BC Employment January 2014

Attached are graphs on BC and Vancouver's employment rates (15 years and older)

This month I decided to drill a bit deeper into the data, in part because both changing demographics and economic malaise can affect labour rates. To try to determine this I have plotted unemployment, employment and participation rates by age cohorts 15-24, 25-54, and 55 and older:

Analysis

• The under 25 unemployment rate is noisy but is showing some improvement, and it should be noted took a marked drop in 2005 until the recession. If we "discount" the period between 2005 and 2008, youth unemployment has improved since its levels between 1990 and 2005.
• Participation rate of the 25-54 age cohort has remained tightly bound since 1990. This is a different pattern from what the US has seen in its 25-54 participation rate since the recession.
• Participation rate of the over-55 crowd is increasing. I may get around to checking into this more, but I am going to speculate that part of this is due to: a rise in female employment rates in the baby boom cohorts as they start entering the 55+ category, a "bulge" in 55-65 ages due to baby boomers, and overall health improvements and less physical jobs are allowing employment to continue later than has been the case previously.
• Overall BC's labour market is showing gradual improvement, as has been the case since the end of the recession. Conditions are comparable to levels seen in the first half of the decade 2000-2009.

BC Interprovincial and International Migration

As I await the annual census metropolitan area population data from mid-2013 I have updated my series on tracking interprovincial and international migration to and from BC through 2012 (source). BC interprovincial migration is primarily to and from Alberta, Ontario, and spread between the other provinces and territories. I have not broken down international migration into countries of origin, but the majority are from Asia, and about one in four are non-permanent residents.

Here is net international and interprovincial migration:

Here is the change of each of the categories year-on-year:

Here is the total interprovincial "volume" (ie in-migrants plus out-migrants). This indicates how many bodies are passing the border. If there is zero net migration in a category that means as many are leaving as are arriving.

The next graph is the net interprovincial migration as a percentage of total migration in a category. This gives a sense of the magnitude of the "vector" of migration. The larger the deviation from zero, the more "biased" the migration is.

I looked at Alberta-BC migration in more detail, by quarter through Q3 2013:

A few observations:

• Net international migration has remained steady since 2010. (As mentioned about one in four net international are nonpermanent residents)
• Migration to and from Alberta has been the most volatile over the past 30 years, which makes some sense as, one assumes, the threshold one overcomes to move to Alberta is lower than to other parts of the country.
• Negative net interprovincial migration from Alberta was a major contributor to lower population growth in 2012. So far in 2013 this number has seen an improvement, meaning this component's headwinds that persisted through the late 1990s and early 2000s are not re-appearing.

Note these values are for BC, not Vancouver; there are intraprovincial migration components, as well as the natural increase, that contribute to a region's overall population growth. I eagerly await the major cities annual population growth data to ascertain how much of the population growth of 2013 has been in the Vancouver area.

Interest Rates and 2014

The Canadian mortgage market favours five year fixed rate term renewals, and as such the prospects for those looking to renew mortgages in the coming year matters for inflation as well as credit growth. A borrower has a few options at renewal time, including continuing to amortize a loan on its original schedule, refinancing for a different loan amount, and changing between fixed and variable rate over various terms. Now-retired "Vancouver Housing Blogger" brought us the concept of the "renewal gap", the interest rate differential a borrower sees upon mortgage renewal, shown below for the 5 year fixed rate mortgage using the "average residential mortgage rate" as reported by CMHC, and the "posted" rate as reported by the Bank of Canada (note current rates are held as constant indefinitely into the future):

Extending this concept further, we can look in terms of change in payment, which depends upon whether a borrower refinances or re-amortizes. The four scenarios considered are:

• Borrower refinances a 5-year amortized $100,000 loan into another $100,000 25 year amortization loan (and pocketing the amortized amount) (blue line)
• Borrower refinances a 5-year amortized $100,000 loan into a $100,000 20 year amortization loan (and pocketing the amortized amount) (red line)
• Borrower continues a 5-year amortized $100,000 loan into a 25-year amortization loan (ie extends the amortization only) (yellow line)
• Borrower continues a 5-year amortized $100,000 loan into a 20-year amortization loan (ie continues the amortization schedule; this would be the scenario for a borrower who wants to continue with a government-insured policy loan) (green line)

The four scenarios are graphed below for the average lending rate, again assuming current rates are extended indefinitely into the future:

The blue and green lines overlap exactly. That is, a borrower deciding to refinance a $100,000 loan for 25 years or continuing to finance a loan five years into its 25 year amortization for 20 years is the same. If a borrower decides to refinance but not re-amortize, that results in a higher payment, and if a borrower decides not to refinance but to re-amortize, that results in the lowest payment in the scenarios considered.

