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British Columbia Real Estate Association: Housing Forecast (4th Quarter)

HOUSING MARKET TO EXHIBIT STABILITY

After declining 12 per cent in 2010, residential unit sales through the Multiple Listing Service® (MLS®) in BC are forecast to rise by 3 per cent to 77,000 units in 2011 and a further 4 per cent to 80,000 units in 2012. However, BC home sales will remain relatively low by historic measures, falling short of their 10-year average of 87,600 units. While low mortgage interest rates are expected to persist through 2012 accommodating housing demand, headwinds in the global economy will act to restrain BC economic and employment growth.

BC economic growth slowed from an Olympic charged 3.8 per cent in 2010 to a forecast 2.1 per cent this year. Lackluster economic performance is largely the result of weaker than expected US economic activity, some belt tightening and deleveraging by households, and the Euro-zone debt crisis. Employment growth in the province is estimated to fall to 1.1 per cent this year. While emerging Asian markets have tilted some BC exports in an upward trajectory, domestic demand has stagnated. Retail sales in the province are estimated to increase just 1.5 per cent this year after climbing 5 to 6 per cent per annum over much of the last decade. Against this backdrop, moderate consumer demand for housing and relatively flat home prices are forecast through 2012.

Despite more moderate consumer demand, average home prices have climbed dramatically this year. The average annual
BC MLS® residential price is estimated to increase 12 per cent to $564,600 in 2011. Rather than reflecting market conditions, the upward skewing of average price data was the result of a change in regional demand patterns and a shift in
the mix of home types sold rather than as a result of a return to pre-recession market froth. By the winter months, most of the upward bias in average price data will have dissipated which will contribute to the average annual BC MLS® residential price decline of 2.5 per cent to $550,500 in 2012. Market conditions in most BC regions are expected to remain in buyers’
to balanced market conditions, meaning the typical BC home will see little change in value through 2012.

ECONOMIC OUTLOOK


The BC economy is muddling through a fairly unremarkable 2011. While still growing at a moderate pace thanks to decent export growth, the BC economy is being held back by disappointing job growth and associated low consumer spending.

Employment growth this year will reach just 1.1 per cent and the meagre job creation that has occurred has mainly been concentrated in part-time work. The BC labour market did experience a long-overdue, and probably temporary, surge of close to 40,000 new full-time jobs in September. However, even that impressive jump still leaves full-time employment 3 per cent below its pre-recession peak. We anticipate the pace of job creation will start to pick up in 2012, pushing the provincial unemployment rate down slightly, albeit to a still elevated level of 7.4 per cent.

The lack of quality full-time job creation has significantly impacted consumer spending. After posting average growth of nearly 6 per cent in the years before the 2008/2009 recession, year-to-date retail sales are just 1.4 per cent higher than in 2010 and will struggle to reach 2 per cent growth for the year. Since consumer spending comprises about 65 per cent of BC GDP, a slowdown in household consumption has created a significant drag on economic growth in 2011.

However, export growth fared quite well, expanding 13 per cent over 2010. BC’s export performance is especially surprising given the economic woes of the United States and Japan, which combined purchase two-thirds of BC’s export. Credit for the province’s strong export performance belongs to a shift in the composition of trade towards emerging Asian markets.

One of the early beneficiaries of this diversification is the long-suffering BC forest industry whose exports have risen 10.2 per cent this year due to an 80 per cent jump in forestry exports to China.

While export growth has been a positive for the economy, increasing uncertainty in the global economy due to the Euro-zone debt crisis presents a significant threat to economic growth. However, financial market volatility caused by the Euro-crisis has forced long-term interest rates to record low levels and will keep the Bank of Canada on hold for an extended period. A deferral of higher borrowing costs should allow consumers time to shore up household balance sheets which may continue to constrain consumer spending in the short-term. Therefore, we are forecasting economic growth of just 2.1 per cent this year, followed by 2.4 per cent in 2012.

HOUSING STARTS


Housing starts in 2011 are on pace to match 2010’s rate of about 27,000 units. Building activity has been largely concentrated in the multi-family sector and largely in the Greater Vancouver area where multi-family starts are 40 per cent higher than last year. Elevated inventory levels and weak employment growth have constrained new construction in many other areas of the province; a trend we expect will continue into 2012.

