A tumble in Metro Vancouver sales this year will offset gains in other parts of the province, particularly in B.C.’s northern markets, pushing provincial resale transaction activity down to the lowest level since 2001. Positive, albeit slow economic and population growth alongside low borrowing costs will generate rising sales in 2013 and 2014, but gains will be modest.
Relatively low demand and excess inventory mean markets will experience a flat pricing environment through 2014. The median residential resale price is forecast to fall by about 3.5 per cent this year, reflecting weak market conditions in a number of markets and changes in the types of homes sold compared to 2011. Price gains are forecast to be in line with general inflation in 2013 and 2014.
Resale market conditions will feed into declining housing starts in the second-half of 2012 that will extend into 2013. New home starts are forecast to hold steady at 26,700 this year, but edge lower by 1 per cent in 2013 to 26,500 units. Total starts will rebound to 30,000 in 2014.
Economic growth below-average through 2013
B.C.’s real Gross Domestic Product (GDP) growth will slow to 1.7 per cent in 2012 from an estimated 2.6 per cent in 2011. The economy remains caught in a below-average growth phase in 2013 at 2.2 per cent before gaining momentum in 2014.
Economic growth will be driven largely by domestic demand, with the foreign sector acting as a drag on growth. Within the domestic economy, the government sector will hold down overall growth as it strives to achieve balanced budgets.
The consumer sector will continue to provide the most stability and is forecast to generate moderate and improving growth over the next two years.
Business investment spending will be a key source of growth. Industries forecast to grow faster than the economy’s overall rate will be mining, oil and gas, wood products and primary metal manufacturing, and construction. Growth laggards are mainly in the public sector but include utilities, pulp and paper manufacturing, accommodation and food services, and transportation and warehousing services.
The structure of growth will be reflected in regional housing market strength, with northern regions leading the way.
B.C.’s economic expansion will enter its fourth year in the second half of 2012 and this forecast assumes no U.S. or global economic recession occurs during the remainder of the forecast.
The risk of a U.S. recession is about 30 per cent to 40 per cent, though a few analysts put it closer to 100 per cent. The current economic growth slowdown likely extends through the rest of 2012 and into 2013. Technically, this phase could be labeled a ‘growth recession’. Thereafter, the U.S. and global economies are assumed to enter a gradually improving higher growth phase though held down by a struggling European economy.
Economy to generate moderate employment growth
Employment growth so far in 2012 is running 1.9 per cent ahead of last year, but growth is expected to slow in the second half of 2012 due to the wider economic slowdown underway, bringing down the year’s growth to 1.6 per cent. This slowdown phase extends into 2013 resulting in 1.4 per cent net job growth for the year before increasing to 2 per cent in 2014. The unemployment rate is forecast to decline fairly steadily and approach 6 per cent in 2014.
In the near term, the unemployment rate will edge down to average 6.7 per cent during 2013 from 7.0 per cent in 2012. These aggregate employment gains mask an increase in hours worked and greater labour utilization. This shift includes lower part-time employment from the record high set in 2011.
More labour demand will translate to higher wages and salaries growth with a time lag. The modestly improving labour market results in labour income growing 4.3 per cent in 2012, up slightly from 2011, and rises at a similar rate in the following two years. The average hourly wage rate rises less than 2 per cent annually.
Population to hold steady but losses to Alberta to accelerate
The underwhelming pace of population growth observed since late-2010 will impede a full housing recovery over the forecast horizon. B.C.’s population base expanded at an annualized rate of 0.9 per cent in Q1, down from 1 per cent in the previous quarter.
While consistent with trends observed over the past year, this is significantly slower than the growth rates of 1.5 per cent to 2 per cent observed from mid-2006 through 2009.
Population growth is forecast to hold steady at the current pace of about 1 per cent per annum over the forecast horizon. Migration remains the engine of population growth for the province, but the rumble is more Vespa than Ferrari.
While the flow of landed international immigrants is on the mend after hitting a multi-year low in the third quarter of 2011, total net international migration remained tempered. The seasonally-adjusted pace of about 8,700 persons in the first quarter marked the second consecutive quarter that international net migration fell below 9,000 persons. Notwithstanding the first quarter of 2011, the trend is the lowest since 2004 and reflective of fewer non-permanent residents in the province.
