2. Economic Update and Outlook Mortgage Investment Association of British Columbia
January 17, 2017
Helmut Pastrick
Chief Economist Central 1 Credit Union

3. Outline: Review of 2016 forecasts B.C. economic and housing trends
Macro economic trends and forecasts
2017 forecasts

4. Review of 2016 economic forecasts
Indicators
2015
2016 f
2016 a
Diff.
Trend
B.C. Employment, % change
1.2
1.5
3.2
1.7 Y
B.C. Unemployment rate, %
6.2
6.0
0.0
B.C. Population, % change
0.9
1.0
1.3
-0.3
B.C. Retail sales, % change
7.0
6.3*
0.8
Prime rate, %
2.79
2.70
5-yr mortgage rate, %
4.67
4.70
4.66
0.04 N
Source: Statistics Canada, C1CU. f = forecast, a = actual, *YTD October

5. Review of 2016 housing forecasts
B.C. Indicators
2015
2016 f
2016 a
Diff.
Trend
Housing sales, % change
22.0
10.0
9.5
0.5 Y
Housing starts, % change
11.9
15.0
32.0
-17.0
Average sale price, % change
12.0
16.0
8.6
5.4 N
Lower mainland HPI, % change
10.2
14.0
26.6
-12.6
Private rental apt. vacancy rate, %, Oct.
1.2
0.8
1.3
-0.5
Source: CREA, CMHC, C1CU. f = forecast, a = actual.

6. Growth turns up Population Growth Quarterly: British Columbia
Per cent change y/y
Source: Statistics Canada, Central 1 Credit Union Latest: Q3-16

7. International returns to trend; interprovincial rising
Population Growth Components Quarterly: British Columbia
Persons - thousands
Source: Statistics Canada, Central 1 Credit Union. Note: 4-qtr. moving total. Latest: Q3-16

8. B.C. gaining from Alberta
B.C. / Alberta Interprovincial Migration
Persons - thousands
Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Q3-16

9. Exports advancing; large recent gains
International Merchandise Exports: British Columbia
Dollars - billions
Employment levels in Canada holding up well, up from a year ago by about one per cent. Mild but not devastating.
Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted three-month moving averages. Latest: Nov-16

10. Rising trend International Tourist Entries: British Columbia
Persons - thousands
Employment levels in Canada holding up well, up from a year ago by about one per cent. Mild but not devastating.
Source: Statistics Canada Note: Seasonally adjusted Latest: Oct-16

11. Retail sales up 6% this year
Retail Sales: British Columbia
Dollars - billions
Employment levels in Canada holding up well, up from a year ago by about one per cent. Mild but not devastating.
Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted Latest: Nov-16

12. Private investment off recent high
Private Non-residential Building Construction Investment: B.C.
Public Non-residential Building Construction Investment: B.C.
Dollars - billions
Dollars - millions
On the dollar-side, we expect the CAD to hold below 80 cent
Low oil prices, Canadian growth
Low interest rates, and relatively stronger US economy and rate upcycle will put pressure on Canada currency
Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Q3-16

13. Cyclical sales pattern – at or near the peak?
Residential Sales: British Columbia
Units - thousands
Much of the remaining housing price analysis will focus on Metro Vancouver because of data availability, its high profile in bubble talk, and it demonstrates important supply-demand information.
There is a growing divergence between the average and median sale prices in Metro Vancouver to the extent that the gap approached $200,000 in This divergence probably reflects a changing composition of properties sold because the average price is unduly influenced by high-end sales in high-priced areas. The median price is also influenced by shifts in product composition but less than the average price, which makes the median price is more representative of the market than the average price. Most analysis of affordability and overvaluation use the average price because the median price is not readily available. However, use of the average price will overstate the ‘price effect’ analyzed.
The average and median price trends understate the actual price trend. In 1976, about 80% of sales were single family homes compared to less than 40% in the same dwelling type compositional shift occurred, in varying degrees, in most other Canadian markets.
Source: Landcor Data Corp. Note: Arms length transactions only. Latest: 12 months ending October 2016

14. Long term rising trend, cyclical upswing underway
Residential Median Sale Price: British Columbia
Dollars - thousands
Much of the remaining housing price analysis will focus on Metro Vancouver because of data availability, its high profile in bubble talk, and it demonstrates important supply-demand information.
There is a growing divergence between the average and median sale prices in Metro Vancouver to the extent that the gap approached $200,000 in This divergence probably reflects a changing composition of properties sold because the average price is unduly influenced by high-end sales in high-priced areas. The median price is also influenced by shifts in product composition but less than the average price, which makes the median price is more representative of the market than the average price. Most analysis of affordability and overvaluation use the average price because the median price is not readily available. However, use of the average price will overstate the ‘price effect’ analyzed.
The average and median price trends understate the actual price trend. In 1976, about 80% of sales were single family homes compared to less than 40% in the same dwelling type compositional shift occurred, in varying degrees, in most other Canadian markets.
Source: Landcor Data Corp. Note: Arms length transactions only is Jan. – Oct.

