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Scotia on BC's economy; Economists now expect 10% correction

NOVEMBER 09, 2012

I'm taking a quick break from my series commenting on CIBC's recent report to write a quick note on some headlines from today:

 

1)  Scotia comments on BC's economy

An interesting report from Scotia today.  Some key quotes:

Recently, British Columbia has experienced a slowdown in population growth from an annual growth rate of 1.7% in the second quarter of 2009 to 1.0% in the same period of this year.  While immigration remains strong, net inter-provincial migration turned negative in 2011 for the first time in eight years, with the majority moving to Alberta where employment growth is faster and average weekly earnings are about $200 higher. If this trend continues, softening population growth could pose a downside risk for economic growth and the housing market.

Jesse over at the Housing Analysis website has written quite extensively on this topic.  It's not surprising that population growth is slowing, particularly via negative net provincial migration.  It's one symptom of excessively high house prices forcing some young people out of the city, a trend recorded through some amazing anecdotes over at VREAA. 

With regards to the current housing market, the report noted the following:

Home sales have dropped sharply, with a year-to-date decline of 11% province-wide and 22% in Vancouver as of September. This decline in sales has begun to affect house prices which are down modestly in the Okanagan, Vancouver Island, and the Lower Mainland. The most pronounced price declines were in Vancouver, where the reduction in high-priced housing sales has contributed to a year-to-date average price decline of 7% as of September. Ongoing housing weakness is likely to cut into consumer spending, retail sales and employment in 2013.

We'll find out pretty soon just how reliant the BC economy has been on credit-driven consumer spending and housing-related industries.  As I've noted before, line of credit growth (primarily HELOCs) coming out of the recession was running at 4% of BC's annual GDP, a level not matched anywhere else in Canada.  This has since slowed considerably, but as the US experience has taught us, the flow of money from housing equity into the broader economy is very closely related to house prices and consumer expectations.  People generally don't pull equity from their home in a declining market, and if the US experience has anything to teach us, it's that this flow can turn completely negative, constraining spending where it once boosted it. 

The BC economy has been very reliant on housing-related industries to generate economic and labour market growth, a fact I've outlined before.  And with little in the near-term to reinvigorate housing demand, at least on the domestic front, I suspect the fallout from the ongoing housing correction will be more acute than most realize.

 

I'll be in Vancouver later this month discussing this very topic for those interested in attending the free seminar.

 

2) Economists now expecting a 10% correction in house prices

From BNN:

Canadian housing prices will fall 10 percent over the next several years and homebuilding will slow sharply in 2013, but the country's recent property boom is not expected to end in a U.S.-style collapse, according to a Reuters poll.

The survey of 20 forecasters published on Friday showed the majority believe the Canadian government has done enough to rein in runaway prices, preventing the type of crash that has devastated the U.S. market for years.

"This isn't a sharp correction, this isn't a U.S.-style correction, it's just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time," said Craig Alexander, chief economist at Toronto-Dominion Bank.

"I would emphasize that while a 10 percent correction sounds scary, in actual fact, this would be a healthy outcome."

U.S. house prices crashed as a mortgage crisis unraveled in 2008, triggering a financial crisis and leaving a trail of foreclosures, negative equity and financial hardship for millions of people. Housing prices in the U.S. have only begun to rise again this year.

On a national basis, Canadian house prices are expected to drop 10 percent over the next several years, and housing starts will fall more than 17 percent to 184,000 units by mid-2013, according to median results of the poll, which was conducted over the last week.

It wasn't long ago that the consensus was that housing was 10% overvalued, but that it would be resolved through a "soft landing". Not long before that, prices were well supported by underlying fundamentals.  Economists in general are sliding their price expectations slowly towards a more realistic projection.

I recently discussed the likelihood of a housing construction slowdown.  Bottom line is that a slowdown in housing starts from the current ~215K/year rate down to one more in line with underlying household formations (~185K) would shave 1% off real GDP growth in Canada simply from the hit to the construction sector, and not including the multiplier effects on ancillary industries.  The issue here is that after a lengthy period in which housing starts have outpaced underlying demographic growth (they've averaged nearly 209K for the past decade), it's not hard to envision housing starts slowing well below demographic demand for a period of time.  That being the case, and if Canada does not find a way to goose its current ~2% annualized GDP growth rate, a decline in real GDP (i.e. a recession if it persists beyond two quarters) can't be ruled out. 

Cheers,

Ben

 

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Ben Rabidoux
By Ben Rabidoux

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6 Comments

  • Appraiser said:
    • 1 year, 5 months

    OECD says Canada to lead G7 in growth for next 50 years:

    http://www.cbc.ca/news/canada/story/2012/11/09/oecd-canada-growth.html

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  • rp1 said:
    • 1 year, 5 months

    More BRICs endless growth BS. You can't take the last decade and project it forward over 50 years.

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  • Alexcanuck said:
    • 1 year, 5 months

    The average male baby is 50 cm in height.
    The average 15 year old male is 170 cm. They increase their height to 340% in 15 years.
    Therefore, the average 45 year old male is 20 meters tall!
    Feeling inadequate yet?

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  • jesse said:
    • 1 year, 5 months

    Scotia misses the boat, it's taking the economy's temperature but not doing any thorough analysis of future problems. Pop growth is old news, it was highlighted over a year ago. The biggest two risks facing BC's economy, in my view are a significant construction slowdown and a prolonged rebalancing in China. The two are not entirely independent of each other.

    BC's exports have been increasingly sent to China, including metals, coal, and lumber. All three classes are heavily dependent on fixed Chinese capex. If that deteriorates like Michael Pettis is predicting that is decidedly bad for BC.

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  • Farmer said:
    • 1 year, 5 months

    Good post again, Ben. I tend to agree on the worry for recession unfolding in time. Many others in the analyst community seem to be looking at the wrong numbers to make their case that a soft landing is in the cards. They are backward looking at past growth and consumption numbers including the equity gains to suggest more of the same is in the cards. They might like to believe that only a softening is the outcome but the consumer is the one who will ultimately determine how steep the correction will be. The thing is that periods of excess credit result in malinvestment and debt buildup that is not always beneficial and must be paid out of future income. Future depletion of savings and disposable income to service that debt must therefore weigh against future consumption and the decline therien can only bring on slowing of GDP growth. The idea that consumption will hold steady or increase as credit is withdrawn is at odds with the object of debt retirement. It is clearly more likely that households will devote more of their disposable income to debt repayment than they have in the past particularly as equity wealth diminishes due to falling home values. The process by which savings are utilized to reduce debt also immediately exposes how the current credit bubble resulted in real estate malinvestment and represents a loss of real wealth when the outcome shows up in vanishing equity. Americans of course learned this the hard way and the existing statistics on the evaporation of wealth are startling. The problem I see is that the current buildup of debt did not create real economic value. Not if it vanishes when home prices decline anyway. So we have bought our current economic bouyancy out of future economic activity (which must decline to offset past excesses) and so it is the future that we now need to be concerned with. From that perspective we cannot judge the next quarters performance based on what happened in the last when we know full well that the offset in the decline will be felt more sharply during the correction than during the growth phase. What I mean quite simply is that what goes up must come down. GDP is already in the low single digits. Projecting it will stay there or grow more robustly during a global slowdown is preposterous.

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  • Jack Williamson said:
    • 1 year, 4 months

    The proof of the pudding will be when interest rates return to historical norms; buyers will then face the prospect of eating much higher mortgage payments, and will likely prioritize groceries. The correlation between increasing housing prices and declining interest rates has been quite high, and extremely likely to hold in reverse.

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