U.S. labour conditions remain strong, and the economy continues to grow at a moderate pace. Inflation is still below the Fed’s target despite the rapid decline in unemployment to 4.1 percent. The growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter pace.

In the Fed’s quarterly forecast of economic and financial conditions, policymakers were divided over the outlook for the benchmark interest rate in 2018. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.

This is in direct contrast to market expectations of only two rate hikes this year by the Bank of Canada and is one important reason why the Canadian dollar has fallen sharply vis-a-vis the U.S. dollar in recent weeks, although the loonie did edge upward following the release of the Fed’s decision as the U.S. dollar fell sharply.

In the forecasts, U.S. central bankers projected a median federal funds rate of 2.9 percent by the end of 2019, implying three rate increases next year, compared with two 2019 moves seen in the last round of forecasts in December. They saw the fed funds rate at 3.4 percent in 2020, up from 3.1 percent in December, according to the median estimate.

The median estimate for economic growth this year rose to 2.7 percent from 2.5 percent in December, signaling confidence in US consumers despite recent weakness in retail sales. The 2019 estimate rose to 2.4 percent from 2.1 percent. The 2020 GDP growth continues to be a forecasted 2.0%. Fed officials expect a lift this year and next owing to the tax cuts passed by Republicans in December.

These projections are above the Fed’s estimate for the long-run sustainable growth rate of the US economy of 1.8 percent, a figure that is about in line with the Bank of Canada’s analysis for our country.

The tax cut stimulus was introduced to an economy that was already experiencing labour shortages. The Fed estimates the long-run noninflationary level of unemployment to be about 4.5 percent–well above today’s nearly 20-year low of 4.1 percent, suggesting that inflation is likely to rise in coming months.

New Listings
The number of newly listed homes recovered 8.1% in February following a plunge of more than 20% in January. Despite the monthly increase in February, CREA reported that new listings nationally were still lower than monthly levels recorded in every month last year except January and were 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017.
New supply was up in about three-quarters of local markets. B.C.’s Lower Mainland, the GTA, Ottawa and Montreal led the monthly increase. Despite the monthly rise in new supply, these markets remain balanced or continue to favour sellers.
With sales down and new listings up in February, the national sales-to-new listings ratio eased to 55% compared to 63.7% in January. Based on a comparison of the sales-to-new listings ratio with its long-term average, almost three-quarters of all local markets were in balanced market territory in February 2018. There were 5.3 months of inventory on a national basis at the end of February 2018 – the highest level in two-and-a-half years and in line with the long-term average of 5.2 months.

Home Prices
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose 6.9% y/y in February posting the 10th consecutive deceleration in y/y gains. This continued the trend that began last April when the province of Ontario announced its new housing measures that included a 15% tax on nonresident foreign homebuyers. The slowing y/y home price growth mainly reflects the trend for the Greater Golden Horseshoe. Prices in that region have stabilized or begun to show tentative signs of moving higher in recent months; however, year-over-year comparisons are likely to continue to deteriorate further due to rapid price gains posted one year ago.
Nationally, condo units continued to show the highest y/y price gains in February (+20.1%), followed by townhouse/row units (+11.8%), one-storey single family homes (+3.5%), and two-storey single family homes (+1%).
In the GTA, the Composite MLS HPI rose 3.2% y/y, which was driven by an 18.8% y/y rise in condo apartment prices and 7.5% growth in townhouse prices. Single-family detached home prices were down slightly compared to February 2017.
Benchmark home prices in February were up from year-ago levels in 10 of the 13 markets tracked by the MLS® HPI (see the table below). Composite benchmark home prices in the Lower Mainland of British Columbia continued to trend higher after having dipped briefly during the second half of 2016 (GVA: +16.9% y/y; Fraser Valley: +24.1% y/y). Benchmark home prices rose by about 14% y/y in Victoria and by roughly 20% elsewhere on Vancouver Island.
In the GTA, benchmark price gains have slowed considerably but remain 3.2% above year-ago levels. While home prices in Oakville-Milton are down slightly over the past year (-1.9%), the monthly price trends there have begun to show signs of stabilizing with some tentative upward movement in recent months.
Calgary benchmark home prices were flat (+0.1%) on a y/y basis, while prices in Regina and Saskatoon were down from last February (-4.8% y/y and -3.8% y/y, respectively).
Benchmark home prices rose by 7.7% y/y in Ottawa (led by an 8.9% increase in two-storey single-family home prices). Greater Montreal saw a 6.1% rise y/y (driven by an 8.8% increase in townhouse prices). Benchmark prices increased 5% in Greater Moncton (led by a 6.4% rise in one-storey single-family home prices).

Bottom Line
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos in Toronto and Vancouver where buyers are confronted with limited supply. Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious.

As the Bank of Canada pointed out last week, household credit growth has slowed in recent months led by a slowdown in residential mortgage credit. Rising interest rates are a severe headwind for consumer spending, and tighter monetary policy could derail an already fragile economy. So don’t expect a Bank of Canada rate hike anytime soon.