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business briefing

Briefing highlights

  • Cross-Canada housing affordability
  • Stocks, Canadian dollar at a glance
  • Glencore tumbles on subpoena
  • Let slip the dogs of a trade war
  • What else to watch for this week

48.4 per cent

Amount of median pretax income needed to juggle homeownership: RBC

That was a “short-lived reprieve.”

Having improved modestly in late 2017, housing affordability in Canada is eroding again as mortgage rates rise.

And it probably won’t get any better any time soon, Royal Bank of Canada warns.

“Well, the winning streak for housing affordability in Canada ended ... at just one quarter!” RBC chief economist Craig Wright and senior economist Robert Hogue wrote in their latest study of the bank’s affordability measure.

RBC’s cross-country measure rose 0.4 of a percentage point in the first quarter from the fourth, which means erosion. That increase eclipsed the decline of 0.3 of a point in the last three months of 2017, which, in turn, marked the first easing in more than two years.

“Higher mortgage rates were the main factor returning RBC’s measure to a multi-decade high,” Mr. Wright and Mr. Hogue said in the study released today.

“It wasn’t the first time mortgage rates increased - they also did so in the previous two quarters,” they added.

“However, a drop in home prices (centred in the Greater Toronto Area) won the day in the fourth quarter, which trimmed ownership costs modestly over that period. This wasn’t repeated in the first quarter as aggregate prices remained flat relative to the fourth quarter and therefore provided no offset to rising mortgage rates.”

Don’t expect another reprieve, either.

“The prospect of more interest rate hikes in the period ahead poses material risk of further affordability erosion in Canada. The odds of this ultimately occurring will also depend on the degree to which household income increases.”

Much of this, of course, has to do with regional markets, and comes as provincial measures in Ontario and British Columbia, meant to tame home prices, and federal bank rules continue to work their way through the system.

“Outside Vancouver, Victoria and Toronto, the weight of ownership costs generally remains in line with historical norms.”

RBC’s measures look at the amount of median pretax income needed to juggle mortgage payments, taxes and utilities, based on average prices, a 25-per-cent down payment, a 25-year loan and a five-year fixed rate.

The national measure rose in the first three months to 48.4 per cent, up 0.4 of a percentage point from 2017′s fourth quarter and 2.3 points from a year earlier.

Let’s start with what Mr. Wright and Mr. Hogue said of the trouble spots:


That means it’s damn near impossible for first-timers such as young people to crack the market, shy of winning a lottery, and a big one at that. Affordability is “at crisis levels” here, and “things could get worse if - or when - interest rates rise further.”

TORONTO: 74.2 ↓0.1 ↑1.7

Things actually got better - “albeit just barely” - over two quarters and potential buyers still face a “tremendous challenge.” Going forward: “The scope for further relief is limited, unfortunately. Home prices are poised to turn slightly higher near-term after declining modestly in the past two quarters.”

VICTORIA: 62.7 ↑1.2 ↑5.5

That’s up from just 48 per cent about three years ago. And “contrary to basic rules of economics,” the sharp runup in prices didn’t entice sellers as listings fell 22 per cent. Said Mr. Wright and Mr. Hogue: “It could be that current owners simply can’t afford to sell given how expensive their next housing options are.”

Asked whether that could also be the case in Vancouver and Toronto, Mr. Hogue said: “Yes, that may well be the case for many potential sellers.”

Other cities measured:

CALGARY: 43 ↑0.5 ↑1.3

“Housing affordability hasn’t been a real issue for close to 10 years in Calgary but the picture isn’t quite as rosy as it was just three years ago ... More recently, rising interest rates drove ownership costs higher despite home prices largely stagnating in the area.”

EDMONTON: 28 ↑0.4 ↑0.4

“Affordability trends remained more stable at more attractive levels in Edmonton than in Calgary in recent years. This continued to be the case in the first quarter despite some modest deterioration.”

SASKATOON: 33.7 ↑0.7 ↑1.1

“The biggest challenges facing Saskatoon’s housing market are soft demand and plentiful inventories - not affordability ... Further improvement may eventually stimulate demand and help rebalance the market - which continues to favour buyers at this stage.”

REGINA: 30 ↑0.3 ↑0.9

“Weak demand and relatively high inventories are also the most prominent issues facing the Regina market. As in Saskatoon, affordability has been generally stable at neutral levels over the past several years.”