The elimination of the HST, scheduled for early 2013, will very likely defer some demand in 2012 for new singlefamily homes in larger markets like Vancouver and Victoria as consumers look to avoid paying the tax. Low levels of single-family inventory and weak construction activity in that segment of the market may translate to an increase in starts towards the end of 2012 in order to service pent-up demand created by the HST.

Overall, we expect that housing starts will grow in-line with new household formations over the next years, though with a clear bias towards multi-family units. Our forecast is for 27,550 total units in 2011 and 27,500 in 2012. Single family housing starts are expected to be well below average levels seen in the past five years, reaching just 9,250 units in 2011 and 10,000 units in 2012. However, a strong trend in multi-family housing is expected to continue, with multifamily starts of 18,300 forecast for 2011 and 17,500 units projected for 2012.

MORTGAGE RATE FORECAST


The third quarter saw a stunning collapse in government bond yields as markets digested weak US economic data and an increasingly serious debt crisis in the Euro-zone. The yield on 5-year Government of Canada debt fell to an incredible 1.28 per cent, the lowest level on record, before posting a modest rebound to still nearly unfathomable levels around 1.5 per cent.

The current level of bond yields would normally prompt a dramatic fall in mortgage rates. However, there are a number of factors complicating the normal arithmetic. First, some lenders are offering deeper discounts for the most creditworthy borrowers. This allows banks to provide competitive rates while also filtering out higher-risk borrowers. Second, the emerging potential of a credit crisis in Europe has raised the short-term cost of funding for financial institutions worldwide.

Finally, the increasing popularity, and much lower profitability, of variable rate mortgages may also be playing a role in the delay. Nearly a third of mortgages are variable rate compared with 25 per cent five years ago and just ten percent a decade ago. The lower profitability of mortgage portfolios, created by the shift in consumer preferences to variable rate mortgages, recently prompted a rare increase in variable rates in the absence of a prime rate change.

Our forecast for the remainder of 2011 assumes that very low bond yields will persist through the end of the year, but a squeeze on profitability will keep the five-year fixed rate from falling below 5.19 per cent. The 1-year rate is expected to average 3.5 per cent. We expect that rates will move higher in the second half of next year, with the five-year rate hitting 5.6 per cent and the 1-year rate reaching 4 per cent.

Once the economy sees its way through the current global economic tempest, interest rates will need to normalize. However, the Bank of Canada is unlikely to make any significant movements on interest rates over the next two to three quarters. Indeed, further monetary tightening will be highly contingent on a brighter growth outlook in the United States and a credible solution to the Euro sovereign debt crisis. Therefore, we expect the Bank of Canada to remain on the sidelines through the end of 2011 and the first half of 2012 before potentially tightening rates towards the end of 2012.

REAL ESTATE BOARD OF GREATER VANCOUVER


Home sales in Vancouver are expected to rebound this year after declining 14 per cent to 31,144 units in 2010. Relatively strong immigration continues to bolster the Vancouver housing market while the overall economy and related job growth faces headwinds from an anemic US economy. However, mortgage interest rates are expected to remain low through 2012 keeping affordability and purchasing power on an even keel. Nevertheless, consumer demand is expected to remain near the ten-year average of 35,000 units both this year and next. MLS® residential sales in Vancouver are estimated to increase 7 per cent to 33,400 units this year and forecast to rise a further 3 per cent to 34,300 units in 2012.

As reported in the spring Housing Forecast, the average MLS® residential sales price in Greater Vancouver was being skewed well above what market conditions suggest. A greater proportion of detached home sales in the region’s priciest markets catapulted the average price into the stratosphere. Since the second quarter, regional demand has trended toward more typical patterns, with average prices more representative of market conditions. While the average home prices are forecast to oscillate between a 16 per cent increase this year and a 3.5 per cent decline in 2012, the typical home price in Vancouver is expected to remain relatively unchanged through next year.

There is a distinct split between the single-family and multi-family new home construction this year. While multi-family construction is on pace for over 30 per cent growth, single-family units will likely end the year down 20 per cent. Moreover, the elimination of the HST in 2013 may further hinder activity in the HST sensitive Vancouver new home market in 2012 if consumers delay their purchase to avoid paying the tax. We estimate a 16 per cent increase in total starts in 2011 based on 31 per cent growth in multi-family starts and a 21 per cent decline in single-family starts. We anticipate a 6 per cent decline in total housing starts in 2012 as the pace of multi-family starts slows.