CANADA: The Teranet–National Bank National Composite House Price IndexTM rose 2.6% in June, the largest increase for that month in the index’s 19-year history. Ten of the 11 metropolitan regions registered higher prices in June, led by Hamilton (+4.1%—a record monthly rise), Toronto (+3.7%—also a record) and Quebec City (+3.7%). Price gains were impressive also in Vancouver (+2.5%), Victoria (+2.2%), Edmonton (+1.8%), Halifax (+1.7%), Montreal (+1.6%) and Ottawa-Gatineau (+1.2%). Year on year, the national index was up a record 14.2%, with Toronto (+29.3%—a record), Hamilton (+25.6%—also a record) and Victoria (+17.4%) registering the sharpest gains. Elsewhere, price movements were more subdued and even negative in the case of Edmonton (-0.1%) and Quebec City (-0.6%). The June stats show that the Ontario government’s Fair Housing Plan, which is expected to put a damper on Toronto home price inflation, had not yet had a bearing in this regard. However, given the plan’s effect on home sales and listings (see chart below), the impact on prices should be felt soon enough.
In June, housing starts rose 17.7K (+9.1%) to 212.7K. In urban areas, multiple starts increased 10.9K (+9.4%) to 127.9K while single-detached starts jumped 6.1K (+10.1%) to 66.8K. Rural starts, for their part, edged up 0.7K (+4.0%) to 17.9K. Starts were up in four provinces, including Ontario (+24.4K) and Quebec (+9.2K). They were stable in Saskatchewan and declined in British Columbia (-8.8K) and Manitoba (-4.1K), among others. June’s advance was in part due to a return to a more normal level of starts in Ontario after a weak showing in May, but it also resulted from record activity in Quebec City, where a major condominium project inflated gains. For Q2 as a whole, starts averaged 207.5K. Though this is a strong number, it is nevertheless dwarfed by Q1’s astronomical gains (223.4K on average). Consequently, new residential construction is set to subtract from economic growth in Q2.
The Bank of Canada hiked its policy rate for the first time in seven years, raising the overnight rate 25 basis points to 0.75%. While the BoC acknowledged that inflation remained low—the latest reading showed common core CPI rising only 1.3% on an annual basis—it considered this weakness “temporary” and continued to project inflation close to 2% by the middle of 2018. The central bank also justified its decision by describing the economy as “approaching full capacity”. It suggested that any remaining slack would be absorbed by above-potential economic growth. In this regard, in its updated Monetary Policy Report, the bank raised its real GDP growth forecast from 2.6% to 2.8% for this year and bumped it up one tick to 2.0% for next year. In the meantime, the estimate of Canada’s potential GDP growth was left unchanged at 1.0-1.6% for this year. If growth evolved as forecast, the BoC estimated that the output gap, which stood at about 0.5% of GDP at the end of 2017Q2, would be closed by the end of this year, that is, two quarters earlier than was expected in the last MPR.
This week’s rate hike came as no surprise as the BoC had set the stage for it through its communications. The real question is whether the decision to raise the overnight rate should be seen as a first step in removing the “insurance policy” taken out in 2015 or as the first of a series of upcoming rate hikes. BoC Governor Stephen Poloz was unwilling to categorize the rate decision along those lines. Instead, he pointed out that the economy had evolved since 2014 and could behave quite differently than it did prior to the oil shock. Consequently, the policy rate of 2014 should not to be used as a reference point. Poloz added that “the economy [might] be more sensitive to changes in interest rates than in the past” given current household debt accumulation. This obviously argued in favour of a cautious approach to monetary policy normalization. Yet, in his press conference, Poloz stated: “In the full course of time, I don’t doubt that interest rates will move higher, but there’s no pre-determined path in mind at this stage. It’s a data dependent, quarter-by-quarter analysis that we’ll be doing.” With interest rates still very low and the bank projecting the output gap closing by the end of this year, we think that there are more rate hikes to come and that the next one will be delivered later this year.