BRITISH COLUMBIA REAL ESTATE ASSOCIATION
FALL 2008 HOUSING FORECAST
full report here.
CONSUMER CONFIDENCE STALLS HOME SALES
Residential unit sales on the Multiple Listing Service® (MLS®) in BC are forecast to decline 28% to 73,700 units this year. Reduced consumer confidence has many households delaying the purchase of a home this year.
While eroded affordability was expected to slow sales in 2008, a sharp increase in fuel prices in the spring caused a tipping point in consumer confidence. More recently, the global liquidity crisis and volatile equity markets have households concerned about a weakening economy and an erosion of their retirement savings.
This combination is problematic to consumer spending on big -ticket items. Under the strain, many households are tightening their monthly budgets and putting major purchases on hold. While BC economic performance is among the strongest in the country, weaker growth is forecast for this year and in 2009. Economic growth in the province is expected to decline from 3.1% in 2007 to 1.4% this year.
An increase in consumer spending in the second half of 2009 is expected to boost economic growth next year to 1.6%. Most BC housing markets are experiencing a sharp decline in home sales and much larger inventories. The imbalance between supply and demand is putting downward pressure on home prices in many markets. Conditions are expect to improve next year, with home sales forecast to increase a modest 4% to 76,500.
While the average MLS® residential price in BC is forecast to rise 3% to $453,000 this year, the increase is a result of record prices in the first quarter. Home prices have been edging lower since the spring and most of the correction in prices will be observed this year.
Despite low consumer confidence, the fundamentals of the housing market warrant a higher level of sales. Once global financial and equity markets stabilize, The housing market will again reflect the fundamentals of employment, wages and population growth.
ECONOMIC OUTLOOK
Economic growth in the province is slowing. Weaker consumer confidence, global liquidity problems, volatile equity markets and recessionary conditions in the US are all negatively impacting the BC economy.
Real GDP growth is forecast to decline from 3.1% in 2007 to 1.4% in 2008. Weakness in the forest sector will persist until US housing markets improve.
The value of solid wood product exports was down 30% year-to-date through August. A recovery is not expected until late 2009 at the earliest. In addition, belt tightening by US consumers will also limit the number of US tourists to BC through next year. Consumer confidence has weakened, reaching a 26-year low in Canada.
Declines in housing and automobile sales are a result of consumer reticence to undertake major purchases. Retail sales growth has slowed, and is expected to increase by approximately 1% this year and in 2009, on an inflation-adjusted basis.
A timely end to the financial and equity market turmoil is needed to restore a higher level of consumer confidence. Labour market conditions in the province are forecast to ebb as the economy weakens in tandem with world industrialized countries.
While the BC economy is expected to continue out-performing the nation, lower employment growth and higher unemployment is forecast. The unemployment rate in BC fell from 4.8% in 2006 to 4.2% last year. This year, the unemployment rate is expected to average 4.4% and rise to 4.9% in 2009.
Growth in construction employment that has more than offset job losses in the forest sector is expected to slow, with the potential of shedding some jobs toward the end of next year. While the ranks of the unemployed will grow, the jobless rate will nevertheless remain relatively low from a historical perspective.
Employment growth has moderated from an annual rate of 3.2% in 2007 to an expected 2.4% this year. Further deterioration in employment growth is forecast in 2009, to 1.8%.
Weaker labour market conditions will contribute to slower growth in wages and personal disposable income. However, wages and incomes are expected to surpass the headline inflation rate, thereby increasing modestly in real terms.
After a 31% increase in net interprovincial migration in 2007, fewer migrants from other provinces are expected this year. While the provincial economy is expected to out-perform the country, fewer employment opportunities in the province and a general risk aversion by Canadian households is expected to curb net interprovincial migration to 9,000 individuals this year, with a modest increase to 10,000 in 2009.
International migration is continuing on an upward trend. Total net international migration is forecast to reach 42,000 individuals this year, an increase of 6%. International migration is not as susceptible to the ebbs and flows of the business cycle and appears limited only by federal government policy. While the provincial economy will not go unscathed by global economic weakness, households will remain on a relatively solid financial footing.
HOUSING STARTS
Waning consumer demand, rising new home inventories and tighter credit conditions are a strong signal to builders and developers to cut back production. Housing starts in the province are expected to dip a modest 2% to 38,500 units this year on the strength of the first six months of the year. However, BC housing starts are forecast to decline 25% to 29,000 units in 2009.
High-density housing has gained a larger proportion of total housing starts in recent years as a result of land supply and affordability constraints and consumer preferences. Multiple housing starts comprised 63% of total housing starts in the province in 2007.
