VERICO ECONOMIC CONSULTANT:
MICHAEL CAMPBELL
FEBRUARY 2019
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VERICO Economic Consultant: Michael Campbell February 2019
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5 Facts You Should Know 340,000 The Federal Government plans to accept 340,000 immigrants in 2020 with the majority settling in major urban centres like Vancouver, Toronto and Montreal.
226,000
64,000
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You have to earn at least $226,000 to be one of the 273,000 who make up the top 1% of Canadian income earners.
7/10 Seven out of ten provinces have combined federal and provincial marginal tax rates of over 50% - (BC’s combined rate is 49.8%). In other words – work a little harder, earn a little more and the government gets more than you do.
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The Canadian Real Estate Association estimates that on average, every home sale generates $64,000 in spin-off economic activity.
1,057 Canada’s population is forecast to experience a net rise by 1,057 people every day in 2019.
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VERICO Economic Consultant: Michael Campbell February 2019
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Quote of the Month I think we’re raising whole generations who regard facts as more or less optional.. they’re being taught that it’s important to have views, and they’re not being taught that it’s important to know what you’re talking about.
Famed Stanford Economist, Thomas Sowell
Bonus Quote When 60 minutes recently confronted leading Democrat and media darling, Alexandria Ocasio- Cortez about her numerous factual errors, she responded by saying,
I think that there’s a lot of people more concerned about being precisely, factually, and semantically correct than about being morally right (Somewhere Thomas Sowell is saying, “I told you so.”)
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VERICO Economic Consultant: Michael Campbell February 2019
What’s Going On? - The Bank of Canada miscalculates - The Federal Office of the Superintendent of Financial Institutions gets it wrong - What’s Next For Interest Rates - The Big Hope
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VERICO Economic Consultant: Michael Campbell February 2019
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So What’s Going On? As famed publisher Ernest Benn once observed, Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. I can’t be sure but it may have been speaking about the mortgage stress test. It was nuts right from the beginning – an overreaction by government to a problem that didn’t exist. Real estate activity and prices go up and down but rarely has the
stated goal of government been to slow the activity and reduce prices but that’s precisely what’s happened. In responding to Canada’s two hottest housing markets, Vancouver and Toronto, the federal government introduced the expanded mortgage stress test in January, 2018 that applies to every market in Canada, regardless of size or strength. And to make matters worse, the stress test was introduced in a rising interest rate
market. And it’s not like the Bank of Canada didn’t tell them what was coming. In the spring of 2017, the BoC made numerous statements regarding the imminent rise in rates and they followed through. Starting in July, 2017 the Bank of Canada increased rates by a quarter point five times. The result is now the lowest growth in mortgage lending in 17 years.
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VERICO Economic Consultant: Michael Campbell February 2019
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The Big Question With housing activity down 11% in 2018 and much more in the former leader, Vancouver where sales dropped 42% in December compared to 2017 and 47% in January – it’s not a surprise that real estate boards across the country have been calling for changes or eradication of the stress test. But is the federal government listening? Probably not. At least there’s no sign that they are sufficiently bothered by the sharp drop in activity, mortgage lending and the accompanying negative impact on the economy to revisit the stress test. It would be politically embarrassing. Although they did mention the slowdown in housing when they backed off their stance to increase rates aggressively in 2019.
But is the federal government listening?
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VERICO Economic Consultant: Michael Campbell February 2019
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Interest Rates The drastic change in the Bank of Canada’s stance regarding future increases in interest rates since October is a clear indication that the Bank and the Finance Department are surprised by the impact of rising rates on the real estate market and the overall economy. Gone is the October talk of three to four more rate hikes by the end of 2019 to today’s mantra of “wait and see.” I still shake my head at the thought that they were surprised that an economy that had been built on debt and record low interest rates, especially in the real estate market, would react negatively to higher rates. Despite the fact that surveys and polls had relentlessly delivered the message that higher rates would cause consumers to cut back. The average Canadian has nearly $23,000 in non mortgage consumer debt. It shouldn’t have been a surprised that by July, 2018, after four quarter point increases a third of Canadians were worried about paying the bills and bankruptcy. Environ Analytics calculated that for the average person living in Calgary the five rate increases since July, 2017 would translate into $3,641 in higher interest costs. In Halifax, an extra $2,246, Winnipeg and Montreal $2,100 more and in Vancouver, a whopping $3,943 in additional interest payments.
