Canadian housing starts surprised on the upside in May with 193.5k units (annualized) being constructed. This was a significant increase from the 166.5k in April. The jump was reflective of the resumption of residential construction after it was shut down in April. Excluding this factor, starts would have dropped by 20 percent. Nevertheless, the aggregate level of starts above 190k is very healthy. It shows remarkable resilience and is atypical during a downturn for such a cyclical industry. But, can this strength can be sustained? The brunt of the economic impact on households is being tempered by government fiscal support. When income support programs are scaled back (the CERB is only available for four months) and banks end mortgage deferrals (currently available for up to six months) there is a risk that deteriorated personal finances lead to further weakness in residential real estate.
Staying on the real estate theme, last week the Canada Mortgage and Housing Corporation (CMHC) has tightened mortgage insurance qualifying rules, effective July 1, 2020. As such, the CMHC is raising the minimum credit score to be eligible for insurance to 680, some 80 points higher than the current minimum. It will also limit the gross debt-servicing ratio (GDS) to 35 percent of annual income (prev. 39 percent) and the total debt service (TDS) ratio to 42 percent (prev. 44 percent). The changes are not dramatic. However, the measures are likely to pull forward some sales into June as some buyers rush to avoid tighter requirements. The policy decision appears to be related to efforts by the CMHC to reduce the risk related to a possible surge in household debt burden. In 2008/09, real estate rebounded in response to low interest rates when the economic risks subsided. CMHC is forecasting a 9-to-18 percent decline in home prices, so an improvement in affordability could bring buyers into the market pushing up real estate borrowing. This could support a recovery in prices, but lead to more indebt households. Moreover, CMHC has signaled that they believe debt-to-disposable income ratio could climb to 230 percent in reaction to lower income growth in the near term. So, the crown corporation is taking action to temper personal debt risks.
This week has a light economic calendar. There are no major Canadian releases. The US consumer price index comes out on Wednesday. Inflation is expected to drop to 0.2 percent in May, while core inflation (excluding food and energy) is anticipated to be 1.3 percent. This marks a low inflation environment but not one signaling deflation, at least for the time being. The Federal Reserve is meeting this week and will publish its policy announcement and FOMC projections on Wednesday. No change in interest rates is expected. At this point, the central bank will likely want to assess how the economy reopening unfolds. Some tinkering with existing asset purchase programs is possible. Financial markets will read the Fed statement closely for guidance regarding the FOMC’s assessment on the outlook for the economy.
Craig Alexander is the first Chief Economist at Deloitte Canada. He has over twenty years of experience in the private sector as a senior executive and leading economist in applied economics and forecasting. He performed macroeconomic research, regional and sector analysis, and fiscal market forecasting and modelling. Craig is a passionate public speaker and holds a graduate degree in Economics from the University of Toronto.