WINNIPEG: 29.9 ↓0.2 ↑0.8

“Winnipeg was one of only two markets on our list (the other being Toronto) that saw a small improvement in affordability in the first quarter ... A second consecutive easing in home prices helped lower the ownership bar in the area - not that this bar was problematic to begin with.”

OTTAWA: 36.6 ↑0.6 ↑1.4

“A gradual erosion of affordability in Ottawa has been a byproduct of a vibrant housing market over the past year and a half, supported by a strong economy and positive demographic trends. A run-up in home resale activity tightened demand-supply conditions markedly last year. It put sellers in the driver’s seat for the first time since early 2010.”

MONTREAL: 43.7 ↑0.4 ↑1.7

“Montreal’s housing market continues to show all-round, solid momentum and steadily rising prices in the early part of 2018. The flip side, though, is that it’s becoming less and less affordable to own a home in the area.”

QUEBEC CITY: 32.6 ↑0.1 ↑0.1

“It was still a buyer’s market in the Quebec City area in the first quarter as flat resale activity did little to address persisting high inventory issues ... Affordability trends in the area have been very stable since early 2017.”

SAINT JOHN: 25.9 ↑0.2 ↓0.6

“Not even the fact that Saint John is one of Canada’s most affordable housing markets provided immunity against the volatility generated by the new mortgage stress test. After reaching a nine-year high in 2017, home resales fell markedly ... The decline eased demand-supply conditions somewhat, though not enough to disturb the generally balanced position that prevailed through last year.”

HALIFAX: 32.7 ↑0.6 ↑1.8

“Halifax has been one of the few markets in Canada that showed some resilience against the new mortgage stress test this year. Market activity in the area barely skipped a beat in the first quarter ... It could be that a spurt of job creation this year and solid population growth kept bringing a steady stream of buyers to market. And relatively attractive affordability could be a factor, too, though there’s some deterioration in that regard over the past year.”

ST. JOHN’S: 27 ↑0.6 ↑1.2

“Home prices in St. John’s rose in the first quarter for only the third time in the past two and a half years. This looks more like a fluke to us than the start of a new trend because there continues to be so much inventory out there relative to demand. St. John’s clearly remains a buyer’s market at this stage.”

The various measures, of course, look different depending on the type of home.

And nationally, things obviously look far less frightful if you strip out Vancouver, Toronto and Victoria, Bank of Montreal suggested in a separate study.

“Borrowing five-year money costs little more today than five years ago and remains well below historic norms,” said BMO senior economist Sal Guatieri.

“Government intensification policies that restrict the supply of ground-related units, low joblessness and well-paying, high-tech jobs are also cushioning prices.”

The rise in prices should also “slow markedly” from the 13-per-cent pace of 2017 to 3 per cent this year and 1 per cent in 2019, Mr. Guatieri added.

And notably, “outside of pricey Vancouver and Toronto, Canada’s housing market is at little risk of a correction,” he added.

“But both cities, home to one in four Canadians, remain vulnerable to a shock, such as a nasty trade war.”

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Stocks, loonie at a glance

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What to watch for this week

The trade battles that have roiled financial markets will escalate this week as U.S. President Donald Trump goes to war against China, threatening more upheaval for stocks and currencies such as the yuan and Canadian dollar.

“Recurring salvos in the trade war and falling asset prices raise the question of how much tariffs could damage the global economy and what outcome markets price,” John Normand of JPMorgan Chase said.

“Simple frameworks suggest at least a 0.5-per-cent reduction in global growth from medium-intensity conflict, before accounting for tighter financial conditions and sentiment shocks,” he added in a weekly report.

“Global markets already discount this 0.5-per-cent slowdown and some [emerging market] assets price a larger 1-per-cent cut.”

It’s Mr. Normand’s “medium-intensity conflictthat’s the wild card for markets.

And we may get signs of what lies ahead when the United States begins punishing Chinese exports on Friday.

What the Trump administration decides as the next move, and how Beijing responds beyond what it has already planned, will be crucial for the global economy and the markets.

