Dear Reader, In this edition of the rennie landscape, we continue to focus on local indicators of housing market health, while also acknowledging a variety of international headwinds that are creating uncertainty about the shorter- and longer-term trajectory of global economic growth. One consequence of rising investor unease around the world is a marked change in the landscape of interest rates, some of which have moved into negative territory in recent months. Against this backdrop, however, the Canadian and local Metro Vancouver economies continue to be resilient. More specifically, this region’s labour market is the strongest in Canada, posting year-over-year job gains that are the envy of other large metro areas. This in turn has pushed unemployment down to 4.0%, with wages responding to these tight labour market conditions by growing at a rate that's more than twice the national average. There is much more to explore in this edition of the landscape, which we hope becomes a dependable, strategic decision-making tool, whether you’re an individual home buyer or seller, developer, builder, municipal planner, or other market stakeholder or industry partner. Should you have any questions, the rennie intelligence team is here to assist. We look forward to hearing from you. Enjoy.
Ryan Berlin SENIOR ECONOMIST firstname.lastname@example.org
Andrew Ramlo VP, INTELLIGENCE email@example.com
CREDIT & DEBT
THE POCKET GUIDE
01. economy Canada remains one of the most affluent countries in the world, but must invest in its workers and technology to maintain its position.
PER CAPITA RICH, BUT A LOW GROWTH PITCH
Economic growth is often spoken of in the context of the whole, with policymakers and market watchers the world over referencing changes in countries’ gross domestic product (GDP, or the total value of all goods and services produced) as a means of assessing overall well-being. Curiously, there seems to be less of a focus on per capita GDP, which expresses how much countries produce after adjusting for the number of residents that live within their borders. The reality is that such a measure, and changes in it, are better indicators of the well-being of a country’s residents than overall GDP. When compared to our peers in the G20 (a club of 19 individual countries and the European Union), Canada fares well by this
measure, with a per capita GDP of $44,051 placing us in fifth in the rankings. Ahead of us are Australia, Germany, Saudi Arabia, and of course, the United States—whose per capita GDP of $55,681 is 26% higher than it is in Canada. We should aspire to higher per capita GDP. However, with it growing by only 0.8% annually over the past 5 years—compared to 1.7% in the US and 6.3% in China�Canada’s economic well-being is improving relatively slowly. An aging demographic makes continued improvements that much more challenging and further reinforces the importance of investing in education and technology that together will help maintain our position among the world’s industrialized elites.
CANADA RANKS HIGH ON THE LIST OF RICH-COUNTRY PER CAPITA GDP
PAST YEAR GROWTH ANNUAL AVG.
6.4% 3.8% -0.3% -1.7% 6.3% 1.4% -1.4% -0.8% 3.2% 0.9% 2.5% 1.1% 1.1% 1.3% 0.8% 1.0% 1.4% -0.1% 1.7%
SOURCE: WORLD BANK DATA: GDP PER CAPITA, PURCHASING POWER PARITY (CONSTANT 2011 INTERNATIONAL $)
JOBS, JOBS, AND MORE JOBS (AND EVEN MORE JOBS) At three times the national rate, Metro Vancouver’s job growth rate is impressive; let’s hope we can keep the good times rolling.
The beat goes on for Metro Vancouver’s labour market, with the July 2019 data showing a whopping 6.5% year-over-year growth in employment. Among the more established metro economies in Canada (those with a job base of at least 100K), this pace of job growth ranks second, only a hair behind Calgary’s 6.6%. This is quite a feat for Vancouver’s economy, where the unemployment rate has been hovering near its theoretical minimum
for much of the past year (more on this on the next page). This compares to Calgary’s growth, which has materialized against a backdrop of a recovering economy and a not- insignificant amount of labour force slack. Notably, Abbotsford-Mission also registered impressive employment growth over the past year as well (coming in at 4.8%, right behind Metro Vancouver). In the context of affordability, these are positive signs for the Lower Mainland’s housing market.
VANCOUVER ADDING JOBS AT 3 TIMES THE RATE OF THE CANADIAN AVERAGE
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA
DATA: 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED, PAST-YEAR CHANGE
UNEMPLOYMENT RATE LIMBO: CAN WE GO LOWER? Vancouver’s tight labour market could soon serve as a constraint to growth in our regional economy; more housing would help.
