The Twenty-Four
The Weekly Wrap, April 12, 2024
Alberta housing market not waiting for rate cuts
By Mark Parsons, ATB Economics 12 April 2024 8 min read
In this week’s ATB Economics Weekly Wrap…
- Still looking: The BoC wants to see more
- With or without you: Alberta housing market powers ahead
- U.S. inflation - running too hot
- U.S. consumers - why so glum?
- Favorite things: coffee and chocolate getting pricey
- Interesting Fact: the late Daniel Kahneman - the grandfather of behavioural economics
- Chart of the Week: BC - Alberta migration patterns
Inflation and interest rates steal the spotlight this week. The Bank of Canada stayed on the sidelines, with few signals as to what’s next. U.S. inflation is running hot, which may keep the Federal Reserve on hold longer. The Alberta housing market is moving ahead with or without rate cuts. Productivity is top of mind these days, with Canada’s dismal performance ushering in a national conversation. Yesterday, we talked about why productivity is not just an academic concern - it matters for wages.
Getting closer… interest rate waiting game continues
The Bank of Canada kept its finger on the pause button Wednesday, and said it is happy with what it sees. It just wants to see more. What are they looking for? More signs that dip in inflation is not just a blip, and that the declining trend holds.
One swallow doesn’t make a summer, but perhaps a couple more will. The next two inflation reports are key ahead of the June announcement.
The balancing act continues: hold long enough to win the inflation battle, but not so much to inflict more economic harm than necessary to get inflation to 2%.
Where to from here? Governor Macklem said June cuts are ‘within the ‘realm of possibility’ - that’s a maybe, but hardly a commitment. The Bank is signaling they’ll be ready to pull the trigger if core inflation keeps falling. Our baseline view is still a mid year cut (June or July).
Somewhat lost in the shuffle…the Bank of Canada also said Wednesday that the estimate of the neutral rate is 2.25-3.25%, up from the previous range of 2-3%. What is the neutral rate? The policy interest rate you can expect when the economy is ‘normal’ (not overheating, or underperforming, and inflation is at target- goldilocks in other words).
Alberta housing market charts own course
“With or without you
With or without you, ah, ah…”, U2
The Alberta housing market is pushing ahead, with or without rate cuts.
The Alberta interprovincial numbers are staggering (a record for any province since 1971), as we discussed at length last week. They largely explain why Alberta’s housing market is charting its own course, even in an uncozy interest rate environment.
Alberta benchmark home prices rose 9.9% in March year-over-year, compared to only 1.1% in Canada. Even with the recent divergence, Alberta benchmark housing prices sit $213K below the national average (though that’s well down from the peak of $378K in February 2022).
Unit sales leaped 31% over the last year in Alberta vs. 13% nationally. Months supply of inventory is now only 2.3 (3.8 nationally).
Calgary is one of the rare major Canadian markets where housing prices have actually risen since the Bank of Canada started hiking rates. That trend continued in March, with benchmark prices up 11% y/y. We’re not the only ones making the migration connection. According to Calgary Real Estate Board Chief Economist Anne-Marie Lurie, “we have not seen March conditions this tight since 2006, which is also the last time we reported high levels of interprovincial migration and a months-of-supply below one month”.
Edmonton is playing catch up. Prices are still below pre-rate hike levels, but up over the last year by 4.5%. Edmonton is one of the most affordable large markets (relative to incomes), which should support further gains in in-migration and housing activity.
The Calgary-Edmonton housing price gap, using benchmark prices, was $192.8K in February - the highest on record (comparable data goes back to 2005).
Outside the two largest cities, we don’t have benchmark prices (which control for changing attributes), but average residential prices were up over the last year in March across all Alberta regions except for a small decline in Ft. McMurray.
Benchmark home prices ticked up again in Alberta while they pulled back by 0.9% nationally in March 2024
US inflation - stubbornly high
South of the border, the lingering question is whether the U.S. Federal Reserve can wrestle inflation to target with minimal damage to the economy. The U.S. economy has been defying rate hikes, with unemployment rate below 4%, and economic growth exceeding expectations.
Inflation had been trending lower, even as the economy continued to roar. It seems, though, that the persistent economic heat is frustrating efforts to cool inflation. Inflation has been sticky the last few months, with March’s reading coming in hot at 3.5%. More concerning, core annual inflation (which strips out more noisy movements in food and energy) did not fall as expected, landing at 3.8%.
U.S. equities fell on the news. Markets slashed expectations of a June cut, placing greater odds in July and September according to CME FedWatch. Recall the Fed’s ‘dot plot’ forecast in March penciled in 3 cuts this year.
Speaking of monetary policy, Japan finally raised its policy interest rates out of negative territory last month. Inflation has arrived on the scene, giving the Bank of Japan confidence it can exit the negative rate policy era.
