rennie landscape - kelowna spring 2024.indd

Thank you for taking the time to read the Spring 2024 edition of the rennie landscape.

rennie landscape Kelowna spring 202 4

Thank you for taking the time to read the Spring 2024 edition of the rennie landscape. Springtime is often associated with rebirth, renewal, and a general sense of optimism, and there is indeed a feeling of optimism around our local housing markets today. Almost all of that optimism, however, is centered around an outlook of declining interest rates. This means that all eyes are focused on the Bank of Canada, with the conversation shifting from “if” they will cut their policy rate to “when” and “by how much”. The reason there is confidence that the Bank will be cutting interest rates is that we have an economy that has, in fact, responded to restrictive monetary policy. Inflation has dipped back inside target range and is falling, the labour market has softened, consumers are spending less on goods and services, and more than they ever have on servicing debt. Canada’s population continues to grow by leaps and bounds, and while that has some positive benefits, particularly for our labour force, it has been putting stress on our undersupplied housing markets, especially rental housing. So where do we go from here? To answer the question of when the Bank of Canada will cut interest rates we need to watch inflation, at least for a little while longer. We also need to keep an eye on what’s happening in the US as our neighbour and largest trading partner factors greatly into our circumstances, as well as the myriad of macroeconomic and demographic data we explore in this latest edition of the rennie landscape. We hope you find it useful and interesting, and it helps you navigate the complexities of the day.

Ryan Wyse MARKET INTELLIGENCE MANAGER & LEAD ANALYST rwyse@rennie.com

Ryan Berlin VP INTELLIGENCE & HEAD ECONOMIST rberlin@rennie.com

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contents

ECONOMY

RATES

CREDIT & DEBT

DEMOGRAPHICS

HOUSING

POLICY

KEY INSIGHTS

GET THE DATA

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economy

01. economy Canada's unemployment rate has been rising modestly even as the economy has been adding jobs. The reason for this juxtaposition? Look no further than the country's expanding population.

AN UNDERWHELMING LABOUR MARKET

There are myriad ways to examine the labour market in Canada. While the unemployment rate is the most often cited metric, total employment and its month-to-month changes (the number of jobs being added or subtracted each month) gets its fair share of the attention as well. And increasingly of late, the employment measure has been portraying a relatively robust labour market, much more so than it actually is. In 2023, 11 out of the 12 months saw net jobs being added in Canada, with 417,500 new jobs added overall. That’s a larger gain in net employment than in four out of the past five years (with the recovery year of 2021 being the lone exception). And yet, the unemployment rate has consistently risen over the last year, from 5.0% in December 2022 to 5.8% in December 2023, where it also sits as of February 2024. The reason that rising employment has been accompanied by rising unemployment is due

to the record-setting population growth across the country. And while we unfortunately won’t have the full-year population estimates from Statistics Canada in time for this edition of the rennie landscape, we do have the growth in population for those aged 15+ as estimated by the Labour Force Survey. Per that survey, Canada added 945,500 working age Canadians in 2023, an all-time record and 90% more than in 2022. Meanwhile, in 2023 there were only 0.9% more jobs added than in 2022. The unprecedented population growth Canada has been experiencing has had a number of economic benefits, including adding more people to the workforce. But it has also masked, to a degree, a labour market and economy suffering under the weight of high interest rates. And when we look at metrics on a per-capita basis (which will be a theme throughout this edition of the rennie landscape), we see a relatively weak labour market which is bad news for workers, but likely good news for inflation.

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economy

ADDING MORE PEOPLE THAN JOBS

1,200,000

953,800

945,500

1,000,000

800,000

600,000

497,200

480,400

460,700

417,500

413,800

400,000

332,700

300,500

279,400

266,300

200,000

-200,000

-400,000

-600,000

-658,900

-800,000

2018

2019

2020

2021

2022

2023

CHANGE IN EMPLOYMENT

CHANGE IN POPULATION

DATA: CHANGE IN MONTHLY, SEASONALLY-ADJUSTED, EMPLOYMENT AND POPULATION, CANADA SOURCE: LABOUR FORCE SURVEY & TABLE 14-10-0287-01, STATISTICS CANADA

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economy

GROWING UN– AND UNDER-EMPLOYMENT Rising unemployment reflects a segment of our population that wants to work but can’t find jobs—though they aren’t the only ones experiencing labour market challenges.

As the unemployment rate has been on the rise of late, it has reflected a rise in the number of unemployed people. This is stating the obvious, but unemployed persons are also a specific measure from Statistics Canada, namely they are people without a job but actively looking for work and therefore still a labour force participant. Adults who aren’t looking for work, for various reasons such as going to school, being retired, and taking care of a family member aren’t included in unemployment. Discouraged workers, those who want to work but aren’t actively looking because they believe no suitable work

is available, are likewise excluded and their numbers have also been growing. Alongside unemployment has been a growing trend of underemployment as well, that is the number of persons working part-time but who wish to work full-time. The number of these workers has increased by 13% over the past 12 months, while discouraged workers have grown by 81%, and unemployed persons by 18%. That each of these metrics is moving in the same direction is another indication of a softening labour market.

WANTED: MORE WORK

1,400,000

1,297,100

1,100,800

1,200,000

1,000,000

800,000

615,200

600,000

543,700

400,000

200,000

15,100 27,300

UNEMPLOYMENT

DISCOURAGED

PARTTIME, WANTED FULLTIME

FEBRUARY

DATA: UNEMPLOYMENT, DISCOURAGED WORKERS, PART-TIME WORKERS WHO WANT FULL-TIME WORK, MONTHLY, SEASONALLY-UNADJUSTED, CANADA SOURCE: LABOUR FORCE SURVEY & TABLE 14-10-0017-01, 14-10-0028-01 & 14-10-0127-01, STATISTICS CANADA

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economy

A POTENTIAL EFFECT OF RISING UNEMPLOYMENT A weakening labour market affects local real estate markets vis-a-vis reducing demand, but a high unemployment rate often corresponds to an increase in the availability of homes.

Typically we talk about subjects like housing supply in the housing section of this publication, but in this case we have the correlation between the unemployment rate and MLS inventory in economy. Let us explain: a low unemployment rate over the past two years has been a critical component of the relatively constrained inventory we’ve observed in markets across BC and Canada, even in the face of generationally- high interest rates. And further increases to the unemployment rate could change that dynamic.

Here in the Central Okanagan, MLS inventory already sits above the long-run average, with the past 12 months of listings averaging 2,028, while the unemployment rate most recently checked in at 5.6% regionally. Historically, an unemployment rate in the range of 6.0% to 10.0% has correlated with average annual inventory of between 2,000 and 3,500 available listings, although Kelowna’s unemployment rate has been known to fluctuate more than some of the larger markets in Canada. As high interest rates continue to work their way through the economy, an increasing unemployment rate is likely in the near term, and that could lead to a greater availability of homes for sale.

EMPLOYING ADDITIONAL INSIGHT INTO INVENTORY

4,000

14.0%

mortgage deferral program Sep 2020-Mar 2021

3,500

12.0%

3,000

10.0%

2,500

8.0%

2,000

6.0%

1,500

4.0%

1,000

2.0%

500

0.0%

UNEMPLOYMENT RATE LEFT AXIS

TOTAL MLS INVENTORY, MONTH MOVING AVERAGE RIGHT AXIS

DATA: 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED UNEMPLOYMENT RATE & 12-MONTH MOVING AVERAGE TOTAL LISTINGS, CENTRAL OKANAGAN SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA, AOIR

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economy

AN EXPANDING MARKET FOR RETAILERS Retail spending continued to grow last year—albeit by a declining margin—however the increase was driven by record-setting population growth.

Retail sales are a useful metric in evaluating how households are faring, on average, at a given time. During good economic times, households are likely to spend more as they potentially have more disposable income and more confidence in their incomes going forward. Conversely, they are likely to spend less during difficult times due to job loss, concerns about future job security, or, as is the case for many Canadians, allocating more of their incomes to servicing debt (which we’ll explore in greater detail later on). And when consumers spend more of their incomes on debt payments, they naturally have less to spend elsewhere, which is one of the aims of the Bank of Canada’s restrictive monetary policy in order to reduce inflation. So given the backdrop of today’s high interest rate environment, which has affected variable-rate debt holders (both mortgage and

non-mortgage debt), as well as about a third of fixed-rate mortgage holders, it stands to reason that retail sales should be declining as Canadians adjust their household budgets. But on the whole, that hasn’t happened yet as retail sales in Canada grew in 2023 by 0.4% and in BC by 0.3%. A small increase to be sure, but an increase nonetheless. The primary driver of that growth, however, isn’t individual households spending more, it’s once again Canada’s record population growth. When we adjust for population change, per-capita retail sales declined in 2023 in both Canada and BC, by -0.1% and -1.0% respectively. This is one of many indicators that show a growing economy, at least at first glance, but when adjusted for population tell a tale of an economy that has been responding to a restrictive monetary policy.

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economy

STORES SELL MORE AS CONSUMERS BUY LESS

1.08

Canada

1.06

1.05

1.04

1.02

1.01

1.00

0.98

0.96

2022

2023

2022

2023

RETAIL SALES

PERCAPITA RETAIL SALES

SOURCE: STATISTICS CANADA. TABLE 20-10-0056-01 & 14-10-0017-01 DATA: INDEX OF RETAIL SALES AND PER-CAPITA RETAIL SALES, MONTHLY, CANADA & BRITISH COLUMBIA

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economy

TECHNICALLY NOT A TECHNICAL RECESSION Would we experience a recession in 2023? That was a frequently asked question for the better part of the past 18 months and it turns out the answer was ‘no’. That certainly sounds like a positive development, and to an extent it is. Canada avoided two consecutive quarters of negative real GDP growth. Of course, your authors are on the record in the past saying this isn’t really all that telling in terms of what’s happening in an economy and how it relates to housing, which is why we start this publication with a discussion on the labour market. That said, there are some noteworthy trends to explore in the GDP data from last year. The difference between being in a recession and not being in one last year was incredibly close. In fact, it was only after a revision of the Q2 GDP data from marginally negative to marginally positive (revisions are a normal

part of these data releases) that a recession was avoided in Q3, where real GDP declined by -0.13% that quarter. And with 0.25% real GDP growth in Q4, the Canadian economy, per real GDP, grew by just 0.6% overall in 2023. So while not a technical recession, last year saw almost no growth whatsoever. But there’s another important consideration, and stop me if you’ve heard this one before: this happened against the backdrop of record- setting population growth. And sure enough, if we adjust these metrics on a per-capita basis a different story emerges, one of an economy in decline as per-capita adjusted real GDP decreased by -2.0% in 2023. Where Canadian GDP goes in 2024, in per-capita terms or otherwise, will depend largely on the Bank of Canada and when it starts to loosen monetary policy.