A low unemployment rate on its own doesn’t reveal whether it’s a feature of a fertile economic landscape or simply the product of an older workforce operating in a stagnant job market. In Metro Vancouver, a region whose population is growing by up to 45K people per year and whose employment base has most recently grown by an impressive 6.5%, we can say with confidence that the current unemployment rate of 4.0%—creeping ever- closer to its all-time low of 3.5%, achieved in
early 2007—is a reflection of a robust, well- performing labour market. It also compares favourably to the latest unemployment figures for its peer markets of Toronto (a 5.7% unemployment rate), Calgary (6.9%), and Edmonton (7.5%). It is also 9% lower than in British Columbia as a whole and 27% below Canada. It’s inarguably a good sign for the economy that those who are seeking work in Metro Vancouver are finding it.
UNEMPLOYMENT: IS THIS THE FLOOR, OR WILL WE SEE SUB-4(%)?
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 2019
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: 3-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED UNEMPLOYMENT RATE
WAGES RISE, WORKERS HIGH-FIVE Tight labour market conditions driven by growing employer needs are finally helping to fill the piggy banks of BC’s workforce.
During the past few years of the extended post-Great Recession economic expansion, slow wage growth has perplexed many economists, policymakers, and indeed workers themselves. The specific question varies depending on who’s asking, but the gist is the same: with a low and declining unemployment rate, and Canadian employers in virtually every sector seemingly exasperated by the lack of available labour, how has the pace of employee earnings not picked up? The answer for now is: it has (though it took a while). The Canadian economy has now registered four consecutive months of increases in the year-over-year growth in full-time median weekly wages, rising from no change in February 2019 to 4.0% most recently in July—the fastest rate of growth in a year and a half.
In comparison, BC most recently clocked a 6.0% year-over-year increase in wages—the fastest pace of growth here since February 2011, when wages rose by 6.3% on a year- over-year basis. It’s no secret that the cost of living in British Columbia, and in particular in its metro areas, is high, so it’s encouraging to see the median weekly full-time wage rate in BC reach $1,038—on par with that of Ontario and 3.8% higher than in Canada as a whole. Continued wage growth will be a key ingredient of the West Coast's continued economic prosperity, with the latest data indicating we're trending in the right direction.
BC LOOKING GOOD FOR ITS WAGE
MED.WEEKLY WAGE FULL TIME
Q Q ANNUAL AVERAGE
Q3 2018 - Q3 2019
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA
THE RISE OF THE STOCK MARKET: A DECADE OF GROWTH Arguably, the most ubiquitous (but perhaps also the most dubious) indicator of economic
the NASDAQ, which has seen a more-than- tripling in its total market capitalization (301% growth). In hindsight, going all-in on the NASDAQ in August 2009 versus doing the same on the TSX or FTSE would have been unambiguously preferable, but really, who wouldn’t take a 50% return over ten years? This is all to say that during the post- recession recovery stock markets, reflecting among other things the strength of corporate earnings, have performed very well. But with 2018 being the worst-performing year for stocks in a decade—due to signs of a global economic slowdown, political dysfunction, and inflation fears, among other factors— the question is begged as to whether 2019’s stock market rebound is sustainable. We will be watching this, along with the ongoing US- China trade dispute, tensions in the Strait of Hormuz, and evolving monetary policy over the coming months for what it means to our economy and housing market.
well-being is the stock market. Each day, we read or hear about its ups and downs, reflecting moment-to-moment developments such as disappointing corporate earnings reports, geo-political clashes in the Middle East, or the frenetic social media musings from people in power. In any event, while stock market movements can simultaneously mean one thing or another depending on the lens through which they are viewed, they are on the whole indicative of both the current health of global economies and the risks they face going forward. What we know is that in the ten years since the Great Recession, global stock markets have performed well. At the low end are the FTSE and TSX, which returned 52% and 50%, respectively, over the past 10 years. At the other end of the spectrum is
Though stock markets command our attention with every unexpected rise and fall, we are better served by following more fundamental economic features.
IT’S BEEN A GOOD RUN FOR MORE STOCKS THAN ONE
PAST YEAR CHANGE
YEAR AVG CHANGE
+15% +11% +11% +7% +11% +4%
+2.0% +1.9% +1.1%
-7% -6% -1%
1.99 1.52 1.50
AUG ‘ .
2009 2010 2011 2012 2013 2014 2015 2016 2017
DATA: INDEX OF STOCK MARKET VALUES, DAILY, 20 AUGUST 2009 = 1.00
THE IMPORT OF RISKS THROUGH THE EXPORT OF GOODS British Columbia’s sale of goods to other countries is arguably our most important source of economic growth; risks abound, but the supply chains are sound.