You don’t need an economics degree to figure out that taking an extra $2,000 to $4,000 out of people’s pockets will impact their spending. The increase in interest rates cut Canadians average discretionary income by 5% along with a 5% drop in their net worth because of the fall in homes prices. Simply put, people feel poorer and they’re paying significantly more in interest expenses - and that’s never a recipe for consumer confidence.
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VERICO Economic Consultant: Michael Campbell February 2019
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So what now? The Bank of Canada says it will depend on the data. The overwhelming consensus is that the probability of a rate hike in the first half of 2019 is remote. Seventy percent of analysts don’t think rates will increase at all this year with the notable exception of both the TD Bank and Scotiabank who forecast two more ¼ point rate increase by early next year.
The Bank of Canada continues to project overall growth at 1.9% this year and 1.5% in 2020, which doesn’t suggest a need for higher rates, especially with low inflation, a continuing weak oil and housing sectors and only minor wage increases.
One Big Issue Overlooked One of the biggest questions to be resolved is how will Canadian consumers react not only to the reduction in disposable income due to rising interest rates and higher taxes but also to the massive drop in the net worth of the average homeowner.
In Greater Vancouver for example – the total value of residential real estate dropped about $947 billion in 2018 compared to the previous year, which economists estimate will result in a $2.9 billion reduction in consumer spending.
Canadian real estate prices dipped just under 5% in 2018, which translates into a reduction of $280 billion in net worth of residential real estate owners. Of course prices in markets like Vancouver, Victoria, Kelowna and Regina dropped much further.
It’s called the wealth effect. The price of housing and other major assets has a psychological impact on an individual’s feelings of financial security. Falling real estate prices won’t make the 9 ½ million homeowners in Canada feel more confident and secure.
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VERICO Economic Consultant: Michael Campbell February 2019
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BC and Ontario Governments Piled On It’s incredible to think that the goal of the government was to slow activity and reduce prices in the vast majority of individuals’ most valuable financial asset. Home owners in Edmonton, Calgary, Regina, Winnipeg…everywhere with the exception of Montreal, Quebec City and Ottawa must have rolled their eyes when the government said they wanted to slow the market given they hadn’t sped up in the first place. Alberta’s real estate market is still recovering the massive impact of falling oil prices while markets in Saskatchewan, Manitoba, the Maritimes and northern Canada never experienced anything like the price rises in Toronto and Vancouver, along with their surrounding markets like Victoria and Hamilton. They didn’t need measures to “cool” the market, yet that’s what they got.
The property purchase tax on homes over $3 million dollars was raised to 20% along with a new additional annual school tax, which impacts virtually every single detached house on the West side of Vancouver, the municipality of West Vancouver and many others in Great Vancouver. For a Canadian resident the purchase tax on a $3 million homes is now $150,000. And if they don’t occupy the home for at least 6 months a year then a speculation tax is added on annually.
Both the BC and Ontario governments weren’t satisfied with just slowing down the market. They wanted to put a stake right through the heart with a series of new taxes and regulations that were guaranteed to exacerbate any downturn. The Wynne government in Ontario had already introduced its 16 point plan, which immediately resulted in a sharp drop in activity by the time the stress test was announced. The higher interest rates and mortgage stress test aggravated the decline, which continued in 2018 where activity fell 16% compared to 2017.
Canada’s Hidden Economic Driver
In BC the provincial government introduced a series of new taxes taking dead aim at the single detached housing market in Metro Vancouver.