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economy

Canada narrowly avoided a recession last year, but that doesn’t mean the economy performed well—particularly when viewed against the

backdrop of record population growth.

A PER-CAPITA RECESSION

1.02

1.01%

1.01

1.00

0.99

0.98

0.97

0.97%

0.96

0.95

GDP

GDP PERCAPITA

DATA: INDEX OF TOTAL AND PER-CAPITA REAL GDP CHANGE, QUARTERLY, CANADA

SOURCE: STATISTICS CANADA. TABLE 36-10-0104-01

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economy

THERE’S NO PLACE LIKE HOME The pandemic brought international travel to a virtual standstill in 2020. And though Canadians have, in fact, been venturing out in greater numbers of late, the total number of travellers still lags pre-pandemic levels.

International trade and travel are important components of our local and national economies. Canada relies on international transactions in terms of importing and exporting products (which we’ll look at next), but also on the movement of people. In this case, we're examining Canadians travelling internationally, which impacts our local economies to some extent through purchases such as flights, insurance, and travel-related products locally. It also helps us understand Canadians' expenditure on travel, both for vacations and business purposes. And whether for business or pleasure, travel is an expense that is often scaled back during difficult economic times, a business or household can save a lot of money in a budget by forgoing trips. Of course, the pandemic brought international travel to a relative halt in 2020, and it took a while for many people to get back to travelling again. Canadians have indeed been venturing abroad in increasing numbers over the past

two years with the average number of trips taken–this includes both multi-night trips overseas or to the south, as well as day trips to the US–however the number of travellers is still less than the pre-pandemic average. Given that travel is inherently seasonal, it makes sense to look at the monthly average over the course of a year, and in 2023 there were 48% more trips taken than in 2022. This is still 15% less than the three-year pre-pandemic average. When we adjust for population growth, we’re still further below the pre-pandemic average (by 21%) but the same trend remains, with per-capita trips up 45% over 2022. With more belt tightening on the way in 2024, alongside robust population growth, it may take some time before the per-capita rate of international travel is back to pre-pandemic levels, though in terms of the overall number of trips taken, that pre-pandemic level is likely to be reached sooner rather than later.

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economy

(NOT) LEAVING ON A JET PLANE

200

6,000,000

pre-pandemic 3-year average 154

180

5,000,000

160

140

3,837,374

pre-pandemic 3-year average 4.6 Million

4,000,000

120

116

100

3,000,000

2,000,000

1,000,000

2020

2021

2022

2023

INTERNATIONAL TRAVELLERS LEFT AXIS

PERCAPITA INTERNATIONAL TRAVELLERS RIGHT AXIS

SOURCE: STATISTICS CANADA. TABLE 24-10-0053-01 DATA: TOTAL AND PER-CAPITA CANADIAN RESIDENT VISITORS RETURNING TO CANADA, MONTHLY, CANADA

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economy

ONE CONSTANT IN A CHANGING WORLD With the overwhelming majority of Canadian exports destined for our neighbour to the south, the US economy has an outsized influence on our domestic production.

As a relatively small (from a population perspective), open economy, Canada relies heavily on international trade. Canadian producers sell their products across the globe, and their markets are affected by economic conditions near and far. Given the global nature of high inflation followed by high interest rates, it shouldn’t come as a surprise that the value of Canadian merchandise exports decreased in 2023, by -1.4%.

As the Bank of Canada has noted of late, the economies of the US and China—two of Canada’s three largest trading partners—have been heading in different directions with the US economy being more robust than expected while the Chinese economy has been softer than anticipated. These two trends are not equal from a Canadian perspective, however, as the US accounts for 77% of Canadian exports. A strong US economy is good news for Canadian firms going forward, though as we’ll explore later on, has implications for the Bank of Canada.

WHY THE US ECONOMY MATTERS: PART I

$700

77% of total exports

4% of total exports

$595 Billion $593 Billion

$600

-0.3% year over year change

$500

$400

$300

-6% year over year change

+6% year over year change

$200

$100

$36 Billion $34 Billion

$29 Billion $31 Billion

UNITED STATES

EUROPEAN UNION

CHINA

DATA: CANADIAN MERCHANDISE EXPORTS TO DESTINATION COUNTRIES, ANNUAL SOURCE: STATISTICS CANADA. TABLE 12-10-0011-01

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economy

UNCLE SAM OR UNCLE PENNYBAGS? The US remains the destination for the overwhelming majority of Canadian exports, and robust demand to the south has been important for Canadian producers. ›

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rates

02. rates Inflation has dipped back inside the Bank of Canada’s target range, which has yielded collective anticipation of impending interest rate cuts. Indeed, expect the first cut to arrive in relatively short order.