Here in Canada, we have a small open economy, meaning we stand to gain substantially from trade with other nations. It goes without saying that we cannot sustainably grow bananas, efficiently manufacture CPUs, or authentically produce Champagne here in Canada; similarly, other countries want our trees, our rocks, and our animals. This makes for a strong basis for trade. A fundamental tenet of economics is that trade of all kinds, and trade more narrowly defined as being international in nature, benefits the parties engaged in it (at the risk of stating a truism, if this weren’t the case then trade wouldn’t take place). Here in BC, we are also a small, open economy that chooses to engage in a lot of trade, with our international exports of goods accounting for 15% of provincial GDP. With trade flows mattering as much as they do to our economic well-being, it is
comforting that over the past year BC’s international goods exports have grown by $3.05B, with growth averaging $1.03B annually over the past 2 decades; most of this growth has come via increasing trade with the US (export growth of $5.68B between 1998 and 2018) and China ($6.55B). Incidentally, these two countries are locked in a vicious trade dispute with no end in sight and few winners crowned to-date. Should the current tariff tiff between the US and China escalate, elongate, or propagate to other countries (through the adoption of isolationist political philosophies first and through supply chains second), this will harm those economies and ours. While uncertainty abounds around the extent to which current tariff wars will escalate, cooler heads are likely to prevail in the end with trade flows adjusting and normalizing over time. This would be to BC’s benefit.
BC’S EXPORTS HEAVILY DEPENDENT ON CHINA & AMERICA
BC’S INTL GOODS EXPORTS, .B
BC’S INTL GOODS EXPORTS, . B
SOURCE: TRADE DATA ONLINE, INDUSTRY CANADA
PREDICTING THE NEXT RECESSION, PART 1
Let’s be clear about one thing: economic expansions do not die of old age. There has to be at least one reason–but often there are many–why the business cycle reaches the apex of its growth phase before stalling and moving downwards. One such suggested reason is a slowdown and decline in total hours worked, with there being some evidence of this metric’s predictive value when it comes to recessions in Canada. The year-over-year change in aggregate hours worked fell and/or became negative
immediately preceding each of Canada’s four recessions since the early-1980s. However, aggregate hours worked also did the same thing 3 other times during this period without a recession following. After spiking in 2018, hours worked has since slowed, indicating that an economic slowdown could be near. Having said that, the entirety of the evidence insofar as hours worked are concerned, combined with the observation that the latest data points are in fact trending upwards, hints at continued economic growth in Canada for the foreseeable future.
THE FEWER HOURS WE WORK, THE MORE LIKELY A RECESSION?
CHANGE IN QUARTERLY HOURS WORKED AT MAIN JOB REAL QUARTERLY GDP CHANGE RECESSION
SOURCE: LABOUR FORCE SURVEY & SYSTEM OF NATIONAL ECONOMIC ACCOUNTS, STATISTICS CANADA
NOT SO FAST, RECESSION FEARS Changes in Canada’s aggregate hours worked point to continued economic growth.
How afraid of the dreaded inverted yield curve should we be? Based on the existing evidence, not very.
PREDICTING THE NEXT RECESSION, PART 2
The yield curve plots the interest rates (or more specifically, yields) associated with bonds of varying durations to maturity. A normal yield curve rises from left to right, with longer-term rates sitting above shorter- term ones. This is intuitive: there is more risk (including that posed by inflation, which erodes the value of money) associated with an investment over 10 years than over three months, for example, and investors must be compensated for this added risk. An inverted yield curve—meaning it declines from left to right—is defined by longer- term rates falling below short-term ones, implying that investors are pessimistic about future economic prospects (this may include a view that future inflation will be very low and/or that interest rates will fall from current levels). Across the globe, inverted yield curves have time and time again preceded recessions, thereby yielding (pun intended) the widespread unease associated with currently- inverted yield curves.
In Canada, the shape of the yield curve has not, for many economists, been a reliable predictor of future economic performance despite the alarms recently sounded by the masses of self-appointed yield curve experts. In the three recessions we've had since the late-1980s/early-1990s, an inverted yield curve materialized before two of them, but not the third: the mild 2015 recession, which almost everyone missed if they blinked, was preceded by a normal yield curve. Additionally, the yield curve has inverted three other times since the mid-1980s without a recession following. Because yield curves themselves don’t cause recessions, it is useful to consider that in Canada inflation is normal, job and wage growth is robust, population (and labour force) growth is strong, and incomes are rising. While yield curve characteristics are certainly worthy of our attention, we will more closely be focusing on the true drivers to Canada’s economic performance, many of which are explored in this report.
INVERSIONS, RECESSIONS, AND PROGNOSTICATOR TRANSGRESSIONS
YIELD CURVE YR MINUS MO YIELDS
SOURCE: BANK OF CANADA
MORTGAGE RATES FALL TO THE DELIGHT OF MOST, BUT NOT ALL Falling interest rates are a great thing if you’re a debtor or would- be borrower with confidence in your employment prospects; for all others, they are a warning.