The flow of landed immigrants is expected to revert back to the quarterly trend of about 10,500 persons.
Inflows are largely determined by federal policy, although the ebb and flow of global economic conditions can lead to entry delays on the part of newcomers. There has been no indication that the government will lower the annual target of about 250,000 permanent residents to Canada.
However, net non-permanent residents, which includes temporary workers, fluctuates with labour market conditions. A well-supplied labour market will limit the contribution of non-permanent residents to population growth, which will more significantly impact rental market demand rather than homeownership.
In contrast to the positive contribution of international migration, the pull of stronger labour markets and economies in the prairies has led to a net outflow of residents to other provinces, particularly Alberta. In the first quarter, net movement from B.C. to Alberta favoured the prairie province by an estimated 2,651 individuals. Alberta’s economy is expected to outperform B.C.’s over the forecast horizon, generating lower relative unemployment rates and more job opportunities, leading to further net outflows.
Interest rates remain low over forecast horizon
Deepening recessions in Europe, coupled with soft-patches in U.S. and Chinese economic growth, point to a tempered medium-term growth outlook for the global economy.
Central bankers will stand pat on policy interest rates, with potential for more stimulatory measures on the part of the U.S. Federal Reserve to hold down long-term interest rates.
The lack of certainty in the economy will keep the Bank of Canada on the sidelines until mid-2013, with only modest rate hikes over the following year. While the Bank of Canada would prefer to raise policy rates from the current floor, any hikes will lag real improvements in the economy by a significant margin. The Bank will be wary of economy head-fakes and will err on the side of caution.
This environment will translate into the continuation of low mortgage rates through the forecast horizon. Posted fixed mortgage rates for one-year and five-year terms, are forecast to trend higher but edge up by less than 100 basis points through mid-2014.
While higher rates will nibble into housing demand, the impact will be neutralized by positive economic growth. We forecast posted one-year and five-year fixed-term mortgage rates to hold steady during the remainder of this year and average 3.2 per cent and 5.3 per cent in the fourth quarter.
Rates will edge up slightly in 2013 with one-year rates averaging 3.95 per cent by the fourth quarter, and five-year rates increasing to 5.7 per cent. Rate increases will accelerate in 2014, but levels will remain near historic lows.
Resale transactions to remain low through 2014
Despite a continuation of low rates, provincial home sales are forecast to edge down this year by about 2.5 per cent to 70,550 units, marking the lowest single-year tally since 2001.
Uneven regional economic growth, slow population gains and tighter mortgage insurance rules will combine with temporary weak consumer confidence to keep provincial sales down this year.
This year’s soft provincial sales environment will reflect a significant decline in Metro Vancouver activity as resale transactions in other regions of the province bounce higher from exceptionally low sales in recent years.
Waning confidence – a product of global economic uncertainty and a chorus of calls for a price correction – will cause some buyers to pause and delay their purchase. The effect of weaker consumer confidence will be temporary and is expected to dissipate by the fall months giving way to a more aggressive rebound heading into 2013.
A positive sale trajectory is expected to take root by the end of this year or early next year, leading to annual sales gains of 7 per cent in 2013 and 8 per cent in 2014 to 81,700 units. Positive growth in the economy and population gains will be the driving factors as will higher consumer confidence.
Despite the solid pace of annual gains forecast for 2013 and 2014, sales levels will remain lacklustre over the forecast horizon. Sales will pale compared to the highs observed in the mid-2000s, and market turnover rates will remain low. After reaching highs of near 10 per cent in the mid- 2000s, market turnover is expected to range from 5 per cent to 6 per cent through 2014, which is reminiscent of weak markets observed in the late-1990s.
Tighter mortgage insurance rules to weigh on demand
In a bid to quell rising home prices and slow debt accumulation in a low interest rate environment, the federal government reduced the maximum amortization period to 25 years from 30 years for high-ratio, federal government-backed insured mortgages. Last year, the federal government reduced the maximum period for loans it insures from 35 years to 30 years.
These measures also limit the government-backed mortgage insurance to homes with a purchase price of less than $1 million, and lower maximum refinancing amounts to 80 per cent from 85 per cent.
Buyers who planned to use the 30-year product will face higher monthly payments under a 25-year amortization schedule. While this will extinguish mortgage debt more quickly, the increased payments may force some buyers at the margin to scale back their purchase to a smaller/less expensive dwelling, or put off their purchasing decision over the short term.
Since B.C. housing markets are far from overheated and tempered at best, the associated cut in demand is expected to lead to short-term price declines, particularly in the market for apartment condominiums.
Sales by property type
While multi-family sales activity will bear the brunt of the impact from tighter mortgage insurance rules, apartment sales will still outpace the weak 2011 pace by about 1 per cent. Detached home sales which surged in early 2011 on a spurt in Metro Vancouver activity is forecast to decline by about 5 per cent in 2012. Sales in all product classes are forecast to rise in 2013 and 2014.
Provincial median price to dip in 2012, modest growth ahead
Following a 5 per cent gain in 2011, B.C.’s provincial median resale price is forecast to decline by more than 3.5 per cent to $389,000 this year. While sales activity is forecast to rise in most economic regions outside the Lower Mainland-Southwest, a continuation of relatively low demand and excess inventory will mean markets will favour buyers, contributing to price declines in most areas. Notable exceptions include the Northeast and Nechako.
Posted declines will be modest, extending the flat pricing environment observed since 2009. The principal contributor to the provincial price decline will be the Lower Mainland-Southwest (LMSW), given that more than 60 per cent of annual provincial resale transactions occur in the region. Price movements in the LMSW tend to move provincial medians.
While the median price for residential transactions in the LMSW is forecast to decline by about 5 per cent this year, this largely reflects shifts in the structure type of units sold in Greater Vancouver, rather than underlying price deflation. Prices are forecast to edge higher in both 2013 and 2014 on increased demand.
Weak market conditions in a number of regions are expected to move closer to balance, yielding positive, albeit unspectacular, growth in median price levels. B.C.’s provincial resale price is forecast to rise by about 2 per cent in 2013 to $396,000, and another 2 per cent in 2014 to $405,000. This year’s median price decline will be led by detached sales, reversing the gain observed 2011.
However, detached price levels will lead growth over the forecast horizon reflecting appreciating underlying land values in the Lower Mainland.
New home sales
While resale activity makes up the bulk of total transaction activity, sales of new product have averaged about 18 per cent since 1980, with the share rising and falling with housing construction cycles.
New home transactions are forecast to remain low this year as the sharp drop in apartment and attached housing starts in 2009 continues to generate relatively few completions. Total new home transactions are forecast to reach only 14,500 units compared to about 24,000 units recorded from 2005 through 2008. A significant jump in new home transactions is forecast in 2013 and 2014, reflecting the post-recession bounce in housing starts.
Housing starts to moderate on weaker resale market
Provincial housing starts are forecast to fall over the second half of 2012 and into 2013 as tempered housing demand, and relatively high new home inventories give builders and developers reason to curtail activity.
New home starts are forecast to hold steady at 26,700 this year, but edge lower by 1 per cent in 2013 to 26,500 units. Total starts will rebound to 30,000 in 2014. Rising starts in the Lower Mainland have offset declines in most other regions since 2010 and kept provincial housing starts steady.
However, an erosion of demand this year, which will deepen with tighter mortgage insurance rules and an increase in inventory since mid-2011, is expected to fuel to a 6 per cent drop in housing starts in the Lower Mainland-Southwest in 2013. This decline will largely be offset by gains in other markets.
Housing starts in the Thompson-Okanagan and Vancouver Island which have languished on recessionary lows, reflecting relatively weak economies and overbuilding prior to the recession, are expected to record a modest bump in new home activity next year as inventories recede and recreational buying edges up. Meanwhile, housing starts in the north will rise with investments in the area.
Rental Market
Rental market conditions in the province vary widely. Lower vacancy rates can be found in larger urban markets like Metro Vancouver, Victoria and Kelowna, which consistently attract an inflow of people from outside the region who are constrained by elevated home prices, as well as in small markets benefitting from commodities related investment and job creation like Dawson Creek.
In contrast, areas with stronger dependence on industries like tourism and forestry have observed higher vacancy rates. After peaking in 2009 at 3 per cent, the provincial vacancy rate has gradually tightened, reflecting economic improvements and stronger household formation on the part of younger individuals following a recessionary lull.
Going forward, constraints to homeownership for first-time buyers will add pressure to an already tight rental market over the forecast horizon. Prospective buyers priced out of the market by tighter mortgage insurance rules will bolster rental demand, particularly in Metro Vancouver.
A recent surge in rental apartment and townhome starts is unlikely to put upward pressure on the vacancy rate. Builders have started more than 3,800 units in the province’s urban areas since 2010, which was more than in the previous four years combined. Most of these starts were in the major urban areas of Metro Vancouver, Kelowna and Victoria as developers looked to cater to market needs of individuals unable to afford homeownership.
Recent changes to federal mortgage rules will further make homeownership unattainable in the short-run for some buyers, providing support for rental demand.
The vast majority of rental accommodation growth in large markets has been generated by the condominium stock. CMHC has estimated that 25 per cent of Metro Vancouver’s condominium stock is rented out by individual investors. Despite being priced at a premium to the purpose-built product, reflecting age and amenity factors, estimated condominium vacancy rates are even lower, providing little relief for renters.
The provincial vacancy rate is forecast to dip to 2.1 per cent this year and below 2 per cent in both 2013 and 2014. Low vacancy rates will put upward pressure on rents, although existing tenants will be sheltered by rent-growth restrictions. The allowable increase for rents in 2012 is 4.3 per cent.
Regional Market Activity
Top-line provincial housing statistics and forecasts are largely driven by Metro Vancouver and the broader Lower Mainland-Southwest (LMSW) region of the province – little wonder given that the LMSW share of sales has averaged more than 55 per cent since 1980, a figure that has grown to more than 60 per cent over the past five years.
Regional housing market activity can and does vary widely from provincial trends. While general macro-economic factors including interest rates, the economic environment and confidence impact all markets, local economic and housing market circumstances contribute to regional differences.
Lower Mainland-Southwest The forecast decline in 2012 provincial sales will be led entirely by fewer sales in Metro Vancouver. Following a brief uptrend in the second half of 2011, sales have declined sharply this year. MLS sales in the combined Fraser Valley and Greater Vancouver real estate board regions, which leads official resale transactions and title transfers, fell more than 16 per cent from March to June on a seasonally-adjusted basis.
Sales declined to the weakest monthly pace since mid-2010 despite employment growth and low interest rates. While weak resale demand certainly reflect affordability constraints and subdued migration, global economic uncertainty and the chorus of calls for a market correction likely tempered consumer confidence.
Weak consumer confidence is temporary and an upturn along with the lagged impacts of stronger employment growth are expected to contribute a more aggressive increase in sales in the fall.
Tighter mortgage insurance rules will dampen sales in the second half of this year. This will particularly be the case in Metro Vancouver’s condominium and townhome markets as tighter mortgage insurance rules disproportionately impact younger buyers – a group at the early stage of their income earning years that is likely to have less equity to apply to home purchases.
Metro Vancouver’s sales decline will drive resale transactions in the Lower Mainland-Southwest (LMSW) development region of the province down by 9 per cent this year to 42,000 units. Resale transactions in the LMSW are forecast to rise in 2013 by more than 7 per cent to a still tempered 45,000 units. While tighter mortgage insurance rules will persist and erode affordability, growth in the economy and continued low interest rates are expected to lift demand over 2012 levels. A further gain in sales is forecast for 2014.
Median prices in the LMSW are forecast to fall 5 per cent this year. While weaker demand will certainly weigh on prices as the market enters into a state traditionally defined as a buyers’ market, reported price declines will largely reflect compositional effects of product type sold and base-year effects, rather than pure price deflation. Growth in sales activity is forecast to keep pricing steady in 2013 and 2014
Northern Regions
In line with our view that economies in northern B.C. are amidst a commodity- and global-trade led renaissance, resale housing activity is forecast to surge this year, even after posting significant gains in 2011.
A proportion of these gains reflect a base effect as northern regions recorded consecutive plunges in activity in both 2008 and 2009. Any return to normalcy will produce outsized percentage gains.
However, the uptrend will be driven primarily by the commencement and expectations of major commodity-based projects across the north, including liquefied natural gas terminals and port expansions in the northwest, mining in the interior and continued activity in the oil and gas fields of the northeast.
Sales in the North Coast, Nechako, and Northeast are forecast to rise by about 30 per cent this year before decelerating through 2014. Sales trends are forecast to approach pre-recession levels by 2014.
Activity in the Cariboo, which felt the brunt of province’s forestry downturn, has been slower to recover than more northerly regions. Transactions levels are forecast to remain tempered this year despite a 22 per cent increase from 2011. The forestry sector will still weigh on the economy, but regional mining projects and the growing importance of the Prince George area as a northern gateway and hub will keep resale transactions on an uptrend through 2014.
Median price growth will be mixed this year, with gains in both the Nechako and Northeast B.C. but with modest declines being evidenced in the Cariboo and North Coast. Price growth in 2013 and 2014 will be positive, and generally outpace the rest of the province.
Interior B.C.
In the interior, the Kootenay and the Thompson/ Okanagan regions will record modest sales growth over 2011, but activity will remain near recessionary levels. Although increased mining activity in coal and base metals will provide some support to regional economic activity, weak tourism activity, elevated unemployment rates and lack of recreational/retiree housing will continue to hamper a housing recovery in the region.
Total resale transactions in the Kootenays are forecast to rise 14 per cent this year following a 7 per cent drop in 2011, while sales will increase 10 per cent in the Thompson/Okanagan. Despite these significant annual gains, sales will remain about half of the peak levels recorded in the middle of the last decade.
Recreational and retiree demand is expected to trend higher over the forecast horizon as stronger economic growth in neighbouring Alberta fuels some cross-border real estate shopping. However, gains will be limited by buyer uncertainty due to volatile investment returns, the state of the overall economy and attractive real estate deals south of the border.
Additionally, the glut of new home inventory will compete with resale homes for buyers, especially given the transitional HST/PST grant for recreational properties announced in February.
Buyers’ market conditions that have characterized the interior B.C. housing markets since 2008 are forecast to persist through most of 2013, but excess supply will gradually fade, reflecting a low pace of housing starts.
The median resale price is forecast to decline 5 per cent in the Kootenays this year and 3 per cent in the Thompson/Okanagan. Modest price gains are forecast in the following years, but general levels will remain consistent with that observed since 2008, marking six years of zero net gains in median values.
Vancouver Island
Similar to the interior, housing market conditions on Vancouver Island will remain a challenge over the forecast horizon, despite improvements in demand.
The region, which was hammered by the retrenchment in recreational and retiree housing demand, particularly outside the capital region, recorded a fourth straight decline in sales activity in 2011.
Resale activity this year is forecast to remain on par with 2011, rising by only 0.5 per cent to 11,600 units. In comparison, resale activity ranged from 18,000 units to 20,000 units from 2005 through 2007.
While retiree demand is forecast to improve slowly over the forecast horizon, regional economic conditions will remain a challenge. Although some improvements are expected for in the coastal forestry sector, the elevated Canadian dollar, relatively high transportation fees to the Island and competition for dollars south of the border will keep tourist activity weak. Meanwhile, budget tightening on the part of the provincial government will temper employment growth in the capital region.
Total resale activity on Vancouver Island is forecast to rise by 8 per cent in each of 2013 and 2014 but remain at tempered levels. The recent tightening in mortgage insurance rules is likely to have a more significant impact on the capital region than the rest of the Island, reflecting higher price levels. A modest over-supply of new and existing housing on the Island, particularly outside the capital region will lead to downward pressure on price levels this year. Following a decline of 2 per cent in 2011, the median home price will dip about 3.5 per cent this year before rebounding in 2013 and 2014.
| Central 1 Credit Union
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