IS OUR INTEREST IN INFLATION DROPPING?

If 2022 was all about inflation, then 2023 was most certainly defined by once-in-a-generation interest rates. The Bank of Canada raised its policy rate three more times in 2023, to 5.0% before holding steady through the first three months of 2024. Inflation, meanwhile, has generally been declining, though it has fluctuated in its downward path. Most recently, the headline inflation rate for January dipped back into the Bank of Canada’s target range (of 1-3%) at 2.9% though it’s still above the ultimate target of 2.0%. Against that backdrop of inflation the conversation has focused on when interest rates will start to decline, and the good news for borrowers is that they already have. Fixed mortgage rates have been decreasing of late, on the heels of falling bond yields. The Government of Canada 5-year bond yield monthly average peaked in early September

at 4.25% before declining through the end of the year to 3.17% in December, and has risen modestly in the early part of the year. Discounted 5-year fixed mortgage rates have followed suit, declining from an average of 5.49% in October to 4.84% in January. But the main focus remains on the Bank of Canada, which sets variable interest rates through its policy rate, and influences fixed rates and bond markets through its quantitative tightening program. The Bank most recently held its policy rate on March 6th, though shifted their tone to note that “the data point to an economy in modest excess supply” likely signalling they are almost ready to start loosening their restrictive monetary policy. As headline inflation and core measures decline further in 2024, expect the Bank to begin its loosening cycle.

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rates

INCHING CLOSER TO TARGET

9.0%

8.0%

7.0%

6.0%

4.84% 5.00%

5.0%

4.0%

3.43% 2.86%

3.0%

2.0%

1.0%

-1.0%

2019

2020

2021

2022

2023

2024

BOC POLICY INTEREST RATE

YR GOC BOND YIELD

AVG DISCOUNTED YR FIXED MORTGAGE RATE

ANNUAL CONSUMER PRICE INFLATION

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

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rates

EX-FLATION Inflation can be sliced and diced in myriad ways—with some measures revealing inflation that’s already back to target.

The Consumer Price Index–the basis for calculating inflation– is made up of a basket of goods and services designed to be broadly representative of the things that Canadians buy. By measuring the changes in price of the inputs into the basket and weighting them according to the relative proportion on which they’re bought, Statistics Canada comes up with an estimate for how much prices are changing, which when annualized gives us the rate of headline inflation. Simple, right? Of course there are going to be drawbacks to any methodology used to calculate inflation. For one, everyone’s spending patterns are different, so your own personal rate of inflation will be different. For example, if you’re someone who buys lots of pineapples and the price of pineapples is rising quickly, your personal inflation will be higher than someone who is pineapple intolerant. There are other drawbacks too, and it’s why the Bank of Canada looks at more than just the headline rate. Some prices are extremely volatile, like energy and specifically gasoline, so when stripped out you can see more stable

price changes. Inflation excluding energy peaked much lower in 2022 than the overall rate, at 6.3%, as energy was increasing much more quickly at that time. Most recently in January, inflation excluding energy was higher than overall inflation at 3.3% as energy prices have actually been decreasing of late. Another issue is that high interest rates are— somewhat counterintuitively—contributing to higher inflation. When you calculate inflation excluding just mortgage interest, the annual rate was actually 2.0% in January, right on the Bank of Canada’s target. And beyond that, when you take out shelter (which accounts for 30% of the basket) inflation is below target at 1.5%. The reason shelter is pushing up overall inflation is two-fold: interest costs and rents are both increasing rapidly, both of which are being influenced by high interest rates. This isn’t to say that without high interest rates inflation would have come back down on its own, but rather to highlight that much of the inflationary pressures experienced in the past two years have abated, as new challenges emerge.

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rates

TAKING SHELTER FROM RISING PRICES

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

2.7% 2.9% 3.3% 2.0% 1.5%

3.0%

2.0%

1.0%

0.0%

Jan Apr

Jul

Oct

Jan Apr

Jul

Oct

Jan

Apr

Jul

Oct

Jan

EX. MORTGAGE INTEREST COST

ALL ITEMS

EX. FOOD EX. ENERGY

EX. SHELTER

DATA: ANNUAL CHANGES IN THE CPI, EXCLUDING FOOD, ENERGY, MORTGAGE INTEREST & SHELTER, MONTHLY, CANADA

SOURCE: STATISTICS CANADA. TABLE 18-10–0004-01

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rates

The Bank of Canada and US Federal Reserve are both independent central banks who set their own monetary policies. They don’t, however, operate in a vacuum.

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rates

NEIGHBOURHOOD WATCH The Bank of Canada and Federal Reserve often have a similar policy interest rate and a major reason why is if interest rates diverge too much between Canada and the US, capital will move in greater numbers to the country with higher interest rates and away from the country with lower rates. This will push the currency value of the country with lower rates down and increase the cost of imports, which is essentially importing inflation. For that reason, neither nation wants to have rates too much lower than the other. The Bank of Canada does have some wiggle room though as it navigates an economy that has cooled more quickly than in the US, and

there are some key historical differences that can help inform today. The biggest difference is that the Bank of Canada has more leverage than the Federal Reserve, because most Americans choose 30 year mortgages while most Canadians choose five years. This means that every increase (or decrease) in interest rates in Canada has a larger effect than in the US. As such, US rates generally peak higher than in Canada as they have in this cycle, and end up cutting to a lower level in the US as well. The spread between the two nations has rarely been above 100 basis points over the past 25 years, so don’t expect the Bank of Canada to cut rates very much until the Federal is ready to cut as well.