It’s remarkable the extent to which the interest rate environment has changed since the fall of 2018. At that time, Canadian and US central bankers had been increasing their trend-setting short-term rates for a year- and-a-half, longer-term bond yields had been steadily rising—bringing mortgage rates up with them—and all of this was occurring against a backdrop of rising inflation. Today, the go-forward trajectory for rates is, at its highest, flat, and at its lowest, down. By the beginning of Q3 2019, Canadian inflation had settled itself right in the middle of the Bank of Canada’s target band of 1%-3%, at 2.02%. The Bank’s policy rate has remained unchanged at 1.75% since October and it is expected that there will be at least one 25 basis-point cut to this rate by the end of 2019. The real attention-getter, though, has been the steep decline in bond yields. Government of Canada 5-year bond yields have fallen to
1.46% most recently, from 2.42% at their peak at the end of last year—a 40% drop. As bond markets heavily influence fixed mortgage rates, it has become cheaper to borrow for your home: the CMHC 5-year conventional mortgage rate has dropped by 8% over the same period, to 4.14% today. Of course with discounts, most mortgage holders would pay a far lower rate, with some chartered banks currently offering 5-year fixed rates of 2.49%. In a housing context this is excellent news for those looking to renew, refinance, or take out a new mortgage, as it is has become markedly cheaper to do so. However, to the extent that rates are coming down due to a world that seems increasingly beset by uncertainty, some sober contemplation of the bigger picture is required. Let’s hope that lower rates provide a solid foundation that supports our collective economic performance.
ON A PATH BACK TO HISTORICALLY-LOW RATES
1.75 1.46 2.02
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2015 2016 2017 2018 2019
BOC OVERNIGHT TARGET RATE YR GOC BENCHMARK BOND YIELD
YR CONVENTIONAL MORTGAGE
CANADIAN CPI INFLATION
SOURCE: BANK OF CANADA & STATISTICS CANADA
The current reduction in borrowing costs that is underway is having a meaningful impact on home owners and would-be buyers.
LOWER RATES MEAN PAYMENTS ABATE As interest rates change (up or down), there is a general tendency on the part of analysts to focus more on the rate changes themselves and less on what they actually mean for borrowers. So, how is the changing rate landscape impacting the pockets of borrowers? If we assume for a typical mortgager a few standard parameters—a 30% gross-debt- service ratio, a 25-amortization period, and we use CMHC’s 5-year conventional rate (refer to the previous section for details on
this)—we can evaluate in a more meaningful way the benefits of declining rates. More specifically, the monthly cost of borrowing $100K has fallen by $10 fromQ2 to Q3 2019, and by $15 fromQ3 2018. If we consider the impact of this on a household that is purchasing a $882K home (the most recent average resale price for the Lower Mainland) with 20% down, this translates to a monthly savings of $106—meaning there’s some found money to be saved and/or spent elsewhere within the local economy.
THE SHRINKING MONTHLY COST OF BORROWING $100K
YEAR AMORTIZATION CMHC CONVENTIONAL YEAR RATE % GDS
SOURCE: RENNIE CALCULATIONS
DATA: MONTHLY DEBT SERVICE OBLIGATION OF BORROWING $100K
IT’S NO SURPRISE CONSUMER PRICES ARE ON THE RISE
Metro Vancouver’s economy has a lot going for it these days: near record-high growth in employment, near record-low unemployment, rapidly-rising wages, and a housing market where prices have moderated over the past 18 months (though they are still high by Canadian standards). We would, therefore, be remiss to expect that inflation (the rate at which consumer prices change year-over-year) would be tame: indeed, the latest data on inflation for the Vancouver market clocked in at 2.7%—35% higher than Canada’s 2.0% and higher than each of the region’s peer markets of Edmonton (1.8%), Calgary (1.1%), and Toronto (2.0%).
The good news, insofar as the cost of living is concerned, is that the rate of inflation has fallen in almost all parts of the country when compared to one year ago including here in Metro Vancouver where inflation has eased from 3.0%. When slowing inflation is considered against the backdrop of the robust year- over-year changes in wages seen across BC, a relatively rosy picture is painted for residents of this region after years of rapidly-rising consumer prices and stagnating earnings.
A MODERATION OF PRICE INFLATION
SOURCE: STATISTICS CANADA
DATA: CHANGE IN CONSUMER PRICE INDEX
TOP OF THE HEAP Inflation in Metro Vancouver has slowed, but it still ranks higher than elsewhere in the country. ›
credit and debt
03. credit & debt Rising interest rates in 2017/18 and increased credit consumption have pushed Canada’s debt service ratio back to its pre-recession peak. The good news is, relief is on the way.