Shouldn’t Americans be less glum?
With a resilient economy, you would think that Americans would be a confident bunch. The U.S. unemployment rate is at historic lows, and wage growth has been solid. Sure, excess pandemic savings are evaporating, but the job market has held up incredibly well given the interest rate circumstances.
One way to gauge how consumers feel is using the widely reported University of Michigan Consumer Sentiment index. This index tanked in 2022, falling to levels not seen even during the Great Recession or the depths of COVID. While improving so far in 2024, it’s just now approaching levels from late 2020 (when the unemployment rate was about 3 p.p higher).
So what’s the disconnect? Inflation is the main suspect. As in Canada, purchasing power has been eroded by rapid price gains in the last two years, making many Americans ‘feel’ poorer. Housing affordability, which has declined since 2021 owing to higher interest rates,is another potential culprit. Other potential explanations include feelings that their financial security is vulnerable, unpredictable world events, the after-shocks of the pandemic, and negative news in the media.
While the unemployment rate is low relative to historical standards, consumer sentiment in the US is still below its pre-pandemic level
Why is our beloved coffee and chocolate going up in price?
“These are a few of my favourite things”, Julie Andrews, Sound of Music
You may have noticed a new author in the ATB Owl mix. Miranda Mantey from ATB ventures has been providing us with her insight, and this week she weighed in why coffee and chocolate (two of our favourite things) is getting so darn expensive. Check it out here. A quick summary is below.
A mix of adverse weather conditions and crop disease has led to a significant jump in price in recent months of cocoa and coffee, two commodities vital to the happiness and well-being of many. Cocoa prices more than tripled in the past year and cocoa futures recently surpassed US$10,000, marking a 120% jump. Similarly, Arabica coffee futures have exceeded US$2 per pound, reaching a new annual high and outpacing forecasts. No immediate relief appears in sight. While recent projections point to some stabilization, expect these high prices to be with us for some time.
Not just construction… energy workers also needed
Last week we talked about the shortage of construction workers. Another recent report by Careers in Energy suggests 178,000-182,000 workers could be needed in the Alberta energy sector by 2035 - up from 145,000 in 2022. Most of this growth will occur in the next five years. The paper arrives at this figure by looking at expected production and investment levels, and emerging opportunities like carbon capture and storage. Most of the hiring to fill these new positions will be due to age-related attrition, and the industry’s labour market is predicted to remain tight.
Interesting Fact: The late Nobel laureate Daniel Kahneman is often referred to as the “grandfather of behavioural economics”. He passed away March 26.
Do people behave rationally? Economic models often assume so. It makes the math work, and gives eloquent results. But people can behave in an irrational manner (like a judge who is more likely to grant parole after lunch). Kahneman, a psychologist, won the nobel prize in economics in 2002 for his ground-breaking work in behavioural economics, uncovering human biases, noise and irrational patterns. His best selling novel “Thinking Fast and Slow” summarizes his research findings and is an excellent read.
Chart of the Week - Recent migration patterns between Alberta and BC
As we discussed last week, Alberta’s population is growing faster than the rest of the country, with Canadians flocking to the province. There are two provinces that stand out - B.C. and Ontario. In 2023, they accounted for 70% of Alberta’s net interprovincial gain.
This week, we unpack Alberta-B.C. people movements (next week we look at Ontario).
BC is an unusual case. It is the only province that has gained more people (on net) from Alberta than it has lost since 1971. Ontario, in contrast, has experienced a large net outflow to Alberta over this period.
The last major wave of outflows to B.C. was between 2015 and 2021, a challenging period for the Alberta economy: an energy-related recession in 2015-16, market access problems in 2019, and a COVID recession that hit Alberta particularly hard.
In the last two years, however, outflows suddenly reversed. Alberta has gained people from BC since the third quarter of 2022. In 2023, Alberta added 15,250 people from B.C. on a net basis. Why the turnaround?
Alberta’s job growth has been stronger than BC's, and housing affordability much more favourable. The housing affordability advantage is not new. BC affordability ratios have long been stretched relative to Alberta. But now there is the combination of even more favourable housing affordability in Alberta (third chart) and stronger employment growth. More recently the unemployment rate differential, traditionally a more reliable indicator of migration patterns, has narrowed (fourth chart).
Alberta’s housing affordability advantage relative to BC is one of the major reasons behind the strong inflow of interprovincial migrants seen from BC to Alberta over the last two years
A narrowing of the unemployment rate differential, and much stronger job growth in Alberta, has contributed to inflows from BC in recent quarters
Answer to the previous trivia question: “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything” by Steven D. Levitt and Stephen J. Dubner was first published on April 12, 2005.
Today’s trivia question: At the heart of the 2003 book Moneyball: The Art of Winning an Unfair Game (and a 2011 movie starring Brad Pitt), what is sabermetrics?
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