WHY THE US ECONOMY MATTERS: PART II

7.0%

6.0%

5.33% 5.00%

5.0%

4.0%

3.0%

2.0%

1.0%

-1.0%

-2.0%

BOC POLICY INTEREST RATE

FEDERAL FUNDS EFFECTIVE RATE

DIFFERENCE

SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01, US FEDERAL RESERVE DATA: BANK OF CANADA POLICY RATE, US FEDERAL FUNDS EFFECTIVE RATE, MONTHLY

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rates

CUTTING LIKE IT’S 1999 As the Bank of Canada gets ready to loosen its restrictive monetary policy, some insight can be gleaned from previous cycles.

The Bank of Canada has a mandate to keep inflation low, stable, and predictable and that, above all else, is its main focus. So while we have dedicated a sizeable portion of the rennie landscape detailing all the ways in which the Canadian economy is sagging under the weight of high interest rates, the Bank is far more concerned with getting inflation back to 2% on a consistent basis. This is why, when they do start to cut their policy rate, they will do so carefully to avoid reigniting high inflation.

In the most recent tightening cycle, not only did the Bank raise ten times in total but six of those were greater than 25 basis points while two were greater than 50 basis points. Over the past six loosening cycles combined, only 14 cuts were more than 25 basis points (with eight of those coming in 2020 and 2009) and only four were greater than 50 basis points (three in 2020 and 2009). Expect the Bank to go slowly with their cuts this year, similar to 1999 when they dropped the policy rate four times, each by 25 basis points, in eight months.

MEASURE TWICE, CUT ONCE

NUMBER OF MONTHS FROM START OF LOOSENING CYCLE

1 2 3 4 5

6 7

8 9 10111213141516

0.00%

2015

-0.50%

1998-99

-1.00%

2003-04

2020

-1.50%

1995-96

-2.00%

-2.50%

-3.00%

-3.50%

2000-02

-4.00%

2007-09

-4.50%

SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01 DATA: PERCENTAGE-POINT REDUCTION IN BOC POLICY RATE, MONTHS FROM START OF LOOSENING

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rates

TAKING THE ELEVATOR UP & STAIRS DOWN Expect that when the Bank of Canada begins loosening its restrictive monetary policy that it will do so slowly and cautiously. ›

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credit and debt

03. credit & debt The ongoing battle against inflation is having a predictable impact on Canadian credit: high interest rates are yielding less borrowing.

YOU CAN BET CANADIANS ARE TAKING ON LESS NEW DEBT

It should come as no surprise that borrowing has abated in Canada of late. The Bank of Canada’s restrictive monetary policy is aimed at doing just that, disincentivizing borrowing and spending, and incentivizing saving. Of course, there are plenty of other outcomes, many of which we explore in other sections in the rennie landscape, but the primary motivation is to cool demand and reduce spending. Canadians certainly borrowed (to spend) a lot less in 2023, overall borrowers took on $101 billion in new borrowing last year. Not only is that 42% less than the previous year’s $175 billion, but also the lowest annual total since 2020. This is all the more noteworthy when we consider the record-setting population growth we’ve experienced since then.

Mortgage debt was once again the main driver of household credit last year (accounting for 74% in 2023) with $75 billion in new mortgage debt extended, though that was a smaller share than in 2022 (at 83%). The main reason for the change is consumer credit (which includes credit card debt that we’ll look at more closely later on) which saw its share grow from 15% in 2022 to 21% in 2023 with Canadians adding $21 billion last year. That still represented a year-over-year decline (of 20%), while non- mortgage credit increased by 20% to $5 billion, but only accounted for a 5% share last year. It’s a good thing for Canadians that they took on substantially less new debt in 2023 than in previous years, especially given the significant amount of borrowing they had previously undertaken, which as we’ll see later on, is requiring more income to service than ever before.

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credit and debt

CREDITING BORROWERS WITH RESTRAINT

$80

$70

$60

$50

$40

$30

$20

$10

-$10

-$20

Q1 Q2 Q3 Q4

Q1 Q2

Q1 Q2 Q3 Q4

Q2 Q3 Q4 Q4 Q1

Q1 Q2 Q3 Q4

MORTGAGES

NONMORTGAGE LOANS

CONSUMER CREDIT

SOURCE: STATISTICS CANADA. TABLE 36-10-0579-01 DATA: NET CHANGE IN CREDIT ISSUED BY TYPE, QUARTERLY, CANADA

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credit and debt

PAYING THE PIPER As we move deeper into this heretofore rate-tightening cycle, more and more fixed-rate borrowers are faced with renewing at higher interest rates. It will cost them.

