Strong housing market to continue

Friday, October 28th, 2005

Upward swing to go through 2006 and 2007, B.C. economist predicts

Derrick Penner

CREDIT: Photo illustration Vancouver Sun, Background photo Ian Lindsay, Vancouver Sun Despite predictions of interest rate hikes, B.C.’s housing market is expect to remain robust over the next two years, according to an economist at Credit Union Central B.C.

The torrid upward swing in British Columbia‘s real estate market cycle will continue through 2006 and 2007 to become the longest rise on record, predicts Helmut Pastrick, chief economist for Credit Union Central B.C.

Defying warnings that the Bank of Canada will continue to raise interest rates in order to fight inflation, Pastrick points to a certain inexorability of demand — high migration, increasing incomes, and strong economic growth — that he predicts will outweigh the effects of higher borrowing costs.

Also, Pastrick doesn’t believe record-breaking sales and near-record new housing construction has eased B.C.’s pent-up demand for new housing, so he predicts prices will continue to rise.

In an update of his B.C. housing market forecast released Thursday, Pastrick projected total housing sales for 2006 of 109,300 units, which is yet another increase over the record the province is expected to set by the end of this year.

If that comes to pass, Pastrick noted, the upswing will surpass the boom market between 1985 and 1989.

And he has forecast total sales dramatically higher again in 2007, reaching 117,200 units.

Pastrick is also forecasting that housing starts will continue to rise, hitting 35,700 in 2006 and 38,200 in 2007, compared with his projection of 33,600 by the end of 2005.

“There’s considerable momentum already in the B.C. economy,” Pastrick said in an interview. “The domestic side of the economy, in my view, will hold up and grow, [which] also means some of the other sectors will contribute more, [such as] government spending, and we’ll see some business investment activity.”

It has been a sellers market through 2005, Pastrick said in his forecast, driven by near-record low mortgage rates, and he is forecasting that will continue into 2006 because the housing inventory — through new listings from owners willing to sell, and new construction — will remain low compared with demand.

“For brief periods, market conditions will ebb and flow around the cycle uptrend, due to short-term sales swings,” Pastrick said in his forecast.

“Overall, the market needs more supply, and the weaker the supply response, the higher the rate of housing price appreciation.”

Price increases will also be driven by rising construction costs, which Pastrick is estimating at about 10 per cent per year.

Demand, he added, will come from net population migration into B.C., which he expects will hit 50,000 by the end of the year, and climb to almost 65,000 per year by 2007.

Pastrick is predicting that growth of B.C.’s total economic output will hit 3.9 per cent by the end of this year, and rise to 4.2 per cent through 2006 and 2007, which will translate into rising employment numbers and income growth.

But interest rates are on the rise. Pastrick concurs with other economists who believe the Bank of Canada will raise its key overnight lending rate by a quarter-point to 3.25 per cent in December, and again to 3.5 per cent in January.

He added that the rise will help to squeeze some first-time buyers out of the market, but move-up buyers and investors will remain active.

“Conditions will continue to worsen [for first-time buyers] . . . partly due to higher interest, but more so due to price increases,” he added.

And Pastrick believes the Bank of Canada is due for a rest to allow the economy to adjust to a higher Canadian dollar and uncertainty over world economic growth before considering further increases.

Pastrick does not believe there is a bubble in real estate prices for markets such as the Lower Mainland and Victoria.

He said simple comparisons of house prices to rental income fail to account for the fact that the cost of home ownership is different from price.

Pastrick added that a formula that factors in expected rate of capital gain, depreciation, property taxes and risk premium as well as current prices and rent show Vancouver prices are lower than might be expected in the market.

He said there are risks to his forecast, such as the possibility of more rapidly rising interest rates. If rates go up by 1.5 percentage points, he added that he would revise his numbers downward.

Also, if global events put a dent in world economic growth, that would also affect B.C.’s economy, and therefore housing demand.

However, “prospects for the global economy are good.”

Tsur Somerville, director of the centre of urban economics at the Sauder School of Business at the University of B.C., said Pastrick’s forecast appears a bit optimistic by assuming interest rates will stay low, and that investment interest will continue to fuel the market.

For instance, Somerville has heard anecdotal reports that activity in the downtown Vancouver condominium market is starting to slow down.

He added that generally, conditions appear solid. Any economic model that could be devised would paint a rosy picture of B.C.’s housing market, with the projections of four-per-cent growth in economic output, and interest rates that, in the most pessimistic projection, will rise 1.5 percentage points over the next year.

At the same time, Somerville believes it is a lot to ask for sales in an already hot market to continue rising.

“My view of this is that things come to an end, and they come to an end for unexpected reasons, which makes forecasting a problem.”

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Sure, bank interest rates will rise in 2006, but Credit Union Central B.C. chief economist Helmut Pastrick is predicting that high population migration to B.C. and strong economic growth will be enough to outweigh any dampening of real estate sales, leading to the lreal estate market cycle’s longest upward swing.

2005 2006 2007

Residential MLS sales 106,500 109,300 117,200

Average price $329,000 $360,000 $387,000

Housing starts: total 33,600 35,700 38,200

– Single-family 13,200 12,800 12,500

– Multi-family 20,400 22,900 25,700

Rental vacancy 2.8% 2.6% 2.2%

Renovation spending $4.1 billion $4.6 billion $5.3 billion

Source: Credit Union Central B.C.

© The Vancouver Sun 2005


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