Many thanks to MB for a little perspective from Vancouver, a thoughtful comment on PT post BCs Biggest Industry.
A little perspective is needed.
Yes, there is a steep housing affordabiity challenge here, and yes there is real estate speculation. Neither of these are new, even with the above figures bandied about without context.
In a 2014 report by the Greater Vancouver Gateway Council, the GDP of the port, YVR and rail / truck infrastructure rings in at $7.2 billion and 82,000 jobs. The induced and indirect impacts of this core economic activity (e.g. employee home purchases, purchasing commericial supplies, etc.) pushes the GDP to $15.8B and 182,000 jobs. This is a stable and reliable economy not as susceptible to wild boom and bust cycles.
The annual GDP of Metro Vancouver exceeds $100B. It grew by 3.2% and 30,000 jobs in 2014 and is expected to top out at yet another 3% growth this year, undoubtedly helped along by real estate sales, but also by significant growth in the tech, retail and other sectors.
The GDP of the province rang in at $237B in 2014, but half of that is owned by the Metro. The calculus of the province does not acknowledge the fact that the Big Smoke is it’s primary economic engine, and that makes many of us cynical.
Though the Metro real estate sales comprise about 34% of the local and 16% of the provincial GDP, it’s not a complete story. There is much talk about a housing bubble and wealthy foreign buyers. Perhaps the discussion should widen to try to actually define an affordability ceiling where sales will cease to grow. That ceiling will no doubt be influenced by interest rates.
It could be worse. Calgary, which has a far less diversified economy (in fact, it’s a one-piston engine that’s barely sputtering today after roaring out of control for years), housing sales have dropped over the past year by almost 30% with a corresponding decrease in average value of over 5%. One could move to Calgary and buy a cheaper home, but then one must find a non-existant job too.
May I suggest some perspective on MB’s “perspective”.
As MB points out, residential real estate sales alone make up roughly 1/3 of Metro Vancouver’s GDP. In the same BIV article that MB comments on, there is a quote from a Central 1 economist:
“Yu noted that residential construction in B.C. this year will reach a GDP of $21.2 billion, up 8% from a year ago, and worth more than 10% of the entire industrial gross domestic product in the province.”
Let’s assume that residential construction for Metro Vancouver makes up at least 10% (it’s probably higher) of our region’s GDP.
Why is this concerning?
1) This means that somewhere between 45-50% of our region’s GDP is based on residential construction and residential real estate sales. That doesn’t seem like a balanced, healthy economy to me.
2) Here’s a chart for residential construction in Canada:
http://www.macleans.ca/wp-content/uploads/2015/11/Rabidoux.png
For the nation, residential construction is 7% of GDP. Metro Vancouver is well above that figure, at 10-11%.
3) Here’s a chart comparing residential construction in the U.S. and Canada:
http://www.macleans.ca/wp-content/uploads/2015/12/MacBeth.png
The U.S. housing bubble peaked with residential construction at 6.5% of GDP (from a long run average around 4.5%). Canada has spent the past 7 years above the U.S. peak, at 7%. And again, our region is well above that figure. Look at the chart again, and previous peaks in residential construction as a % of GDP (late 70s/early 80s, late 80s) have presaged slumps in our housing market.
I’m not nearly as sanguine about our region’s heavy economic reliance on residential construction as MB. The figures above concern me.
One further point: a lot of the attention in the media has focused on the impact of foreign investment on our housing prices. While this is certainly one of several factors, another one is the increasing levels of debt that home buyers have been taking on in order to “afford” a home purchase. An ever growing percentage of that mortgage debt is now uninsured:
http://www.macleans.ca/wp-content/uploads/2015/12/Watt.gif
“Based on current growth rates, outstanding uninsured mortgages could exceed insured mortgages by the end of 2016. Seemingly, despite home prices having continued to rise at a brisk pace, more and more Canadians are making down payments that are large enough (at least 20% of the purchase price) to avoid having to take out mortgage insurance. Though the recent increase in uninsured mortgages seems in part a response to rising mortgage insurance premiums, it also likely increases the risks to financial stability. The risks are heightened to the degree that vulnerable, non-prime borrowers are using funds borrowed from smaller or less well-regulated lenders to make larger down payments.” – HSBC Canada
More and more of us are going to private lenders (with higher interest rates) in order to buy homes:
http://torontolife.com/how-private-lenders-and-debt-crazed-homebuyers-are-pushing-torontos-real-estate-market-to-the-brink/
Excellent comments, Pacpost.
