US Housing Activity Shifts

Despite volatility, we anticipate lower mortgage rates over the next year, which should support housing demand, with disproportionate benefits in the existing home segment.

• US Housing Activity Shifts as Existing Home Segment Revives
  
• Canada Growth Weak And Below Potential
  
• Fading Market Pricing for RBA Cuts
  
• Spotlight on Next Week

Weekly Highlights

Shifting Sands in US Housing Market

Amid the high mortgage rates of the past couple of years, whatever meager housing market activity still occurred was heavily concentrated in the new home segment. This was a space where builders had some leeway to tweak building specifications toward smaller footage or cheaper finishes and/or to offer potential buyers rate buydowns to make purchases more affordable. The other big reason for the shift towards newly built homes was the fact that high mortgage rates also had the effect of freezing up supply in the existing home market since homeowners who had secured low mortgage rates in 2020 and 2021 have been reluctant to move and lose those favorable terms.

With the onset of the Fed rate cutting cycle in September, inventory in the existing home market has begun to improve ever so slightly, allowing existing home sales to post their first y/y increase in over three years in October. Moreover, pending home sales have also ticked up recently. Relative to August levels, they rose 9.6% cumulatively during September and October; in October, they were 6.6% higher than their year-earlier levels, the first positive annual comparison since November 2021.

By contrast, activity in the new home segment has become choppier of late. New home sales badly missed expectations in October, plunging 17.3% m/m and dropping 9.4% y/y. The pullback in sales lifted inventory to 9.5 months’ worth of sales, the highest since October 2022 (a time when the entire housing market was adjusting to Fed’s aggressive rate hikes). Importantly, a growing share of this inventory is made up of completed homes, suggesting more pressure on homebuilders to manage inventory and, perhaps, a cap on price gains even as mortgage rates retreat.

Consumer spending remains quite strong, and early evidence suggests a robust start to the holiday season. Nominal personal spending increased 0.4% m/m in October, real spending up 0.1% m/m and 3.0% y/y. Nominal personal income posted a solid 0.6% m/m, with wage and salary income up 0.5%. The combination lifted the savings rate to 4.4%, which is not high but decent. As long as employment holds up, so should household consumption.

PCE inflation data came in as expected. The PCE deflator rose 0.2% m/m, with the core PCE deflator up 0.3% m/m, lifting the two respective inflation measures to 2.3% and 2.8% y/y, respectively. We still view the data consistent with a December Fed rate cut since an uptick in the fourth quarter had long been anticipated.

Canada: Weak Headline GDP but Better Details

Canada’s headline Q3 GDP came in below expectations but, if delving into the details, the picture does not look that bad. While GDP growth is still below potential, there are signs that the effects of past interest rate hikes are fading.

The economy grew a modest 1.0% q/q annualized in Q3, with gains in household spending and government consumption partially offset by declines in business investment and net trade. Even so, underlying fundamentals appeared strong. Household consumption (3.5% q/q) and residential investment (3.0% q/q) picked up during the quarter as interest rates declined. In the next few months, consumption is likely to be further boosted by government stimulus and increased activity in the housing market. Meanwhile, uncertainty around US tariffs could dampen growth in business investment which has been already weak.

The Bank of Canada (BoC) cut rates 50bps in October as inflation fell well below its 2% target and downside risks to growth were rising. Since then, inflation has quickly reversed course but risks to the economy still loom large. The labor market is softening further, evidenced by declining job openings and rising unemployment. Below-potential growth is also likely to persist through the remainder of 2024 and much of 2025. Of note, while Q3 GDP growth is just slightly below consensus expectations of 1.1%, it is well below the BoC October estimate of 1.5%. That said, although we would not rule out a slower pace of easing, we think another 50-bps cut in December is more likely.

Australia Inflation: Not Giving In or Out

Inflation remained at 2.1% y/y in October’s monthly CPI data; sequentially, prices fell 0.3% m/m, primarily due to a 12.3% decline in electricity prices. This is because most households received two A$75 rebates, while some in Western Australia got A$150 in addition to the A$200 local government rebate.

While this is the first month of the quarter, and the data is released as it is surveyed, it excludes most of the services prices, making this data incomplete. Furthermore, the Reserve Bank of Australia’s (RBA) preferred core metric the trimmed-mean rose three-tenths to 3.5% y/y due to a rise in rents. However, the CPI excluding fuel, fresh food & holiday travel eased 30 bps to 2.4% y/y.

Although the data supports our view that inflation is easing, it is muddied by subsidies and unclear progress across the core metrics. This lack of clarity further pushed out the market pricing and consensus picks of the first RBA rate cut into H2 2025. Our position is clear: the RBA should look at forward looking indicators and let economic growth rise towards potential. This means rate cuts need to begin sooner than what market participants expect.

This week’s GDP partials implied some upside risks to our dovish GDP expectations. Construction work done outpaced expectations by rising 1.6% q/q. Private capex rose 1.1% q/q, as expected in a broad-based increase. Our model suggests that GDP may rise 1.1% y/y, significantly below the 2.6% average between 2010-2019 amid continued sluggishness in the household sector.

Spotlight on Next Week

1. US services sector to continue robust expansion. 
   
2. Australia’s Q3 GDP to have risen 1.1% y/y, remaining well below the long-run average.