed this threshold nationally, with there being considerable variation in this proportion among Census Metropolitan Areas (CMAs) across the country. Toronto tops this
dubious list, with 30.3% of households spending more than 30% of their income on housing, with Vancouver right on its tail, at 29.6%. Metro areas in BC actually account for 5 of the 8 most expensive CMAs in Canada per the shelter-to-income-cost metric, with Victoria and Kelowna at 26%, Abbotsford- Mission and Nanaimo at 23%. Of course, this aggregate measure of housing affordability belies tremendous nuance, of which much is germane to discussions about who can and can’t afford a suitable and adequate home. For instance, and without delving into the data here, renters tend to spend more of their income on housing than do owners; within the ownership group, those that have mortgages spend significantly more of their income on housing than do those who are mortgage-free. Policy and related analysis therefore need to be similarly nuanced as the challenge of making housing more affordable for those who need it continues.
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ALL QUIET ON THE DOMESTIC FRONT?
35%
30.3%
29.6%
30%
21%
26%26%
CANADA
25%
23% 23%
21%
20%
18%
15%
12%
10%
5%
0%
SOURCE: STATISTICS CANADA 2021 CENSUS. TABLE 98-10-0252-011 DATA: SHELTER-COST-TO-INCOME RATIO, CENSUS METROPOLITAN AREAS
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COME ONE COME ALL
After resetting permanent resident targets to make up for a shortfall of immigrants in 2020, 2022 is seeing an increase of newcomers in all categories.
Canada is, and has been for many years, facing a labour force challenge due to its aging population (one consequence: all those job vacancies). After the pandemic cut our immigration flow in half in 2020, the federal government upped its targets in response, with the aim of admitting 450,000 new permanent residents per year by 2024. Of course, there’s far more to the international migration story in Canada than just permanent-resident flows, with many newcomers entering the country in other categories, and each of these groups has seen significant growth so far in 2022. Permanent resident admissions to Canada are up 60% year-to-date over 2021, though it should be noted many of these “newcomers” were already in Canada (with 70% of permanent resident additions in 2021 having converted from being work or study permit holders). Naturally, then, it’s useful to consider how non-permanent resident inflows have been changing as well.
Study permit holders (aka, international students) are currently up 30% over last year- to-date, though it should be noted the bulk of these international students typically come to Canada in the fall when school starts; as such, with the current data only getting us through June, we can expect the absolute number to jump in the coming months. Meanwhile, temporary foreign workers are up 1% and those here as part of the international mobility program are up 14%. All considered, Canada is on pace to welcome close to 1.8 million international migrants by 2022 year-end. Here in BC the overall inflow of international migrants is up 17% over last year, however, that increase is being driven entirely by permanent residents (up 60%) and study permits (up 26%), while temporary foreign workers and those in the international mobility program are both down compared with the first six months of 2021. Still, if history is any indication, BC is on pace for another record- setting year of international in-migration.
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PERMITTING GROWTH IN CANADA’S POPULATION
1,757,861
1,800,000
1,600,000
1,400,000
1,297,315
1,200,000
1,168,940
1,035,540
1,000,000
924,785
870,580
792,505
800,000
757,270
690,630
600,000
400,000
200,000
0
YTD JUNE
PERMANENT RESIDENTS
TEMP FOREIGN WORKERS
STUDY PERMITS
INTERNATIONAL MOBILITY PROGRAM
ESTIMATED TOTAL
SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: INTERNATIONAL IMMIGRATION TO CANADA, MONTHLY
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TO HERE FROM THERE AND EVERYWHERE
Metro Vancouver is a draw for people from all over the province and the country, yielding long-term benefits.
By and large, diversity is a good thing, be it cultural (who can complain about getting to choose a meal option from any one of the world’s continents on any given single block in Downtown Vancouver?), financial (gotta balance the potential for higher returns in your portfolio with lower risk), or demographic. To this latter point, the available data on the origins and destinations of domestic migrants in Canada allows us to identify which parts of BC benefit from a broader migrant-origin set and those that experienced a lesser one. Interestingly, there is a correlation between the size of an area and the percentage of its domestic in-migrants that account for
its top five origin destinations: the smaller an area’s population, the less diverse is the set of migrant origins, and vice versa, For example, the share of domestic migration that’s accounted for by the top 5 origins to such small-ish communities as Duncan and Squamish is 72% and 76%, respectively, while the latest reign in our province, Metro Vancouver, as a very diverse migrant base, with its top 5 origins accounting for only 46%. Through the ups and downs of economic cycles, this is a good thing in the long-run
for Metro Vancouver—though it’s obviously far from a panacea for housing market undulations.