I may seem less woried than you about one element (housing sales and construction, essentially two sides of the same coin) because I originally came from Alberta, a jurisdiction that has both widely benefitted and grossly suffered from its foolish reliance on (and undervaluation of) one commodity for its economic sustenance for a half-century. My point is that BC’s economy is greatly diversified, even with the sales and construction of homes currently occupying a large-ish chunk.
Looking at the entire historic pie instead of one slice, one can see that the falldown in forestry due to highgrading (something that was predicted 30 years ago) created only a temporary vacuum into which tech, port activity and construction quickly moved. I would be far more worried about the provincial economy if our premier carries through with putting all her eggs in the Gold Rush LNG basket at the expense of economic diversification or at the same time other areas like construction and tech are falling.
And yes, my point about interst rates applies to household debt. This is where high housing prices may be most susceptible to dropping, perhaps precipitously. Our exraordinarily cheap credit is a phenomenon that is so recent (15 years ago the rates approached 10%) and people forget that a lot can happen during the traditional 25-year amortization period. Making debt more expensive will probably do far more to lower housing prices than banning wealthy Asian immigrants.
Thanks, MB.
So, if I may paraphrase, Metro Vancouver’s rather unbalanced economy compares favourably to Alberta’s horrifically unbalanced economy…
I’d be surprised if BC gets an LNG terminal built in the next decade. Australia and the US beat us to the punch (both have opened new LNG terminals this year, with more on the way). This is one instance where our provincial government’s incompetence is likely to lead to a positive outcome (i.e. no LNG terminals on the west coast).
Regarding debt, we’re already seeing an increase in interest rates on Canadian mortgages. Also note that the 5 year mortgage is the standard in Canada, whereas the 25-30 year mortgages are more common in the US.
“Lenders have already begun boosting their mortgage rates from their September lows. Five-year, fixed-rate mortgages, which represent the largest share of Canadian mortgages, have risen by as much as 20 basis points in the past two months as Canadian government bond yields have moved higher. (A basis point is 1/100th of a percentage point.) Variable-rate mortgages are seeing their first sustained increase since 2012.”
http://www.theglobeandmail.com/report-on-business/rising-mortgage-rates-could-put-damper-on-housing-market/article27466110/
“Metro’s … unbalanced economy …” You could probably justify that, but it’s tempered by tech, port activity, retail and public administration. I’d really like Canada and Vancouver to beef up financial services too. Why should Toronto capture the biggest share of that GDP-generating lion?
Learn from Alberta’s predicament regarding exporting nearly raw natural resources with no attention to value-added measures or getting a fairer price for the owners. I see the highly unusual election of the NDP there as hitting the reset button on the economy and politics. Both are in dire need of ventilation and diversification.
Expect interest rates to be low low LOW for another 20 years or so: http://blog.prestprop.com/about-us/blog/money-is-on-sale-why-interest-rates-will-stay-very-low-for-a-long-long-time-..-and-how-to-use-this-to-your-advantage
And therefor people make the rational choice and borrow at 2-2.5% today for increasing single family homes, even condos. Of course, this influx of foreign capital will stop at some point, when the Middle East becomes Jewish or Christian, or when there is no more corruption in Russia, China, Iran or other large markets .. and with 1M+ people expected in the Lower Mainland that is not for QUITE SOME TIME !!
In BC we need to tax properties & consumption more though, and incomes far far less to exploit this trend better as far too many resident and non-resident real estate owners do not declare any or very little of their often very large incomes here, yet live in big multi-million $ houses and avail themselves to free services such as healthcare, education/ESL, transit, roads, policing etc ..