However, market risk and tighter credit will curb multiple starts in the province in 2009 which are forecast to decline 32% to 17,500 units. Single detached housing starts are expected to decline 12% to 12,700 units this year. Low consumer confidence and expanded inventories in the resale market are impacting absorptions of new homes and increasing the number of complete and unoccupied units. Continuing demand- side weakness is forecast to slow single detached housing starts again next year; a decline of 9% to 11,500 units is expected in 2009.
MORTGAGE RATE FORECAST
Borrowing costs on three- and five-year fixed-rate mortgages rose during the last week of September by 30 basis point (bps) to 7.05 and 7.20%, negating the declines recorded in early August. One-year rates have dropped 30 basis points to 6.35%.
BCREA forecasts mortgage rates to drop from current levels in the near term and remain flat for most of 2009 before trending upward. In the short term, tight credit market conditions are expected to partially offset the impact of monetary easing by the Bank of Canada (BoC).
Global financial market turmoil is the latest chapter of the credit crisis that began more than a year ago as a US subprime mortgage issue. Equity markets have experienced a drop in value since the last week of September, as credit markets seized and fears of a significant global economic downturn emerged. Rising foreclosures, falling home prices and non-performing mortgage loans in the US, combined with the packaging and selling of this bad debt through complex financial instruments in global markets, have pushed financial markets into crisis.
Massive write downs on mortgage assets have led to the failure of financial giants, the conservatorship of Fannie and Freddie Mac, and a consolidation of the financial sector, while holders of mortgage backed securities have suffered significant losses. Governments around the world have implemented multibillion dollar bailout packages, nationalized banks and flooded markets with liquidity in a bid to thaw credit markets and restore confidence to the financial system.
A lack of trust in the financial markets and efforts to shore up internal balance sheets by lenders have contributed to tighter credit markets worldwide. While increases in credit risk premiums in Canada have been milder vis-à-vis other nations, consumers and businesses face higher borrowing costs and tighter lending restrictions.
For homebuyers, this has meant an increase in effective mortgage rates, either through higher posted rates or a lowering of the discounts commonly offered during the last few years. In the variable rate market, consumers are paying at or above the prime rate, in contrast to the discounts offered last year reflecting higher cost of raising funds in capital markets. The credit crisis has further compounded what was already a weakening US economy and is contributing to an even sharper downturn in domestic spending and business investment, while pushing unemployment up further.
As a result, the near-term economic prospect for Canada, which counts the US as its largest export destination, has eroded. An economic slowdown in Canada and lower energy prices will dampen inflationary fears despite high headline inflation in September. However, the recent drop in the value of Canada’s currency vis-à-vis the US may increase import costs, providing some offset to lower inflation pressures.
The BoC slashed its key interest rate by 50 bps on October 8 in a coordinated effort with central banks around the world and a further 25 bps on October 21 to support the economy. BCREA expects the BoC to cut rates by another 25 basis points by year end, as economic conditions deteriorate and downside risks to inflation grow. Rates are expected to rise near the tail end of 2009, reflecting better economic conditions in 2010. While mortgage rates should also lower, high credit risk premiums will offset some of the BoC’s interest rate cuts in the near term, despite lower inflationary expectation for the future. Expect credit markets to normalize in 2009.
REAL ESTATE BOARD OF GREATER VANCOUVER
A marked decline in consumer confidence occurred earlier this year in the wake of rising fuel prices and eroded home affordability. As a result, housing demand fell to a level not seen since the beginning of the decade.
The global financial crisis and volatile equity markets are keeping consumer sentiment low, and the prospect of a US recession and near recession in Canada are causing many households to delay major purchases. Waning consumer demand and a sizable increase in the number of homes for sale has weighted the market heavily in favor of homebuyers.
While homebuyers are benefiting from a wide selection of homes for sale, the imbalance between supply and demand has put some downward pressure on home prices. The average MLS® residential price is expected to increase 3% this year to $585,000.
However, the increase is due to a cyclical price peak in the first quarter. Home prices have been edging lower since then and, while a 10% decline in the average residential price is forecast in 2009, most of that decline will have already occurred by the end of 2008.
MLS® residential sales in Vancouver are expected to decline 31% to 27,000 units this year. However, the combination of increased affordability and some improvement in consumer confidence are expected to lift home sales by 4% to 28,000 units in 2009.
While a small increase in home sales is not sufficient on its own to firm up home prices, a reduction in the inventory of homes for sale is expected to trend the market toward more balanced conditions in 2009.
Housing starts are forecast to increase 2% this year as a result of project commitments during the first two quarters. However, reduced demand, rising inventories and difficulties securing affordable credit are expected to cut new home production by 22% to 16,500 units in 2009. A notably slower expansion of the housing stock will contribute to a narrowing of the gap between supply and demand.
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