WILL HOUSEHOLDS SWEAT SERVICING THEIR DEBT?
Any references to the amount of debt being held by households or businesses needs to be framed within the context of the interest rate environment in which it is being serviced. With outstanding household debt at an all- time high in Canada, the implications for current and future economic growth would be unambiguously ruinous if the year was 1982 (remember when interest rates peaked in the low-20%s?). Of course, this is not 1982, it’s 2019, and interest rates remain near their historical lows. Having said that, as interest rates stopped falling and began their upward march over the past couple of years (after 8 years on the downslope), the total debt service ratio (DSR) in Canada—measured as the proportion of gross income diverted to debt repayments— has risen. In fact, the latest data show it reaching 14.88%—precisely equal to the past 30-year high attained in 2007.
While this is concerning, there are two reasons to view this data point with a level head. First, the bigger driver to the recently- rising DSR has been the mortgage DSR (which at 6.74% is only 2% below its three- decade peak of 6.89% from 1992) rather than the non-mortgage DSR (which comprises less economically-useful consumption-boosting debt and is 7% below its 2008 peak). There is some solace in that fact that households are most likely to service their mortgage debt above other types of debt, like car loans, credit cards, or unsecured lines of credit. Second, the outlook for interest rates has changed dramatically over the past year, with little risk that rates rise in the next 12 months and there being a considerable likelihood that they dip further from their current levels. Should this occur, Canadian households will have a little bit more money left over each month after servicing the debt on their past purchases.
credit and debt
FEELING THE PINCH: PAYMENTS FOR PAST PURCHASES RISE
EQUALTOPEAK % ABOVETROUGH
% BELOWPEAK % ABOVETROUGH
% BELOWPEAK % ABOVETROUGH
Q1 1990 - Q1 2019
SOURCE: NATIONAL BALANCE SHEET ACCOUNTS, STATISTICS CANADA DATA: SEASONALLY-ADJUSTED AT ANNUAL RATES
credit and debt
MORE OF A MIXED BAG THAN A RED FLAG Although BC residents on average owe more money than they did a year ago, there are positive signs in the details.
Across mortgages, auto loans, credit cards, lines of credit (LOCs), and home equity lines of credit (HELOCs), the average monthly debt obligations of British Columbians has risen by 5.5% over the past year, to a total of $3,367 per month. The rate of growth of these financial obligations—notable because it exceeded the rate of inflation over the past year, making said obligations more expensive in real terms—and the current dollar value of these obligations are both causes for concern, but certainly not panic. One important feature of these financial obligations is how they are changing across
debt categories: of the $176 increase in average monthly obligations in BC over the past year, $160 (91%) was associated with debt secured by residential assets. Secondly, consumers appear to be shifting away from old-fashioned LOCs and into HELOCs. From an overall financial risk perspective these are positive characteristics of BC’s changing debt structure. And with interest rates expected to continue to fall in the coming months, expect more muted growth in BC’s average financial obligations over the near-term.
DEBTS OWING: SOME PAYMENTS FALLING, OTHERS GROWING
AVG MONTHLY OBLIGATIONS Q
Q1 2017 - Q1 2018
Q1 2018 - Q1 2019
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: VANCOUVER CENSUS METROPOLITAN AREA
credit and debt
A LITTLE MORE DELINQUENT THAN A YEAR AGO Mortgage arrears rates remain exceptionally low in BC. This is good news, though recent increases should give pause.
British Columbia’s strong labour market, featuring robust job and wage growth, and very low unemployment, has many beneficial knock-on effects, not the least of which is a stable housing ownership market across the province. In each of BC’s four metro areas (Vancouver, Victoria, Abbotsford-Mission, and Kelowna), the mortgage arrears rate is most recently less than half of what it was 4 years ago. Currently, Abbotsford-Mission boasts the lowest mortgage delinquency rate in
the province at 0.10% (that means 1 out of 1,000 mortgages is three or more months in arrears), followed by Vancouver (0.12%), Victoria (0.13%), and Kelowna (0.22%). While the arrears rate has increased in three of BC's four metros in the past year, it may once again be set to fall due to the increased availability of cheaper credit. In any event, maintaining a low delinquency rate is vital for the province’s broader economic prospects.