Carbon taxes are like another GST or PST and go in the right direction to tax consumption, but again real estate is undertaxed here. How about a land transfer tax of 1% per $1M, to 15%, an elimination of any provincial income taxes and a doubling of provincial property taxes ?
So you point to your own blog to argue for why interest rates are going to stay low? Alright…
In March of this you wrote: “I conclude: Interest rates in neither Canada nor the US will go up soon, likely for 20+ years. And if the US raises their federal fund rates from a too low 0.25% by 0.25% or 0.5% ours will not follow.”
Well, the US will likely start raising rates in the coming weeks. Bond markets, and by extension mortgage rates, have already reacted. Canadian mortgage rates have started going up. Furthermore, it doesn’t matter if the Bank of Canada keeps or lowers its interest rates, since:
“Fixed mortgage rates are tied to long-term Canadian government bond yields, which in turn are tied to U.S. bond yields. Those have risen since September as investors have increasingly come to expect Fed Chair Janet Yellen to boost rates before the end of the year. The Canadian and U.S. bond markets are tightly linked as investors generally expect the Canadian economy to be affected by changes in the U.S. economy.”
“With the U.S. Federal Reserve widely expected to raise interest rates next month, Canada’s fixed-mortgage rates could rise by another 60 to 70 basis points, estimates Toronto-Dominion Bank economist Diana Petramala. That could drive down national existing-home sales by as much as 10 to 15 per cent over the following six months, based on how the housing market has historically responded to changes in interest rates and the fact that Canadians have become sensitive to even small increases in mortgage payments, she said.”
http://www.theglobeandmail.com/report-on-business/rising-mortgage-rates-could-put-damper-on-housing-market/article27466110/
On one point I do agree with you: our tax system should shift its focus to land values, rather than income. I would go further than a land transfer tax, and consider instituting a land value tax:
“When land prices soar, residential real estate becomes a more attractive investment opportunity than productive businesses. Land bubbles tend to produce two seemingly contradictory effects. Firstly, it produces urban sprawl as businesses and families are forced to seek cheaper land outside of the urban centres. Secondly, as owners are more interested in expected capital gains than any productive activities, much valuable land become idle.
Eventually, the burden of debt, lack of affordable land and investments based on wrong signals (e.g. luxurious condominiums promising high-profit margins) start affecting the real economy. As workers lose their jobs, they become unable to repay their debts and are forced to sell. Land prices finally stagnate and then fall, taking leveraged banks, speculators and people’s life savings with them. It is, therefore, clear that to escape this never-ending cycle, we need to focus on land.”
http://theconversation.com/a-land-value-tax-could-fix-australasias-housing-crisis-49997
I’m not so sure Canadian banks would fail easily. They don’t seem to be as heavily loaded on the debt side of their debt-to-asset ratio as some of the US investment banks were and still are.
The conditions that created the last meltdown are still largely there (debt, debt and more debt, much of it still as toxic as before), even with the most massive subsidization of banks with public debt in history led by Goldmand Sachs alumni who were in government. The only thing that’s changed is the lowering of the ability of governments to provide bailouts.
What this could mean is that the next meltdown will not get as much cushion from governments as in 2008-9, and the real chance that everything could go south and enter a deflationary cycle taking with it jobs and investment.
But Vancouver house prices will come down!
Changes just announced to morgage rules that should help.
Yes, this will reduce the risk to the federal government and by extension tax payers. This is a positive step.
At the same time, as the last chart in my first comment shows, more and more Canadians are seeking out uninsured mortgages by turning away from the CMHC and towards private lenders for their mortgages. Their interest rates aren’t 2.5% for a 5 year, but rather 4.5% and up. I wonder when our financial regulators will turn their sights on this growing problem…
Why is this a problem ? Some people have a higher credit risk, and as such ought to pay more for their money. Defaulting on credit card debt or auto loans is a choice, resulting in higher mortgage rates. That makes total sense.
CMHC insures banks, not people. We ought to question the need for any type of mortgage insurance in a sub 2.5% lending environment !