Renewing your mortgage in 2024 is a lot like renewing your driver’s license: painful. While variable-rate mortgage holders have had to endure increasing interest rates all along, fixed-rate borrowers are insulated until renewal time. And since most Canadians choose fixed-rate products (72% of outstanding debt), many haven’t had to face the music of high rates yet. But with Canadian Mortgage and Housing Corporation (CMHC) noting that 45% of mortgages are set to renew over the next two years and 60% over the next three, most have a renewal on the horizon.

With that in mind, it’s worth looking at what renewers are facing today by comparing what the average interest rate is on outstanding debt, versus the average interest rate on funds advanced, i.e. what borrowers are borrowing at today. And depending on the term, renewers are facing a difference, on average, between 1.3 and 2.8 percentage points higher. The good news for most renewers is that their new rate is likely in the ballpark of where they were stress-tested to at origination, meaning they can likely afford the increase. The bad news is they will be facing significantly higher interest costs and they will be spending far more than before to service their debt, which as we see in the next section, is exactly what’s happening.

FIXING OUR ATTENTION ON UPCOMING RENEWALS

$700

8.16%

$600

6.31%

6.02%

5.78%

$500

6.14%

$400

5.02%

4.10%

$300

$200

2.94%

$100

YEAR

TO YEARS

YEARS

OUTSTANDING DEBT

AVERAGE RATE OUTSTANDING AVERAGE RATE TODAY

DATA: OUTSTANDING FIXED-RATE MORTGAGE DEBT, AVERAGE INTEREST RATE ON OUTSTANDING DEBT & AVERAGE INTEREST RATE ON FUNDS ADVANCED, CANADA

SOURCE: STATISTICS CANADA. TABLE 10-10-0006-01.

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credit and debt

TIME TO GET NERVOUS ABOUT DEBT SERVICE The share of income that Canadians are devoting to debt servicing is at its highest level ever, which is cause for concern.

As we just noted, fixed-rate borrowers are facing significantly higher interest rates at renewal than they’d previously been paying. That said, it’s important to measure not just the rate of interest cost but also the borrowers’ ability to afford what they owe via the debt service ratio (DSR), which is the proportion of disposable income that is spent paying back loans. We noted in the last edition of the rennie landscape that the mortgage DSR reached an all-time high. Since then, DSR’s have climbed further with the total DSR in Q4 2023 up to 15.00%, just shy of the all-time high

(of 15.03% back in 2019). Mortgage DSR’s have likewise continued upwards, to 8.16%, a record-high. The non-mortgage DSR, on the other hand, remains relatively low historically, though has also been rising, to 6.84%. This means that Canadians are spending about as much of their incomes as they ever have before servicing debt, a concern going forward. The silver lining, at least to-date, is that mortgage arrears (those 90 days or more behind on their payments), while rising, are still quite low at just 0.18% nationally, meaning that Canadians have been keeping up on their mortgage payments.

SERVICING MORTGAGE DEBT AT A RATE WE HAVEN'T SEEN YET

16%

1.6%

15.00%

14%

1.4%

12%

1.2%

10%

1.0%

8.16%

0.8%

6.84%

0.6%

5.00%

0.4%

arrears rate 0.18%

0.2%

0.0%

2020

2021

2022

2023

NONMORTGAGE DSR MORTGAGE DSR

TOTAL DSR

BOC POLICY INTEREST RATE

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

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credit and debt

MONTHLY BALANCE-ING ACT

Not only are monthly credit card liabilities at an all-time high in Canada—and rising—but so too are the population-adjusted amounts owing.

Credit cards are well known for being easy to use, often coming with enticing rewards, but also having some of the highest interest rates on available credit. So the fact household credit card liabilities in Canada have been increasing, reaching their highest level ever at the end of 2023 at $105 billion, could be cause for concern. We should note that Statistics Canada tracks credit card loans that are both interest and non-interest bearing, so the increase will be,

at least partially, from people paying their bill every month. Still, the increase is noteworthy and what’s more, even when we adjust for population growth the trend holds: per-capita credit card debt has been consistently rising and hit its highest level ever in Canada (going back to 1990) at the end of 2023, up 9% in the last year alone. That per-capita credit card debt is rising even as per-capita retail spending is declining, is another indicator of the difficulties consumers have been facing.

ENTHUSIASTIC ABOUT PLASTIC

$3,500

20.0%

pre-pandemic average $2,773

$3,192

18.0%

$3,000

16.0%

$2,500

14.0%

13.2%

12.1%

12.0%

11.8%

12.0%

11.5%

11.1%

$2,000

10.0%

$1,500

8.0%

6.0%

$1,000

4.0%

$500

2.0%

2017

2018

2019

2020

2021

2022

2023

CREDIT CARD DEBT SHARE OF ALL NONMORTGAGE DEBT

PERCAPITA CREDIT CARD DEBT RIGHT AXIS

DATA: MONTHLY PER-CAPITA CREDIT CARD DEBT & ANNUAL SHARE OF CREDIT CARD DEBT, CANADA

SOURCE: STATISTICS CANADA. TABLE 36-10-0639-01

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credit and debt

BUY MORE NOW, PAY MORE LATER Credit cards are taking up a growing share of all non-mortgage loans. ›

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demographics

04. demographics

Iterative outlooks for both Canada and BC's population continue to rise as the demographic implications of an expansive immigration policy comes into focus.

