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Briefing highlights

  • Cost of carrying a home to spike
  • Markets at a glance
  • Canada churns out full-time jobs
  • U.S. loses positions in September

Costs to rise

The cost of home ownership in Canada is about to spike, dealing another blow to affordability in some of the country's wildly inflated markets.

Bank of Nova Scotia now projects that average mortgage carrying costs among new buyers will climb by about 8 per cent next year and 4 per cent in 2019.

To put that in perspective, those increases will "easily" eclipse the rise of about 2.5 per cent in average annual per-capita income, the bank said in a new outlook.

"Low unemployment and strong household formation, reinforced by aging millennials and high immigration, remain supportive of housing demand, further buttressed by international capital inflows," the bank said.

"Nonetheless, we anticipate some moderation in home sales over the forecast horizon, as rising borrowing costs and tougher mortgage-qualifaction criteria lead to some further erosion in affordability, especially for first-time buyers in major urban markets."

The forecast increases in the next two year assumes "relatively stable" home prices, the bank said.

It calculates monthly carrying costs as principal and interest payments for an average-priced home, based on the average of the prime and five-year fixed mortgage rate, and assuming a 10-per-cent down payment and 25-year amortization, Scotiabank economist Adrienne Warren added in an interview.

The monthly carrying cost is now deemed to be $2,262.

"Existing mortgage holders, which account for only about a third of Canadian households, have some insulation from rising rates," Scotiabank said.

"The majority of mortgages in Canada are fixed-rate, with the five-year term by far the most popular," it added.

"As a result, rising borrowing costs feed through only gradually to mortgage holders. In fact, a majority of fixed-rate mortgages coming due in the near term will roll over at interest rates comparable to, or lower, than those that have been paid since origination …Many households with sufficient home equity may also be able to extend their amortization periods to lower monthly debt-servicing costs further."

Like others, Scotiabank believes the housing market has "likely peaked" amid rising rates and policy moves aimed at easing the froth.

"Deteriorating housing affordability, moderately higher borrowing costs, and consecutive rounds of regulatory policy changes have moderated national resale activity," the bank said.

"Much of the recent slowdown in sales and softening in prices has been concentrated in the Greater Toronto Area and surrounding municipalities, and follows the implementation of a series of provincial measures in the spring of 2017. Activity in the region is showing tentative signs of stabilizing, which implies that market sentiment has now largely adjusted to these latest rule changes."

Affordability is a killer, of course.

Indeed, Royal Bank of Canada said in its latest study on the issue, its affordability measure has "eroded" for eight straight quarters, and in the second quarter of the year stood at its worst level since late 1990.

Aside from Ontario and British Columbia, though, it's largely stable.

Like Scotiabank, RBC noted that higher rates will play a role.

The Bank of Canada has already raised its benchmark overnight rate twice, and more increases are expected this year and next that would put the benchmark at 100 basis points higher. (A basis point is 1/100th of a percentage point.)

"We estimate that, everything else remaining constant, a 100-basis-point increase in mortgage rates would lift RBC's aggregate measure for Canada by approximately 3.5 percentage points," said economists Craig Wright and Robert Hogue.

"All markets would be affected, but the effect would be most substantial in high-priced markets – almost seven percentage points in the case of Vancouver," they added.

"This would occur at a time when housing affordability is already stretched in some of Canada's largest markets. While high sensitivity to a rise in interest rates highlights material vulnerability, the reality is bound to be less threatening as other factors such as income gains will mitigate at least part of the impact."

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Markets at a glance

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Canada gains full-time work

Canada's economy created just 10,000 jobs in September, but there's a lot behind that number that shows a mixed bag.

Full-time jobs surged by 112,000, while part-time positions fell by 102,000, Statistics Canada said today, marking a strong showing on the full-time front.

Unemployment held at 6.2 per cent.

Notably, employment over the course of 12 months is now up by 320,000 positions, or 1.8 per cent, again led largely by full-time work.

The number of hours worked gained by 2.4 per cent, the federal agency said.

Now, having said all this, Ontario was "the lone province with a notable employment gain," Statistics Canada said, while Manitoba and Prince Edward Island lost work.

"The 10,000 job addition was close to consensus, but included a full-time gain of 112,000 against a loss of 102,000 part-time jobs, wiping out the nearly opposite story in the prior month's survey," said CIBC World Markets chief economist Avery Shenfeld.

"That's just a reminder of how imprecise these monthly survey data really are," he added.

"As we expected, there was also a large gain in 'education,' a sector that saw a suspicious drop two months earlier, so private sector paid jobs actually declined."

The U.S., in turn, lost 33,000 jobs amid turmoil caused by storms.

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