Employment numbers decidedly above expectation
Expectations of 20,000 new jobs added in January were fully blown out of the water by the 69,000 new jobs added by the Canadian economy. Very impressive stuff.
If we dig beneath the surface we do discover that while the headline number is still excellent, there are a few facts worth keeping in mind:
- Employment gains were still led by the public sector. I question the sustainability of that trend once governments at the provincial and federal levels start dealing with our swollen deficits. As CIBC noted, “with a gain of 3.4% in the past year (vs. 2.5% for private sector paid jobs) (this) will inevitably come to an end as upcoming federal and provincial budgets turn to fiscal restraint. Note that the narrower category of public administration (which does not include public sector education and health), has ballooned by 5.8% since January 2010.”
- Nearly 1/3 of the new jobs added were in the self-employed category, a category that can capture those whose unemployment benefits have run out, but who have managed to make some money on the side through their own initiatives.
- Despite the new jobs, over 106,000 individuals entered the workforce pushing the unemployment rate up 0.2% to 7.8%.
- Full time jobs are still 100,000 below their pre-recession levels
Employment gains were far from evenly spread across the country with Ontario the big winner and BC the big loser. As a result, BC’s jobless rate jumped 0.6% to 8.2%, passing Ontario’s jobless rate of 8.1%.
Nonetheless, the private sector job gains alone were greater than the expected total employment gains, making this an overall excellent report. The Canadian dollar gained on the report, and bonds sold off as the market seemingly sees this report putting additional pressure on Mark Carney to raise interest rates. The 5 year bond yield, which influences fixed rate mortgages, jumped to the highest level since July 2010.
Building permits rise on new Ontario condo projects
Despite the fact that there are 286 active condo projects in the GTA, representing 73,953 units — the most of any city in North America, evidently we haven’t yet satiated demand for new condos. Yesterday, Stats Canada released building permit data for December which showed a 2.4% monthly increase. This increase came after two months of decline, and was driven higher largely by increases in -you guessed it- multi residential development in Ontario.
“Construction intentions for multi-family units increased 55.3% to $1.6 billion in December, the highest level since April 2008. The December advance was due mainly to increases in seven provinces, with Ontario accounting for most of the gain.”
In 2010 alone, over 18,000 condos were started in Toronto….more than double the amount started in 2009. The pace of condo development in Toronto continues to outpace organic demand via population increase. It remains supported by the 30-40% investor participation rate in condo sales, with many of these condos being cash flow negative. One must wonder how long this can possibly go, particularly if the expectation of out-sized capital gains evaporates amid a stagnant or falling market. My position on the Toronto condo market, the driver of the rise in starts, remains unchanged.
Big banks begin hiking rates
It’s worth reiterating how banks fund their fixed-rate mortgages.
Banks make money by paying interest on deposits and GICs at one rate and then lending it out at another rate.
Suppose someone deposits a bunch of money into a 5 year GIC at a bank. The bank will pay them a couple of percent and then look to make additional money on their deposit. If the 5 year Government of Canada bond yields 7%, would they lend it in a mortgage at 5%? Clearly they would prefer to make the better return by buying the GoC bond.
Bond prices and interest rates are determined in the open market. The BoC has no direct influence over the 5 year bond rate. Therefore, if a bank is considering lending you money for 5 years as a mortgage, they would at least make you pay the same rate they could obtain by purchasing a GoC bond with the same maturity length.
There’s a bit more to it than that, but that’s the basics. With that in mind let’s have a look at the 5 year bond yield:
That little vertical spike on the right side of the graph indicates that the bond yield of the 5 year bond is rising. As a result, the banks need to reconsider the interest rate at which they will lend out 5 year mortgages. And they are reconsidering it:
“The bank said that effective Feb. 8, the interest rate on its five-year closed fixed rate mortgage would increases 25 basis points to 5.44%”
All the other big banks will follow suit by the end of the week.
Perhaps the most important interest rate is not the 5 year bond rate but the qualifying rate set by the Bank of Canada. You may recall that back in April when the new mortgage rules took effect, one of the major rule changes was that all new home buyers had to qualify for their mortgage amount using a new qualifying rate set by the Bank of Canada. Typically variable rate mortgages are several percent lower than fixed rates, meaning those using variable rate mortgages could traditionally (theoretically) have qualified for a larger mortgage.
Instead, all insured (less than 20% down payment) variable rate mortgages must now be assessed by the banks using the qualifying rate as the minimum. This rate is set by the Bank of Canada and is updated every Wednesday. I’d expect the BoC to up their qualification rate tomorrow…..next week at the latest.
This simply means less credit available to new home buyers. Coupled with the coming changes to max amortizations, a rise in mortgage rates would serve to undercut the flow of credit and new home buyers essential in maintaining house values.
Ignatieff warns on housing market risks
Interesting article from the Calgary Herald over the weekend highlighting comments made by Iggy while in Calgary:
“The governor of the Bank of Canada has concerns about the overheating in the housing market. That’s one concern…I have got concerns about an interest rate shock. Consider this one figure: for every dollar that Canadians earn, they owe $1.50. If we have one interest rate shock, a lot of families in Calgary will be under water.”
It’s not just families in Calgary at risk. Given the asymmetric distribution of debt, that 150% debt level relative to income masks the fact that many families hold significantly more debt than that. This is true all across the country. An interest rate shock, which the Bank of Canada continues to warn about, would affect many families all across the country.