THREE CHEERS FOR LOW MORTGAGE ARREARS
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION
DATA: MORTGAGE DELINQUENCY RATE, BC CENSUS METROPOLITAN AREAS
credit and debt
MILLENNIALS BETTER OFF THAN GEN-XERS & BOOMERS? YAAAS
two cohorts were the same age as the millennials are today and adjusted for inflation , shows that millennials are carrying a higher median mortgage, at $218K, than Gen Xers ($117K) or Boomers ($68K). It's worth noting, however, that not only are the values of millennials’ homes higher than their peers of the same age (by between 80% and 139%), so too are their incomes (by 27% and 28%), as well as their net worth. This is not to say millennials aren’t facing very real financial challenges—they are— but considering these data in the context of vastly improving labour market prospects over the next two decades adds a different dimension to the conversation.
High home prices. Soaring rent. Low- paying jobs. Expensive tuition. Crippling debt. While these financial features are often associated with today’s millennial generation, it turns out—surprise—that things are a little more nuanced than the headlines suggest. It is beyond argument that rents and home prices, especially in Metro Vancouver, are higher than they’ve ever been (the recent stagnation in rents and decline in home prices notwithstanding), and the same goes for tuition. Indeed, a recent study by Statistics Canada comparing the financial situation of millenials to their Gen-X and Baby Boomer counterparts when the latter
MILLENNIALS: PRICIER HOMES & HIGHER INCOMES...BUT MORE DEBT
PRINCIPAL RESIDENCE VALUE
MORTGAGE ON PRINCIPAL RESIDENCE
AFTERTAX HOUSEHOLD INCOME
SOURCE: SURVEY OF FINANCIAL SECURITY & ASSETS & DEBT SURVEY, STATISTICS CANADA
DATA: MEDIAN VALUES, 2016 DOLLARS
credit and debt
A DIFFERENT TAKE Millennials owe more but own more expensive homes and have higher incomes than their equal-age peers. ›
Against the backdrop of declining working-age populations around the world, Canada’s innovative immigration policy sets a course that is the envy of others.
DEMOGRAPHIC DESTINY AND ITS ECONOMIC EFFECTS
As far as planning for the future goes, Canada has done a remarkably thoughtful job of responding to our below-replacement fertility rate, our aging Baby Boomers, and the combined negative impact this could have on the ability of our economy to grow. How so? Quite simply by increasing our immigration targets to an unprecedented 350,000 people annually by 2021. This is not a panacea, make no mistake, but it is a proactive measure that will ensure Canada’s economic competitiveness for years to come. While the labour situation will remain challenging here in Canada, it is far from dire, with the UN projecting a 16% increase in our 25-64 population over the next 50 years. Similarly, the US is projected to see its prime working-age population grow by 12% over the same period. Unfortunately, the situation is dire for others. Due to extremely low fertility rates and relatively low migration rates to the
continent as a whole, Europe’s working- age population began declining in 2016, and by 2069 is projected to be 24% smaller than it is today. Similarly, Japan—with virtually no immigration to speak of—began experiencing a working-age decline in 2004; it is set to see a further 40% decline in the next half-century. Perhaps most concerning of all for the world economy is that China is due to experience a 31% decline in its working-age population over the next 50 years, beginning in 2024 (you can largely thank the one-child policy for that). When it comes down to it, there are only two ways to grow an economy: by adding workers or making themmore productive. While the first option is being leveraged here in Canada, it is off the table for many developed countries that also happen to have some of the largest economies in the world; regardless, we all must continue to work to find ways to make our workforces more productive.
BUT WHO WILL CHANGE THEIR BEDPANS?
WORKINGAGE POPULATION YEARS BEGINS TO DECLINE IN:
SOURCE: POPULATION DIVISION, UNITED NATIONS
WHAT GOES UP...JUST KEEPS GOING UP British Columbia continues to attract an abundance of international migrants, which in turn is fueling our population and workforce growth.
British Columbia’s population continues to grow, having added 14,180 people in Q1 2019 per the latest data from Statistics Canada. This is 5% higher than in the same quarter last year, with growth continuing to be driven by a net inflow of international migrants (which includes immigrants and temporary residents, such as students and workers). In fact, the year-over-year bump in quarterly population growth in Q1 could almost entirely be attributed to an increase in net international migration, which grew by 8% over the period as it added 12,895 people in Q1. This is a good thing too, because natural increase—which reflects the difference between the number of births and deaths in a given period—added only 277 people to the province in Q1, up from 224 in Q1 2018. Looking ahead, this figure isn’t likely to grow appreciably, falling inevitably into negative territory due to our below-replacement level
birth rate and aging Baby Boomer cohort into the so-called “higher mortality” stages of life. Net interprovincial migration remained positive in the most recent period, adding just over a thousand people to the province, though this was down 24% from last year’s Q1. We continue to offer economic and lifestyle opportunities that attract Ontarians, Manitobans, and Saskatchewanians, apparently, as we added 1,364 of them in the first three months of this year (on a net basis). In aggregate, we lost 298 people to Quebec and the Atlantic provinces, possibly due to desired cost-of-living changes, as well as 207 to Alberta—the third consecutive quarter of net outflows from BC to that province. With tight labour markets across BC, our economic performance will increasingly hinge on our ability to attract young, skilled migrants. For now, things are looking up.