Open this photo in gallery:

Chrystia Freeland, Minister of Foreign Affairs, visited Stelco in Hamilton on Friday, June 29, 2018 where she met with employees in the cold rolling plant and announced the government's latest efforts in response to U.S. tariffs on Canadian steel and aluminumPeter Power/The Canadian Press

“Should the administration follow through with threats of further tariffs on another US$200-billion of Chinese goods and roughly US$40-billion of [European Union] auto imports, and these threats are met with reciprocal measures, real GDP growth could be dented by several tenths,” Deutsche Bank economists Brett Ryan, Matthew Luzzetti and Justin Weidner said in a report.

Where Canada is concerned, the United States has slapped tariffs on imports of steel and aluminum, and Ottawa fired back last Friday with levies on a range of American products and aid for the affected Canadian industries.

The EU and others are also in a tit-for-tat battle with the United States.

“Although President Trump’s tariffs on metals are aimed at promoting expansion in manufacturing stateside, the extent to which metal is used as an input to production will result in varying degrees of harm to producers’ margins across manufacturing sub-industries,” Katherine Judge of CIBC World Markets said.

“Indeed, the U.S. imports almost 50 per cent more primary metals than it manufactures, using them to produce a range of goods including electrical equipment and furniture,” she added.

“That comes at a time when rising energy prices and wages are already pressuring profit margins. Add to that the threat of retaliatory tariffs on U.S. exports, and a trade war is far from a win for U.S. equities.”

An even broader trade war would have more severe consequences, obviously, and such a scenario can’t be ruled out, particularly amid U.S. threats to employ the big guns and punish auto imports.

We’ll see, too, what the latest numbers show when the United States and Canada report their May trade performances, also on Friday.

Economists expect to see that the U.S. trade deficit narrowed to somewhere less than US$44-billion, as much stronger export levels eclipsed the rise in imports.

That will do little to ease Mr. Trump’s concerns.

“Export performance and record-high two-way trade flows appear poised to slip in the months ahead,” said Bank of Montreal deputy chief economist Michael Gregory.

“The U.S. dollar has been strengthening; in June, the broad trade-weighted index averaged 5.3 per cent above its January low or 1.1 per cent year over year. And, global trade protectionism is escalating.”

On the home front, observers believe Statistics Canada’s report will show a fatter trade gap, in the area of $2.5-billion.

“Looking ahead, [Canadian dollar] depreciation should provide a sizeable tailwind to exports over the coming months though steel/aluminum tariffs will start to weigh on exports and imports in June and July, respectively,” Toronto-Dominion Bank economists said in a lookahead.

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Aside from trade, it’s not a particularly busy calendar this week, although Friday also brings the widely anticipated U.S. and Canadian Jobs reports. What to watch for:


Not a lot, although U.S. factory orders are expected to show a small dip for May.


U.S. markets are closed, so toast our American friends and stay away from Mr. Trump’s Twitter feed and any further insults against Prime Minister Justin Trudeau.


This could be an interesting day because markets always want to know what the U.S. Federal Reserve is thinking.

Open this photo in gallery:

In this June 14, 2018, file photo, Federal Reserve chairman Jerome Powell, left, and vice chair Randal Quarles listen during an open meeting in WashingtonCliff Owen/The Canadian Press

And, thus, expect a focus on the afternoon release of the minutes from the U.S. central bank’s mid-June meeting, when it raised its benchmark rate again, by one-quarter of a percentage point.

“The latest minutes should outline whether the Fed is concerned about an inflation overshoot and whether it has any concerns about the current uncertainty around trade, which might derail these plans to raise rates another five times by the end of 2019,” said CMC’s Mr. Hewson.


Hold off on the TGIF beer until after morning is done.

Along with tariffs and trade reports come duelling Canadian and U.S. jobs releases.

You can never really know what to expect from the monthly Canadian reports. But economists believe Statistics Canada’s morning report will show a gain of anywhere from 10,000 to more than 20,000 new jobs in June, with unemployment holding at 5.8 per cent.

“The up and down nature of employment this year reminds us just how volatile these survey results can be,” said Royce Mendes of CIBC. “Business plans are for more hiring ahead, but whether from rate hikes or other drags on growth we’re sitting near the lows for the jobless rate in this cycle.”

Observers expect the U.S. report to show a June increase of between 180,000 and 200,000, with the jobless rate steady at just 3.8 per cent.

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