Starting in 2012 and continuing all the way until today, all four scenarios resulted in lower mortgage payments compared to the previous five year term. Starting in early 2014, that scenario quickly changes, with only the re-amortization scenario offering any significant easing of payments. The sudden change in payment terms for borrowers will tend to reduce credit growth and yet be relatively inflationary through most of 2014 and all years hence, barring any significant drops in mortgage rates.

Canadian and US Bond Yields

The perpetual threat of rising bond yields that (one assumes) translate to higher mortgage rates are back in the news. Well, rising US yields are in the press, anyways, and we all know that Canadian yields are tightly linked to US bond yields.

The graph below shows the linear spread between Canadian and US 10 year bond yields (ie the Canadian 10Y bond yield minus the US 10Y bond yield) since 1955:

When we say Canadian and US yields track, it is in the statistical context.

Teranet House Price Index - Home Prices Down in November

HOME PRICES DOWN 0.1% IN NOVEMBER

In November the Teranet–National Bank National Composite House Price Index™ was down 0.1% from the month before, essentially reversing the October gain. Because prices in November 2012 had declined by a greater margin, 12-month home price inflation accelerated to 3.4% from 3.1% in October. The rise from a year earlier exceeded the cross-country average in five of the 11 metropolitan markets surveyed for the index: Calgary (5.9%), Hamilton (5.2%), Toronto (4.2%), Vancouver (3.9%) and Quebec City (3.7%). The 12-month gain lagged the average in Edmonton (3.0%), Winnipeg (2.8%), Ottawa-Gatineau (1.2%), Halifax and Montreal (0.8%). Prices were down from a year earlier for a ninth consecutive month in Victoria (−1.4%).

Teranet – National Bank National Composite House Price Index™

The 0.1% monthly decline of the composite index was the fourth November decline in a row. Be it as it may, since November prices have on average gained 0.1% from the month before over the 15 years of data index collection, this year’s retreat does not signal a buoying market. Prices were up on the month in four of the 11 metropolitan areas: Vancouver and Halifax (0.6%), Hamilton (0.3%) and Winnipeg (0.1%). The Winnipeg gain was the first in five months. Prices were down from the month before in Victoria (−1.8%), in Montreal (−0.6%), in Calgary (−0.3%) and in Edmonton, Quebec City, Ottawa-Gatineau and Toronto (−0.2%). Vancouver prices have been rising for seven straight months, reaching a new record in November. However, prices in six of the 11 markets have been trending down recently: for four consecutive months in Quebec City (total −1.8%), Montreal (−1.4%) and Edmonton (−1.1%); for three consecutive months in Ottawa-Gatineau (total −0.8%). Prices have declined 0.4% in Toronto over the last three months and 2.4% over the last two months in Victoria. Despite November’s increase, prices are down 0.7% over the last five months in Winnipeg.

Teranet – National Bank House Price Index™

The historical data of the Teranet–National Bank House Price Index™ is available at www.housepriceindex.ca.

Metropolitan area	Index level November	% change m/m	% change y/y
Calgary	172.23	-0.3 %	5.9 %
Edmonton	171.19	-0.2 %	3.0 %
Halifax	142.07	0.6 %	0.8 %
Hamilton	147.03	0.3 %	5.2 %
Montreal	149.65	-0.6 %	0.8 %
Ottawa	142.39	-0.2 %	1.2 %
Quebec	176.42	-0.2 %	3.7 %
Toronto	153.50	-0.2 %	4.2 %
Vancouver	174.04	0.6 %	3.9 %
Victoria	136.22	-1.8 %	-1.4 %
Winnipeg	193.82	0.1 %	2.8 %
National Composite 6	158.53	0.0 %	3.5 %
National Composite 11	159.21	-0.1 %	3.4 %

The Teranet–National Bank House Price Index™ is estimated by tracking ob­served or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at www.housepriceindex.ca.

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, To­ronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Cen­sus. According to that census¹, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion.

All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

By :

Marc Pinsonneault Senior Economist Economy & Strategy Group National Bank of Canada

Teranet - National Bank House Price Index™ thanks the author for his special collaboration on this report.