ADDING A MILLION TO THE NEXT MILLION

We’ve spent considerable time discussing Canada’s rapid population growth throughout this edition of the rennie landscape and some of the impacts it’s had to-date. In addition to those, there are future implications to consider and for that we turn to BC Stats, the provincial statistics agency that, among other things, produces population projections for the province. When we compare the 2023 population projection to those from 2019 and 2015, it becomes clear just how much the forecast for future growth has changed, and changed quickly. In the 2015 forecast, growth in the provincial population was projected to be 18% from 2023 to 2041. In the 2019 forecast, that grew to 19% and in 2023 that grew to 35%. That’s on top of a revised base as well, as the 2023 population came in at 5.5 million instead of the originally forecast 5.2 million. BC is now expected to grow by an additional 1.3 million people between 2023 and 2041 compared with the 2015 forecast for a total growth of 1.9 million new British Columbians.

The reason for the drastic changes to these revisions is the recent growth in net international migration, not only from increasing permanent resident additions but also temporary permit holders. The models assume that the growth in temporary migrants is, well, temporary as the rate of growth is expected to slow with growth in the next nine years of 17%, whereas the subsequent nine years is estimated at 15% as temporary migration reverts back to longer term averages. The new proposed international student cap will have an impact on reducing the amount of population growth we experience in the coming years as well, which we’ll explore in the next section. Building enough housing to accommodate this growth will be a major hurdle, and even though BC started construction on a record number of homes last year (more on that later), it isn’t enough.

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demographics

PROJECTION REDIRECTION

8,000,000

projection 2023

7,396,521

7,000,000

6,103,770 6,334,378

6,000,000

5,000,000

4,076,950

projection 2019

4,000,000

3,000,000

projection 2015

2,000,000

1,000,000

POPULATION PROJECTION

SOURCE: BC STATS DATA: ANNUAL POPULATION PROJECTIONS FROM 2015, 2019, & 2023, BC

rennie.com

demographics

YOU DON’T HAVE TO GO HOME, BUT YOU CAN’T STUDY HERE

International student inflows have become a lightning rod for criticisms of Canada’s immigration policy, but they aren’t the only incoming temporary residents having a significant impact on this country’s demography.

Like most developed nations, Canada has a low birth rate and almost all of our population growth comes from international migration. That said, Canada is unlike every other nation on earth in terms of its rate of population growth through international migration. And what’s more, most of that migration comes in the form of temporary migrants. There are three types of temporary permits issued by the Canadian government: study permits, temporary foreign workers, and the international mobility program (STUDY, TFWP, IMP). Previously, none of them had explicit targets the way the federal government has for permanent residents. The first type on that list has made plenty of headlines of late, with an estimated 1 million international students currently residing in Canada. On January 22, 2024 the government announced a new cap going forward on the number of study permits issued to 364,000 annually. While this is a substantial decline from 2023’s 705,305 permits (-48%), it essentially takes us back to 2018/2019 levels. While this is no doubt a major reduction in the number of newcomers entering the country in the coming year, it’s not the whole picture with respect to temporary migration.

Canada issued a whopping 1.7 million temporary permits in 2023, including 1.2 million to the international mobility program and temporary foreign workers. We should note that a permit issued doesn’t necessarily translate into a newcomer entering the country, permits are also issued for renewals, or people changing status like a student moving into the workforce. Still, this number of permits is not only an all-time high, it’s 42% higher than 2022 which was the previous record-high. In fact, if Canada were to issue the same number of worker permits in 2024 as in 2023, and then issue the new 364,000 capped study permits, the sum would equate to more than 1.3 million, which would be higher than every year prior to 2023. So while the new policy has taken a measurable step towards reducing the number of international students coming to Canada, don’t expect the new policy to slow down population growth too much, as many more workers are still coming to join our labour force.

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demographics

LABOURING OVER THE NUMBER OF ADMISSIONS

982,150

705,305

New Cap 364,000

WORKERS

STUDENTS

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: TEMPORARY PERMITS (STUDY, TFWP, IMP) ISSUED 2023, CANADA

rennie.com

demographics

PUTTING DOWN NEW ROOTS

The profile of people moving into metro areas and of those already residing in them look starkly different. That’s a good thing.

The main reason for Canada’s ambitious immigration is that we have an ageing population and an ageing labour force. The aim is to bring in young people to work as older Canadians retire in ever-growing numbers. But it’s not just international migrants who are moving into Canadian cities, plenty of Canadians are moving as well, either as intra-provincial (within province) or interprovincial (to another province) migrants. And regardless of the type of migrant, they are much more likely to be younger adults and labour force participants.

Here in Kelowna, we attract a larger share of interprovincial and intra-provincial migrants, and a relatively small share of international immigrants. Regardless, the age profile of movers to the Central Okanagan is remarkably similar to other markets in BC, with 57% coming in the 20 to 34 age group, which accounts for just 28% of the resident population. Conversely, just 5% of movers are over the age of 55, which accounts for 36% of the local population. With the aforementioned ageing population, the profile of younger movers is important for labour force growth.

THE YOUNG AND THE RESTLESS

25%

Movers between ages 20-34 57%

20%

15%

10%

AGE GROUPS

POPULATION MOVERS

SOURCE: STATISTICS CANADA. TABLE 17-10-0135-01 & 17-10-0136-01 DATA: AGE PROFILE OF RESIDENTS & MOVERS, KELOWNA, 2022

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demographics

LEAVING HOME Younger adults make up a disproportionate proportion of the people moving into cities and are a vital source of labour. ›

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housing

05. housing

Canada’s undersupplied purpose-built rental markets are not only facing challenges of low vacancy rates and quickly-rising rents, but there are incentives for renters not to move—even if their home no longer suits their needs.

SHOULD I STAY OR SHOULD I GO NOW?

The purpose-built rental market has been long neglected in most of the major metro areas in Canada since the 1980’s. Only recently has new construction on purpose-built rental picked back up in a major way, with some exceptions (looking at you Montréal). And while the secondary rental market–individual condo owners renting out their properties–has filled some of the gap left by the purpose- built market, overall conditions remain extremely tight. The overall vacancy rate in major metros in Canada (per CMHC’s definition) hit an all- time low in 2023 at just 1.5%. And those low vacancy rates lead to significant rent growth, with the average rent for a two-bedroom nationally (regardless of whether it was a turned over unit or a continuation of tenancy) growing by 8% last year. But there are other symptoms of an undersupplied rental market today beyond

low vacancy and rising rents, and one of those is low turnover rates. Markets with some of the highest rents (and rent controls on raising those rents within a tenancy) have some of the lowest turnover rates. That makes sense, when rents are rising quickly, the longer a tenant stays in their apartment, they are insulated from current market rents. This leads to a correlation between low turnover rates and greater differences in average rents between turned over and non-turned over units. Here in Kelowna, where vacancy is just below the national average at 1.3%, we actually have a healthier turnover rate than most other markets at 19.3%, and as such the difference in rent between turned over units and non-turned over units isn’t quite as high at 21%. This difference in rents is still a strong incentive for renters to stay in their homes, even if their needs change and leads to further imbalance in the rental market.

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housing

MAKING DO WITH WHAT YOU HAVE

40.0%

35.0%

30.0%

21.4%

25.0%

20.0%

19.3%

15.0%

10.0%

5.0%

0.0%

EDMONTON CALGARY

KELOWNA MONTRÉAL VANCOUVER TORONTO VICTORIA

TURNOVER RATE

DIFFERENCE IN RENTS

DATA: PURPOSE-BUILT RENTAL APARTMENT TURNOVER RATES & % DIFFERENCE IN AVERAGE RENTS BETWEEN TURNOVER SUITES AND NON-TURNOVER SUITES, SELECT CMA’S, 2023

SOURCE: CMHC, 2023 RENTAL MARKET REPORT

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housing

ONLY THE FEW BUY YOUNG

Would-be first-time buyers are generally the most sensitive to high prices and high interest rates—no surprise, then, that the housing market participation of this segment of the population has dwindled in recent years.

Home prices peaked across BC in the spring of 2022, shortly after the Bank of Canada embarked on its once-in-a-generation campaign to stamp out generationally high inflation. Since then, there was some recovery in 2023, before softening some more in the latter half of last year. And while prices today remain below their peak levels, across all home types, in markets throughout the province, relative affordability is worse now than it was then. That’s because the drop in prices was not enough to offset the increase in costs from higher interest rates. That means buyers, on average, can afford less today than they could in early 2022. First-time buyers are impacted more by these changes in rates and prices than other buyers. And it makes sense, whether someone is a move-up buyer or downsizer, they have the equity in their current home to lean on when making their next purchase. We can see that sensitivity manifest in the first-time buyer data, where pre-pandemic the provincial average share of purchases by first-time buyers was 12%. BC’s three largest

markets all had slightly lower shares, Metro Vancouver was 9%, Capital Region was 10%, while Kelowna’s first-time buyer share was 11%. This also tracks, as these markets are generally more expensive than the rest of the province, particularly Metro Vancouver. As rates fell and prices rose in 2020 and 2021, those shares declined (though the actual number of first-time buyers grew) to around 8% for all three metro areas. Most recently, as interest rates shot up and prices only softened, the share of first-time buyers fell more, even compared to much lower sales counts. Since March 2022 the share of first-time buyers in the Central Okanagan was 6%, while in the Capital Region 5%, and in Metro Vancouver it has fallen all the way to 4%. We know that changes in prices or interest rates don’t affect everyone equally, and in the case of recent changes, particularly today’s high rates, it’s first-time buyers that have been largely pushed out of the market, though as we observed before, renewers aren’t having a great time either.

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housing

GETTING A FOOT IN THE DOOR IS HARDER THAN BEFORE

16%

pre-pandemic BC avg. 11.8%

pandemic price growth BC avg. 9.6%

interest rate growth BC avg. 6.9%

14%

12%

10%

6.2% 7.2% 7.1%

3.6%

2018

2019

2020

2021

2022

2023

METRO VANCOUVER

CAPITAL REGION CENTRAL OKANAGAN BC

DATA: SHARE OF FIRST-TIME HOMEBUYER RESIDENTIAL PROPERTY TRANSACTIONS, 3-MONTH MOVING AVERAGE, BC

SOURCE: BC GOVERNMENT PROPERTY TRANSFER TAX DATABASE

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