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Briefing highlights

  • How we’ll be pinched in 2019
  • Markets, loonie, oil at a glance
  • How the loonie fared last year
  • Toronto home sales slide in 2018
  • Canada creates 9,000 jobs in December
  • U.S. creates whopping 312,000
  • From today’s Globe and Mail

Expect some belt-tightening in the years ahead

— Royal Bank of Canada

RBC sees some good things ahead for our economy. But for many Canadians, not so much.

Arrested wealth, steeper interest rates and unaffordable housing will pinch us this year, RBC’s economics department warns in a new 2019 outlook.

There’s a lot in the report that signals optimism, for the oil patch, business conditions and wage growth, for example. And a soft landing for the housing market. But personal finances will be an issue.

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To start with, the “golden decade of household wealth creation is losing its lustre,” RBC said.

Canadians basked in the glow of cheap crisis-era borrowing costs, but that’s changing. The Bank of Canada has raised its benchmark rate five times since mid-2017, and RBC and others forecast two more increases this year.

“Declining interest rates over the past decade didn’t just make the cost of borrowing cheaper for households,” RBC’s economists said.

“They also had a hand in pumping up asset values and household wealth in Canada,” they added.

“While it wasn’t shared by everybody – far from it – net worth per household soared by 56 per cent over that period, which represented an average gain of a little more than $20,000 per year per household in today’s dollars.”

The sharp rise in home prices was a major part of that, as homeowner equity climbed an average of $7,800 a year. Tack on an average $12,200 a year from the “significant growth” in financial assets, such as stocks.

But “with interest rates now climbing, expect dynamics to change for both sides of households’ balance sheets, not just liabilities,” RBC said. “On the asset side, we see more limited growth prospects in real estate holdings.”

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The bank projected “largely flat” home prices over the near term, with a declining pace of home ownership amid high costs.

“So after a strong decade-long run of aggregate household wealth growth in Canada, we may be facing a slower rate of appreciation over the next little while. If this is the case, much will rest on (so-far meagre) income gains to ease the impact.”

Then there’s the effect of the rate increases themselves, which RBC expects to cost the average household $1,000 more this year to service principal and interest.

“That would represent a 7.6-per-cent jump from 2018 – a tough pill to swallow for many,” the RBC economists said.

But offsetting that will be a projected $2,300 rise in average disposable income before debt-servicing, which, when you do the math, means $1,300 more per household.

“A nice cushion like this will keep a majority of households out of trouble,” RBC said.

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“The question, though, is whether it will be enough to cover the rise in the cost of other goods and services. For many Canadians, it probably won’t. Expect some belt-tightening in the year ahead.”

As for housing affordability, RBC said it expects more trouble.

Source: Royal Bank of Canada

“The bar to home ownership is higher than ever in Vancouver and Toronto, where a typical household would need to spend a record 88 per cent and 76 per cent of its income, respectively, to pay the mortgage, property taxes and utilities for a home purchased today,” its economists said.

“The bar will get even higher in 2019, as the Bank of Canada continues to hike rates. Add in tougher mortgage stress-test rules and some first-time buyers will be looking at a very high hurdle.”

Read more

Markets at a glance

Read more

Pity the loonie

Pity the poor Canadian dollar, which lost out against many of the world’s currencies, Matt Lundy writes.

Read more

Home sales slide in 2018

Final numbers from the Toronto Real Estate Board today show home sales tumbled 16.1 per cent in 2018 from a year earlier.

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New listings slipped 12.7 per cent, with average prices sliding 4.3 per cent to $787,300.

“After spiking in 2017, new listings receded markedly in 2018,” said the group’s director of market analysis, Jason Mercer.

“In many neighbourhoods, despite fewer sales from a historic perspective, some buyers still struggled to find a home meeting their needs,” he added.

“The result was a resumption of a moderate year-over-pace of home price growth in the second half of the year.”

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Jobless rate at 5.6 per cent

Canada’s jobs market held steady in December, while the U.S. saw a surge.

Canada’s economy churned out about 9,000 new positions last month, Statistics Canada said today, while unemployment held at 5.6 per cent.

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Over the course of a year, employment climbed almost 1 per cent, or by 163,000, and all of it full-time.

December’s gains followed a surprising increase of 94,000 jobs in November.

“That the headline number didn't reverse any of the prior increase is a positive indicator, and kept the unemployment rate at an historically low 5.6 per cent,” said Royce Mendes of CIBC World Markets.

“That said, there were a few flies in the ointment,” he added.

“Average hourly earnings for permanent workers remained at a cool 1.5 per cent. All of the job creation also came from the part-time sector, with full-time job employment declining 19,000. Furthermore, paid-employment fell 37,000 during the month, leaving it to self-employment to make up the gains.”

The U.S. jobs report was a big surprise, with the economy creating a far greater-than-expected 312,000 positions, and unemployment edging up to 3.9 per cent.

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From today’s Globe and Mail
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