CANADA NEEDS MORE INTERNATIONAL MIGRANTS
NET INTERPROVINCIAL MIGRATION
NET INTL MIGRATION
SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA
A TEMPORARY TORRENT OF TEMPORARY MIGRANTS?
In 2018, Canada saw its number of non- permanent residents (those here as international students or on work visas) increase by an unprecedented 160,841. This after an at-the-time unprecedented net inflow of 138,966 in 2017, with an additional 88,815 added in 2016. Compare this to the average net inflow of just under 15,000 that was seen in the years preceding 2016 back to 1972, when data were first collected. Here in BC, we saw our stock of non- permanent residents grow by 24,243 in 2018
and by 22,041 in 2017—compared to a 1972- 2016 average of 3,700 annually. Due to the complexity of the issue, there is a better time than now and a better place than this to explore why this is happening. However, we know there is a strong correlation between growth in temporary residents and the demand for rental housing; as such, we must continue to ensure there is an adequate supply of the right types of homes as BC grows and changes. Our economic prosperity depends on it.
NON-PERMANENT RESIDENT (NPR) POPULATIONS SURGE
BRITISH COLUMBIA’S Q NPR CHANGE,
SOURCE: QUARTERLY DEMOGRAPHIC ESTIMATES, STATISTICS CANADA
MORE COMING OR FEWER LEAVING?
Canada, its provinces, and virtually all metros have seen a surge in non-permanent residents in the past two years.
After lagging its peers in per capita completions for much of the past two decades, Metro Vancouver has surged ahead.
NEW HOMES + NEW PEOPLE = A GROWING ECONOMY
A key feature of successful economic development is the existence of an adequate supply of housing. Without enough housing, or the right type of housing, it becomes that much more difficult to attract the workers (and their families) needed to fuel the evolution and growth of regional economies. This has long been a challenge in Metro Vancouver, with the overall lack of housing and accordingly high cost of homes serving to hinder the ability of firms big and small to add talent to their workforces, all the way from the C-suite to the front line. Good news, then, that in Metro Vancouver the number of monthly housing completions per capita has been increasing since 2011— slowly at first, and more rapidly since 2016, pushing the rate to 887 completions per 1,000 people most recently. This is 18%
above Calgary, 20% above Edmonton, and a whopping 73% higher than in Toronto. In fact, Metro Vancouver’s per capita completions have continuously exceeded its peers’ levels for the past year amd a half. For this region, the current rate of completions per capita is at its highest level in the past 20 years. With the sales of many new developments being delayed (and a few even being cancelled) over the past year, expect Vancouver’s per capita completions rate to slide. For a region with near-minimum levels of unemployment and rental vacancy, this will pose a challenge for continued economic growth. Needless to say, provincial and local governments should be focused on ensuring a continued flow of new housing supply.
PER CAPITA COMPLETIONS: FROM WORST TO FIRST
740 754 887
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION; LABOUR FORCE SURVEY, STATISTICS CANADA DATA: MULTI-FAMILY COMPLETIONS PER 1,000 RESIDENTS AGED 15+
BUILT BUT UNSOLD: A BELOW-AVERAGE PROBLEM
Though the stock of unabsorbed condos in Metro Vancouver has recently surged, a look at history provides some useful perspective.
Beginning in July 2018, the number of completed but unabsorbed (i.e. unsold) condos in Metro Vancouver jumped from 232 to 552. Since then, this stock of available homes has moved up as high as 815 homes in November 2018, though the most recent data show a drop to 645 in July. To be sure, this excess supply of new condos is greater than the average of 265 completed and unabsorbed homes that characterized this market between July 2016 and June 2018; however the inventory of unabsorbed condos moves in cycles, and indeed this market has endured extended periods of greater excess inventory than we are currently experiencing.
Between August 1990 and August 2001, the inventory of newly-built and unsold condos never dipped below 1,000, averaging 2,164 over that period (more than three times current levels). The same circumstances characterized the January 2010 to August 2015 period, with the region’s unsold condo inventory persistently exceeding 1,000 homes and averaging 1,807 (just under three times the current level). While in the current market some challenges certainly exist for purveyors of these homes, the headwinds are less fierce than in past cycles.
