Who wants to see the future of interest rates?

If you’re interested in Calgary Real Estate, perk your ears up!  Interest rates influence people’s home affordability which is a part of Real Estate demand.

In part 1/2 of this MEGA update we dive into some leading economic indicators that affect interest rates.

In part 2/2 of the MEGA update, we will look at Real Estate supply metrics.

I think combining some major moving parts in our economy and relating them to Calgary’s Real Estate market help provide context for what the future might look like …

Key Economic Factors Related To Interest Rates And Real Estate Demand.

Employment Data:

As recently as last Friday, Stats Canada published the latest “Labour Force Survey”.  Here are what I think are the key findings:

1. Canada’s unemployment rate dropped.  From Sept – Oct the unemployment rate dropped from 5.9% to 5.8%.

   Note: unemployment numbers do not include people NOT actively looking for work.  This is referred to a “participation rate”.  Canada’s participation dropped from 65.4% to 65.2%.  I think it’s possible the unemployment rate dropped because of less participation than actual increased employment.  Regardless, Canada’s unemployment data is very positive.

   A) Alberta’s unemployment rate increased.  AB’s unemployment rate is up 0.3% month-over-month to 7.3%.  AB’s labour participation rate also increased (more people looking for work) to 72.3%.  Calgary’s unemployment rate is 8.4%.

2. Full time jobs increased.  Canada added 11,200 jobs month over month, with the majority of them being full time employment.  Full time jobs are typically higher paying, which boots wage-growth.

   Wage growth has been a serious conundrum for our Central Bankers.  Wage growth in Canada for October 2018 is 2.19%.  This is just below Canada’s inflation which means purchasing power is ever so slightly less year-over-year.

Inflation Data:

1. Canada’s Consumer Price Index (CPI), which is a measure of overall percentage change in one’s purchasing power of a basket of goods, is 2.2%.  The Bank of Canada’s target for this number is 2%. CPI is down from July’s peak of 3%.  The method of reporting some statistical data changed, which is a little concerning about how made-up some important data can be sometimes.
2. Core inflation numbers are about the same.  The Bank of Canada has three core measures of inflation.  The Bank created these to strip out volatile goods from the inflation basket.  These three inflation indicators (CPI Trim, CPI Median, CPI Common) are 2.1%, 2% and 1.9% respectively.  This let’s our central bankers know our inflation numbers are on target right now.
3. U.S inflation rate is 2.3% with the Federal Reserve Interest Rate at 2.25%.

   Canada’s inflation 2.2% with the Bank of Canada interest rate at 1.75%.

Gross Domestic Product:

GDP is the measurement of Canada’s economic output.  Here are highlights from October’s data:

1. Canada’s GDP grew by 0.1% in the month of August (bit of a lag in data).
2. GDP increased due to increases in oil and gas extraction.  This sub sector was up 1.9%, led by a 3.2% increase in non-conventional oil as crude bitumen and total crude production reached record levels here in AB (now we need to work on the WCS/WTI discount!!).  The finance and insurance sector and Real Estate activity rounded out net positive GDP gains.
3. Manufacturing and construction sectors saw an overall decrease in GDP.  A primary contributor to lower manufacturing was the shutdown of an assembly plan in ON.  Residential Real Estate construction is slowing down.  The declines of June (0.4%), July (2.6%) and August 2018 (1.6%) reflect the largest declines in Real Estate construction since the beginning of 2009!

Central Bank Updates:

1. Neutral interest rate target range: 2.50% – 3.50%.  The Bank of Canada’s laid out a direction and target range for our central interest rate.  They have provided this range because it relates to many contributing and variable factors.  Ideally, the BoC want our economy producing at capacity (+/- 1% or 2% at economic capacity) with inflation of 2%.  Stephen Poloz refers to this as “bringing our economy home”.
2. Use of the word “gradual”.  In the latest interest rate announcement, the Bank of Canada Governor Stephen Poloz made note to remove the word “gradual” from the outlook statement.  Many are anticipating this to be a very “hawkish” (upward trending) position on future interest rate hikes.  However, the Bank did also say they are basing future rate decisions on incoming data (see above).

Conclusion:

Existing economic data remains supportive of relatively near term interest rate increases by the Bank of Canada. However, there are looming risks that could be cause-for-pause, and at the extreme end, create an environment for rate decreases:

Some of the major downside risks to our economy and current interest rate direction are:

1. U.S – China trade war.  It’s possible the U.S economy would suffer due to this trade war.  Canada’s largest buyer of our economic goods is the U.S.
2. U.S debt crisis and Global monetary tightening.  As U.S interest rates rise, servicing their National debt of 21 TRILLION dollars becomes very expensive.  Globally, many nations are removing accommodative monetary stimulus which could lead to increases of wage growth and inflation.
3. Canadian consumer trouble.  The BoC rate hikes could trip highly leveraged Canadians into financial trouble.
4. Pronounced decline in home values.  Toronto and Vancouver home values have been rising sharply, and it is a risk they could fall sharply.

Thank you for reading.  I create this content to earn your trust in advising on your future Mortgage plans.

I hope this summary of leading economic indicators that trickle into affecting homebuyer demand, are a part of helping you understand what is happening in our broad economy today.

Talk soon,

Chad Moore