OF ORIGIN STORIES AND HOUSING MARKET GLORIES
3,000,000
METRO VANCOUVER
2,500,000
2,000,000
1,500,000
1,000,000
GREATER VICTORIA
ABBOTSFORD MISSION
500,000
0
CHILLIWACK
-500,000
80%
40%
45%
50% 55% 60% 65% 70%
75%
TOP ORIGINS % OF ALL DOMESTIC IN MIGRANTS
DATA: STATISTICS CANADA, DOMESTIC MIGRATION BY ORIGIN/DESTINATION FOR CMAS AND CAS IN BC (2019/20) & 2021 CENSUS
SOURCE: STATISTICS CANADA. TABLE 17-10-0141-01
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STABILITY IN DIVERSITY Larger urban areas throughout British Columbia benefit from a broader array of in-migrant origins than do smaller ones, providing a useful economic and housing market buffer. ›
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housing
05. housing
There is a direct relationship between the proportion of renters in a community and the scale of that community’s apartment stock. This should inform planning for the future.
DREAMS OF FIELDS (OF APARTMENTS)
The latest batch of 2021 Canadian Census that’s just been released sheds new light on, among other things, our housing stock and market and, more specifically, characteristics and renter and owned households; a previous release covered details related to the physical features of our dwelling stock. Overall, these data have been relatively consistent over time, with the proportion of homes in Metro Vancouver that are (occupied) apartments remaining stable between the 2016 and 2021 Census counts, at 43%. The ratio of renters in Metro Vancouver was up slightly over the same period, from 36% of households in 2016 to 38% in 2021. When we look at individual municipalities across the region, a clear pattern emerges: there is a strong correlation between the scale of apartment stock in a community and the proportion of residents that are renters in that community. (We should note here that apartment refers to the built-form of the building and does not differentiate between
condominiums and purpose-built apartments; more discussion on condominiums filling the rental gap to come.) In this region, the UBC area has the highest proportion of both apartments and renters, which makes perfect sense given its large student population. Vancouver, the City of North Vancouver, and New Westminster all have more than 60% of their homes as apartments, and have the next three highest ratios of renters. At the other end of the spectrum, Anmore and Lions Bay have the lowest share of renters in the region, and no apartment stock whatsoever. In the spring edition of the rennie landscape we noted, “if you build it, they will come” in relation to new housing and population growth. Well, when it comes to rental housing, the same adage can be applied: if you want to generate housing opportunities for renters, you need to find ways to densify and build more apartments (and lots of them).
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APARTMENT-ALIZING RENTERS
60%
UBC
VANCOUVER
NORTH VAN CITY
50%
NEW WESTMINSTER
METRO VANCOUVER AVG
BURNABY
40%
CITY OF LANGLEY
WHITE ROCK
30%
LANGLEY TOWNSHIP
20%
BELCARRA
BOWEN ISLAND
10%
ANMORE
LIONS BAY
0%
-10%
0%
10%
20% 30% 40% 50% 60%
80% 90%
70%
RENTAL % OF STOCK
SOURCE: STATISTICS CANADA 2016 CENSUS DATA: PROPORTION OF HOUSING BY RENTAL AND AS APARTMENTS, METRO VANCOUVER
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DO SUBURBAN MARKETS EXPERIENCE MORE MARKET ACTIVITY?
Insofar as the frequency of real estate transactions is concerned, not all communities in Metro Vancouver are created equally.
For those participating in real estate as partners, or facilitators—variously referred to as agents, brokers, realtors, and advisors— there is a lot to unpack and understand when it comes to a regional housing market as complex as ours in Metro Vancouver. Where is population growing the most? Where are the most desirable neighbourhoods? What are conditions like in one corner of the region versus another? Do property tax rates differ enough among municipalities to matter to buyers? These questions are some of the most obvious ones to ask, though their answers may, at any given point in time, be somewhat elusive. Often overlooked among the more common metrics and features of housing markets is that of transaction frequency. Sure, larger communities tend to see more buying and selling activity than smaller ones, but when adjusted for population is there any major variation in sales activity throughout the region? It turns out, there very much is.
At the top of the list within Metro Vancouver is White Rock—a small community with just over 21,000 residents—where the median annual sales count per 1,000 residents over the past decade (2012-2021) was 29.9. There was much variation around this value, with the ratio peaking at 45.9 in 2021 (shocker) and bottoming-out at 21.0 in 2018 when market activity had slowed considerably regionally. Rounding out the top 5 are Pitt Meadows, Maple Ridge, Port Moody, and the Langleys— all what one might consider to be suburban communities. At the other end of the spectrum sits the very urban city of Vancouver, with a past-decade median number of sales per 1,000 residents of only 14.1 (as the City averaged 9,699 sales….versus White Rock’s 644). At the end of the day, as realtors look for opportunities in the housing market, and for local residents looking to compare
“liquidity” in various markets, the differences in per capita sales counts appear somewhat compelling.
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CHURN IN THE HOUSING STOCK: VANCOUVER TO WHITE ROCK
40 45 50 35 30 25 20 15 10
2011-2021 PEAK
2011-2021 LOW
5 0
MEDIAN
SOURCE: REBGV & FVREB DATA: PER-CAPITA MLS SALES BY MUNICIPALITY, METRO VANCOUVER
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housing
Slowing sales counts haven’t been accompanied by an oversupply in the housing market. We have a robust labour market to thank for that.
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