In addition, the foreign buyers tax increased to 20% in BC, which means that foreign buyers pay $750,000 in taxes up front on a $3 million purchase. It’s not a big surprise that they started to look elsewhere in cities like Seattle and Montreal.
All three levels of government are increasing a wide range of taxes including higher payroll taxes, higher property taxes, increased fees and levies, increased liquor taxes, new marijuana taxes, gas taxes and carbon taxes, which in jurisdictions like BC are not offset by rebates or other tax relief. Higher taxes always have a negative impact on economic growth. So what measures if any offset the increased cost of government? The answer is straightforward. We discount the cost of labour, exports and every asset in the country by having a weak currency.
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VERICO Economic Consultant: Michael Campbell February 2019
At today’s value, Canadian workers are paid 33% less than their American counterparts doing the same job. Everything produced in Canada is discounted by a third, which makes our exports less expensive to American consumers. And let’s not even get started about the big discounts on Canadian oil exported to US customers. The result is that every Canadian is poorer with a devalued currency. Our purchasing power is reduced as anyone buying goods or travelling to the US can attest. That $1,000 vacation in the US you took 5 years ago now costs $1,330. On an international basis our housing is marked down by a third because it’s price in Canadian dollars. Consider that despite the apparent price increases in hot markets like Vancouver from 2013 to 2106, American owners actually lost money because our currency fell faster than housing prices rose. In international terms, especially compared to the US our economic performance is far worse than reported. Consider that in US dollar terms the Toronto Stock Exchange is ranked near the bottom in terms of growth when compared to other global markets.
The Best News For Real Estate A huge number of variables will impact real estate in the future but none are more important than population increases and the level of economic activity.
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The federal government has revised its immigration goal to one million arrivals by the end of 2021. The target is 331,000 this year, 341,000 in 2020 and 350,000 in 2021. The analysis isn’t too tough to understand. In a nutshell, they have to live somewhere. Urban centers like Greater Vancouver, Toronto and Montreal will get a large influx.Greater Vancouver is expected to receive an average of 45,000 new arrivals every year for the next 23 years, which will obviously increase demand not only in the region but will have a spillover effect in Victoria, Kelowna, Kamloops and other centers. The population in the Greater Toronto area is forecast to grow by over 500,000 in the next five years. Calgary’s population is forecast to grow by an average of 26,000 annually through 2023. Metro Edmonton is expected a steady stream of new arrivals, which will result in nearly doubling the existing population to 2 million. Canada’s population is growing, especially in the West, which brings me to the coming change in employment. I will go into the details in a future report but for now let me say that a positive for housing will be the return of the commodity cycle in 2021, which will positively impact agriculture, oil and gas, and mining. A revitalization of the commodity sector will spur both employment and spur population growth. In other words, good news for real estate.
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VERICO Economic Consultant: Michael Campbell February 2019
Best Tweet So Far in 2019
It’s so cold outside that I saw the Prime Minister and Premier walking downtown yesterday and their hands were in their own pockets.
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VERICO Economic Consultant: Michael Campbell February 2019
Mike’s
MINUET UPDATE Click to see a short update from Michael Campbell.
About Michael Campbell One of Canada`s most respected business analyst, Michael is best known as the host of Canada’s top rated syndicated business radio show MoneyTalks, and Senior Business Analyst for BCTV News on Global. Mr. Campbell is the Economist for VERICO, Canada’s most respected network of independent mortgage brokers.
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About VERICO Canada VERICO was founded in 2005 with a single idea: to unite top mortgage originators in Canada and create additional opportunities for this group of highly driven professionals. Together, we knew we could make a mark on the Canadian mortgage industry. In 2010, we reached $10 billion in collective loan volume, a number that rivaled the mortgage business of the big 5 banks in Canada. Operating at the highest degree of professionalism, excellence and ethical standards, we originate over $15 billion by helping 45,000+ families annually with their mortgage needs. VERICO was named Best Broker Network of the Year in 2009, 2013, 2014 and 2016.