Juggling Dynamite

The Canadian unemployment rate rose to 6.9% in April (from 6.7% in March). Outside of the 2020 COVID shutdown, this was the highest level since January 2017 and up 210 basis points from the July 2022 cycle low of 4.8%.

This is a warning sign: in past cycles since 1953, we have been six months into a recession by the time the unemployment rate has risen 101 basis points (1.1%).

The national election on April 28th helped drive a temporary surge in public administration employment (+37k), which offset a 31k loss of manufacturing jobs. Ontario bore the brunt of the weakness with employment down 35k in April and -50k since February, while the unemployment rate rose to 7.8%–the highest in nearly four years.

In its recently released Monetary Policy Report for April 2025, the Bank of Canada noted two potential scenarios unfolding.

Scenario 1, where new tariffs are negotiated away, but the process is unpredictable and continues to spook businesses and households. In that case, they see: “GDP growth in this scenario stalls in the second quarter, then expands only moderately. Inflation drops below the 2% target for the rest of 2025 and into 2026, because of the end of the consumer carbon tax and a weak economy.”

In Scenario 2, a long-lasting global trade war causes Canada’s GDP to contract in the second quarter, and the economy goes into recession for a year.  In this case, they assume growth gradually returns in 2026 but remains soft through 2027 as US tariffs permanently reduce Canada’s potential output and lower our standard of living: “Inflation rises above 3% in mid-2026 as tariffs, countermeasures, and shifts in supply chains raise costs, pushing up many prices. Inflation then eases as weak demand limits ongoing inflationary pressures”.

The Governing Council agreed that the April 2 US trade announcement would put the situation closer to Scenario 2. However, the partial rollback on April 9 and new exemptions since have potentially moved trade policy back towards the middle of the two scenarios.

As I have noted for some time, the Bank of Canada’s relatively sanguine outlook for the Canadian economy over the past couple of years was predicated on the assumption that employment would remain strong and households would remain current on their debt payments. Those assumptions are increasingly in doubt.

A scenario-two long-lasting trade war would raise the rate of mortgage delinquencies above the rates seen during the 2008 financial crisis (shown in blue below since the late 1980s).
This suggests further pain for borrowers and lenders, home prices, and Canada’s highly leveraged, real estate-sensitive economy. The case for capital protection has rarely been greater than now.

TRREB is Canada’s biggest real estate board, covering the Greater Toronto Area (area codes 416 and 905, as shown below), which has the largest population concentration in Canada. TRREB just posted April numbers (here); year over year, single-family home sales were down 22%, and condo sales were down 30%.
An hour or so in each direction of metro Toronto—places that saw the largest buying frenzy during the ultra-low rate era, 2019-2022—average sale prices are down more than 20% year over year. New listings are leaping daily, and some sellers are starting to panic.

Even so, the median GTA selling price of $950k remains a ludicrous 11x the median household income of about 80k. As a reminder, the long-term affordable home price-to-income ratio, commonly called the “median multiple,” is a key indicator of housing affordability. Historically, a ratio of 3x or less has been considered affordable–meaning a median home price three times the median household income (see here). After home prices tanked in the early 1990s, the Canadian national median price hovered around 3 to 4 times the median household income for about a decade.

Many people erroneously believed that home prices only went up and did not realize that housing bubbles typically end with significant price declines that do not recover for many years. Unfortunately, many ill-informed decisions were made as the financially blind led the financially blind and unaware.

Real estate is the most widely owned and leveraged asset, so housing downturns have historically led to the most painful economic contractions. This is a huge macro theme with reverberations yet to unfold.

What do we make of this? What happens next? Ron is one of the few who has actually gone through this disaster before, in 1990. Here is a direct video link.

Yesterday, the US Federal Reserve held its policy rate steady at 4.25%–4.50%, as Chair Jerome Powell admitted he doesn’t know whether rising inflation or surging unemployment will hit hardest.

In the meantime, indebted businesses and consumers feel the pressure of interest rates near multi-decade highs.

A larger share of student loan balances are past due now than before the pandemic forbearance began (below since 2017, courtesy of The Daily Shot), and the Trump administration resumed collection efforts on Monday after a roughly five-year hiatus. See: Trump administration to garnish wages of 5.3 million defaulted student loan borrowers this summer.As US 30-year fixed mortgage rates hover around 6.76%, new US home sales have fallen to 2019 levels, and existing home sales to a 14-year low.Canadian real estate boards report that home resales fell significantly in April from a year ago in most markets (blue below with new listings in yellow). The MLS Home Price Index fell again in several markets, including the Toronto region, Hamilton, Kitchener-Waterloo, Cambridge, Vancouver and Fraser Valley—extending months-long negative streaks. Even the Calgary index recorded its first year-over-year decline in five years. See RBC: Canada’s housing markets crack.Many people alive today did not think that home prices could go down. They also erroneously believe that central banks will not ‘let’ stock markets fall. The truth is that central banks do not have the power to bail out a world full of reckless and wilfully blind financial decisions, especially with asset prices still at uneconomically high levels and revenues in retreat.

DDB offered lucid updates on the many moving parts yesterday. Worth a listen.

 Danielle DiMartino Booth, CEO of QI Research and former Fed advisor, joins Jeremy Szafron to break down why she believes the Fed is missing clear signs of recession and a credit crunch already hitting Main Street. Here is a direct video link.

QI Research CEO and chief strategist Danielle DiMartino Booth discusses China’s stimulus plan and the Federal Reserve’s interest rate strategy on ‘Making Money.’ Here is a direct video link.