The Economy
Canada’s real gross domestic product (GDP) fell by 0.1 per cent in the first quarter of this year as inventory accumulation suffered a significant slow down.
The inventory correction shaved over one percentage point off of GDP, while a decline in exports subtracted about one-third of a percentage point (nonannualized) in the first three months of 2008.
Strong growth in wages and income bodes well for the consumer, although personal spending did slow to 3.2 per cent on an annualized basis.
Domestic demand has been driving Canada’s economy over the last two years and will have an integral role this year as well. Final domestic demand grew by 4.8 per cent in 2006 and 4.2 per cent in 2007.
However, net exports will continue to act as a drag on the Canadian economy thanks to a high-flying Loonie and a weakened U.S. economy. The U.S. economy continues to suffer from a housing market correction and the protracted financial market crisis, in addition to high commodity prices.
Canada’s real GDP is forecast to grow by 1.5 per cent this year and 2.4 per cent in 2009.
Mortgage Rates
The U.S. Federal Open Market Committee has made aggressive cuts to policy interest rates south of the border. The Fed Funds Rate has been cut by 325 basis points and now stands at 2.00 per cent.
In Canada, the Bank of Canada has cut the Target for the Overnight Rate by a total of 150 basis points since December 2007, bringing the rate down to 3.00 per cent.
For 2008, the one year posted mortgage rate will be in the 6.50 – 7.25 per cent range while the five-year posted mortgage rate will be in the 6.75 – 7.50 per cent range.
Mortgage rates are forecast to climb by 25 to 50 basis points in 2009.
Mortgage rates moved higher in mid June thereby taking away part of the decreases seen earlier in the year. Rates are expected to remain low in a historical context both this year and next. Higher mortgage carrying costs will be the end result, however, as mortgage rates are not expected to offset rising house prices; this will cool home ownership demand, particularly for first-time buyers.
Migration
Net migration (immigration minus emigration) is forecast to increase by 6.5 per cent this year to just over 245,000 people, then remain essentially unchanged in 2009. Historically high levels of migration will continue to support housing demand.
The majority of newly arrived immigrants initially settle in rental accommodations then move into home ownership over time. Positive net interprovincial migration to the West, coming at the expense of central Canada, will continue to boost housing demand in these provinces both this year and next.
Net migration is forecast to increase in 2008 and remain at a high level through 2009. Positive net interprovincial migration to the West will continue to boost housing demand at the expense of central Canada.
Employment
Employment in Canada grew by nearly 127,000 people in the first six months of this year and was up 1.7 per cent on a year-over-year basis in June. With a near record share of Canadians employed, future job growth will be constrained by increases in the population.
Employment growth is expected to come in at 1.7 per cent this year then slow to 1.2 per cent in 2009. Tight labour market conditions will continue to drive wages and incomes higher.
A near record share of Canadians are currently employed. Job creation is expected to slow as employment growth is forecast to be increasingly constrained by population growth. Tight labour markets will continue to drive up wages and income, thereby adding to strong domestic demand. Positive job growth will continue to fuel housing demand, but at a slower rate than last year.
Income
A tight labour market will continue to push wages and incomes higher. Rising incomes will offset part of the impact of higher mortgage carrying costs on home ownership demand.
Population
Canada’s aging population is resulting in a smaller proportion of people in their child bearing years. The declining birth rate is slowing the rate of increase in the natural population (births - deaths). This will lessen the demand for additional housing stock in the medium term.
Consumer Confidence
The index of consumer attitudes as measured by the Conference Board of Canada showed a marked decline in consumer confidence this summer. The last time consumer confidence fell so rapidly was after hurricane Katrina and the ensuing soaring gas prices. Shaken confidence will cause some consumers to postpone purchases of large ticket items such as housing.
Resale Market
Rising mortgage carrying costs will cool home ownership demand, particularly for first time buyers who have not benefited from the previous six years of strong price growth. Slowing sales combined with record levels of listings have pushed the Canadian existing home market into balanced territory. Balanced market conditions will keep future house price growth more in line with the general rate of inflation, although the Canadian average price will also be impacted by compositional effects.
Vacancy Rates
Increased competition from the condo market and modest rental construction will be partly offset by strong rental demand due to high immigration and a rising gap between the cost of home ownership and renting. As a result, vacancy rates across Canada’s metropolitan centres will remain relatively stable this year and next.