Canada Employment

Further Cracks in Labour Market Lend Support
to Additional Interest Rate Cuts

Labour market continues to loosen. Canada’s economy lost 1,400 jobs in June, well below the consensus estimate of a 25,000 position gain and marking the second monthly contraction in just four months. Hiring intentions remained weak, as elevated borrowing costs continued to work their way through the broader economy. Not only are some measures of job vacancies now below their pre-pandemic levels, but hours worked also fell 0.4 per cent monthly. At the same time, the number of active job seekers across Canada increased by 40,400 last month, on the heels of still-elevated population growth. These factors combined to lift the unemployment rate 20 basis points to 6.4 per cent, up 160 basis points from the July 2022 trough. This further easing in labour market conditions lends support to an additional interest rate cut at the Bank of Canada’s July meeting, which would likely continue to foster growing investor enthusiasm in the commercial real estate sector.

Wage growth a risk to Central Bank. Despite the labour market broadly loosening over the past year, annual wage growth remained elevated and rose 30 basis points to 5.4 per cent in June, providing some risk to Canada’s inflation outlook. However, this re-acceleration was largely due to unfavourable base-year effects, with the three-month annualized rate falling to 3.3 per cent. Other wage measures calculated directly from business payrolls have also been more gradual. Combined with labour demand and supply continuing to rebalance, wage pressures are likely to ease over the coming months. Consequently, June’s labour report increased the odds to just over 60 per cent for a second interest rate cut later this month.

Commercial Real Estate Outlook

Higher worker pay needed. Given labour productivity concerns in Canada’s economy, elevated wage growth is inflationary. However, income gains are needed in Canada. Not only do average earnings trail the United States by roughly 25 per cent, but income levels in Canada do not support rents that incentivize housing development. While multifamily construction has hit record highs in recent years due to improving fundamentals and government incentives, current rent levels still make the feasibility of new projects challenging. This is especially true in the current environment of surging construction costs, lengthy approval timelines and restrictive borrowing costs. Consequently, housing affordability in Canada has become a major concern and enhancing overall labour productivity should be a main point of focus in order to stimulate wage growth while at the same time minimizing its impact on inflation. Investment in housing could grow with less government intervention and help address widespread barriers to homeownership as a result.

Commercial real estate investment approaching inflection point. The Bank of Canada cut its policy rate to 4.75 per cent in June, after holding it at 5.0 per cent since July of last year. As a result, bond yields have largely been trending down over the course of 2024, which is causing positive investor sentiment to grow. Preliminary estimates for the second quarter indicate a modest 3.0 per cent quarter-over-quarter increase in total dollar volume sold. Investors continued to favour property types benefiting from robust population growth and limited supply, with industrial, multifamily and retail capturing the largest shares of total dollar volume transacted.   

Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada