BC Economic Snapshot May 18, 2013

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VANCOUVER, BC, May 18, 2013/ Troy Media/ – B.C.’s Consumer Price Index (CPI) declined 1.1 per cent in April from March due to temporary factors. The switch back to the PST tax system from the HST on April 1 reduced the cost of many services and some goods to consumers.

Notably, restaurant meals declined 6.2 per cent from March, nearly the entire 7 per cent HST rate. Other price declines in a variety of services occurred such as personal care and taxi and other local and commuter services which declined 6.2 per cent.

The other major change was in gasoline prices, which were down 1.5 per cent in April from March. There was a 15.7 per cent drop in furniture prices in April from March. It is not clear what is behind this decline but there was a 13.5 per cent jump in February. The furniture price index is now at prior levels.

The year-over-year change in the CPI was a 0.8 per cent decline in April compared to a 0.5 per cent increase in March. This CPI inflation measure has been less than 1 per cent for the past eight months. This month’s decline in the CPI does not signal a deflationary economic environment since it is due to temporary factors.

The May CPI will bounce back since the tax change is a one-time event. Nonetheless, inflation will remain low, which is a reflection of a slow growing economy.

Housing

Latest data on residential markets in B.C. indicates sales activity is stabilizing with prices continuing to slide lower.


MLS residential sales during April rose from March and expectations are that May sales will be higher. Further price slippage is likely until the sales-listings balance improves sufficiently later this year.

Residential sales rose to 5,418 units seasonally adjusted from 5,316 units in March. April sales were at the highest level since July 2012 when the last round of federal mortgage insurance tightening occurred.

While sales remain at low levels, this stabilization is an important market signal that demand is no longer declining, despite a slow growing economy and tighter mortgage credit conditions. It also signals that house prices will not collapse.

The MLS Home Price Index (HPI) for the lower mainland increased in April due to the seasonal effect, however, after seasonal adjustment, the HPI decreased 0.1 per cent from March. The HPI has declined every month since last May and was 3.4 per cent lower than that high.
Other price measures substantiate this performance. The Teranet-National Bank HPI for Metro Vancouver has an identical performance, except that its decline from the May 2012 high is 3.2 per cent. In contrast, the MLS average sale price is down 12.5 per cent from its high of April 2011. A further contrast is the average price trending higher in the past nine months. These differences highlight a weakness in the average price since it is subject to compositional changes in units sold, unlike the more accurate HPI measures.

Reports housing prices will collapse are incorrect and based on analysis using the average price. (READ Roslyn Kunin’s Little chance of correction in Vancouver real estate market). More importantly, those analyses fail to recognize the importance of land-supply constraints in this housing market. These reports identify housing fundamentals such as income, real GDP, population, mortgage rates and the like but never include any supply-side variables. This is a critical omission since prices are determined by supply and demand factors.

This is not to say that prices could not collapse, but if this occurs, it will be due to a significant external demand shock such as played out in 2008 or during other economic recessions.
In the near term, housing sales will probably firm up in May and exceed the year-ago level for the first time since 2011. Year ago comparisons will become easier due to last year’s downshift but nonetheless it will bring out positive news reports. For all of 2013, sales look to come in slightly lower than in 2012 as will prices. Prospects for 2014 are more positive with modest-to-moderate gains expected.

Tourism

International tourist entries into B.C. remain stuck at levels seen since after the 2010 Winter Olympics. Seasonally adjusted tourist entries from other countries hovers around 350,000 persons per month, down from more than 400,000 per month prior to 2007. Tourist traffic is expected to improve in the future with a faster growing U.S. economy and favourable currency movements for U.S. tourists.