UNABSORBED CONDOS: MIDDLING, NOT MONDO
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: INVENTORY (STOCK) OF COMPLETED BUT UNSOLD HOMES
Though the sluggish demand of the past couple of years may weigh on the future volume of new construction, recent construction activity is up.
MORE SHOVELS IN THE GROUND AS STARTS COME AROUND
On the whole, Metro Vancouver needs more housing and according to the latest data we’re getting it: on a year-over-year basis (through Q2 2019), total apartment starts in the region rose 7% to 19,409 annually. As mentioned earlier in this section, increased construction activity is helping to boost the per capita supply of new homes to healthier levels in this region. This rate of increase exceeds that of Toronto (+3%) and Calgary (which experienced a 28% contraction in new apartment building activity). The outlier among Vancouver’s Metro peers is Edmonton, which saw a 50%
increase in new apartment starts over the past year (part of which is due to a relatively small sample size). Of course, the apartment segment of the sister Alberta metro markets plays a lesser role in accommodating growth in their resident populations than it does here, where land constraints are greater. As such, the pace of new apartment growth in Metro Vancouver is a key indicator to watch, as it strongly influences the ability of our local population, and our regional economy, to grow.
MORE STARTS ARE GOOD IN THE END
APARTMENT STARTS INCLUSIVE:
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION
DATA: APARTMENT STARTS
FOREIGN BUYERS? LET’S PARK IT—WE’RE A LOCALS’ MARKET
While there will always be a contingent of market-followers that believes that non- resident (or foreign) buyers are driving Metro Vancouver’s housing market, the data continue to be unambiguous: foreign buyers account for a miniscule percentage of total residential sales in this market. In July 2019 this share was 1.2%, down from 1.6% in May and June, and down from the past-year high of 4.1% (which means that even then, resident buyers accounted for 95.9% of sales). The story is largely the same in the Fraser Valley and Victoria: in the Valley, the sample
size of sales involving foreign buyers is low enough to preclude the Ministry from providing estimates, while in Greater Victoria the foreign buyer share is 1.0%. The existence of the foreign buyer tax is one factor here, but so too are China’s capital controls. Both of these factors should keep foreign buyer participation low. That said, recent unrest in Hong Kong could result in a short-term spike, as Canadian expats and Hong Kong natives seek refuge from the current political uncertainty in that part of the world.
METRO VANCOUVER’S FOREIGN BUYER SHARE DIPS EVEN LOWER
SOURCE: PROPERTY TRANSFER TAX DATA, BC MINISTRY OF FINANCE DATA: SHARE OF RESIDENTIAL PURCHASES WITH FOREIGN INVOLVEMENT
A FOREIGN CONCEPT? Non-resident buyers are playing an insignificant role in the landscape of residential transactions in Metro Vancouver.
Central bankers may be the most powerful people in the world right now, as governments, investors, home owners, and others try to anticipate their next move.
THE NEW POLICY HIATUS CONTINUES
Much like in Q2 of this year, not much has changed from a policy perspective here in British Columbia, at least insofar as housing is concerned. Provincial elections aren’t looming, and with municipal councils locked in for the next couple of years, most elected representatives seem content to sit back and observe market goings-on along with the rest of us as our province and region adjust to changing demographic, economic, and financial conditions. With benchmark prices having adjusted by up to 10% and inventory having expanded
over the past year, Metro Vancouver’s housing market is objectively more balanced than it has been at any time in the recent past. Having said that, there is evidence that demand is beginning to re-emerge from the sidelines, that supply may be reaching its apex, and that prices have levelled-out. As the market continues to evolve, will policymakers feel compelled to intervene? Time will tell—and we may not have to wait too long to find out.
CENTRAL BANKS MULL FURTHER RATE CUTS While investors’ assumptions about potential rates of inflation and economic growth—which, by the way, aren’t always correct—determine longer-term yields in the bond market, the same investors, and their assumptions, are heavily influenced by central banks, who set short-term rates as a matter of policy. In this country, the Bank of Canada is headed by Stephen Poloz. Lucky to be him, too: rare are the instances when the Bank of Canada governor generates as much interest with every rate announcement as he does now. While the Bank of Canada has held its trend- setting rate level at 1.75% since last October, our money is on one rate cut of 25 basis points by the end of year, with two cuts not being completely out of the question.
In the United States Jerome Powell, who heads the Federal Reserve (which sets short- term rates in that country), has cited trade policy uncertainty as a major headwind for both the US and the global economy, denting as it has consumer and business confidence and capital investment. That’s one of the reasons the Fed recently cut its rate by 25 basis, with most Fed-watchers betting on at least one more before year’s end. Should these cuts take place they will provide a boost not only to global and local economies but also to this region’s housing market, making ownership just a little more affordable.
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