15. Price cycles Change in Residential Median Sale Price: British Columbia
Per cent
Much of the remaining housing price analysis will focus on Metro Vancouver because of data availability, its high profile in bubble talk, and it demonstrates important supply-demand information.
There is a growing divergence between the average and median sale prices in Metro Vancouver to the extent that the gap approached $200,000 in This divergence probably reflects a changing composition of properties sold because the average price is unduly influenced by high-end sales in high-priced areas. The median price is also influenced by shifts in product composition but less than the average price, which makes the median price is more representative of the market than the average price. Most analysis of affordability and overvaluation use the average price because the median price is not readily available. However, use of the average price will overstate the ‘price effect’ analyzed.
The average and median price trends understate the actual price trend. In 1976, about 80% of sales were single family homes compared to less than 40% in the same dwelling type compositional shift occurred, in varying degrees, in most other Canadian markets.
Source: Landcor Data Corp., Central 1 Credit Union. Note: Annual data. Deflated by BC CPI. Latest: 2016

16. Recent housing market trends: B.C.
Units – thous.
Source: CREA, BCREA, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec.-16

17. Recent housing market trends: Lower Mainland REBs
Units – thous.
Source: CREA, BCREA, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec.-16

18. Sharp drop in average sale price with foreign buyer tax
MLS Res. Average Sale Price: B.C.
MLS Res. Average Sale Price: REBGV
Dollars – thous.
Dollars – thous.
On the dollar-side, we expect the CAD to hold below 80 cent
Low oil prices, Canadian growth
Low interest rates, and relatively stronger US economy and rate upcycle will put pressure on Canada currency
Source: CREA, REBGV, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec-16

19. Sharp drop in average sale price with foreign buyer tax
Ave. Sale Price: Detached, Westside
HPI Benchmark Price: Detached WS
Dollars – millions
Dollars – millions
On the dollar-side, we expect the CAD to hold below 80 cent
Low oil prices, Canadian growth
Low interest rates, and relatively stronger US economy and rate upcycle will put pressure on Canada currency
Source: REBGV. Latest: Dec-16

20. Prices declining MLS Home Price Index: Lower Mainland REBs
Jan = 100
Employment levels in Canada holding up well, up from a year ago by about one per cent. Mild but not devastating.
Source: CREA, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec-16

21. New construction supply responding
Housing Starts by Dwelling Type: B.C. Urban Centres
Units - thousands
Source: CMHC. Note: Seasonally adjusted at annual rate Latest: Q4-16

22. First-time buyers roughly 20 per cent of market
First-time buyer exemptions to sales ratio by Assessment area (Fiscal Year 2015)
Landcor data
Source: Landcor, BC Government, Central 1 Credit Union calculations.

23. Global economy improving heading into 2017
JP Morgan Global Purchasing Managers’ Indexes
50 = no change from prior month
Source: Bloomberg. Note: Seasonally adjusted Latest: Dec. 2016

24. MAKE AMERICA GREAT AGAIN – Policymaking in 140 characters; 24/7.+
MAKE AMERICA GREAT AGAIN – Policymaking in 140 characters; 24/7.

25. Election Impact: Trump’s economic proposals
Target of 25 million jobs; 4% real GDP growth
Tax cuts for households, business (from 35% to 15%)
Infrastructure spending, approx. $500 bn
Approvals for pipelines, coal export, repeal Dodd-Frank, lax regulations
Review WTO & NAFTA, pull out of TPP; 45% tariff on China imports, 35% Mexico imports, 35% tariff on imports from U.S. firms relocating overseas
Uncertainty over actual policy; campaign rhetoric harsher than reality? Expect market volatility until policy details emerge.
Presidential powers limited by Congress, more moderate proposals expected.
Tax and infrastructure measures stimulative; trade measures restrictive
Inflation pressures will mount; bond yields climb higher; USD appreciates
Updated May 17
While the Canadian growth profile is sluggish, the oil sector malaise does not cross over the AB/BC border
BC does not produce commercial oil
Combination of lower oil prices, low interest rates is a boon to consumer spending and businesses
Low Canadian dollar, US growth in housing will prove positive for exports
Expectations of one LNG project, other major infrastructure lifting future economic growth

26. Trump bump drives increase in yields, steeper curve
US 10 – 2 Spread
10-year US Treasury Yield
Per cent
Per cent
Per cent
2-year US Treasury Yield
S&P 500
Source: FRED FRB St. Louis, Central 1 Credit Union. Latest: Jan 12, 2017

27. USD strength; China’s currency - manipulated?
Trade-Weighted U.S. Dollar Index
China-U.S. Foreign Exchange Rate
1997 = 100
Yuan to One U.S. dollar
Existing-home sales increased to 4.82 million annualized units in August, a gain of 7.8% from July.
Sales numbers indicate that housing is no longer declining and a tentative recovery is underway. Months of Supply is dropping
A final wave of foreclosure filings will hit the housing market. Distress sales will likely increase over the next year and while lifting sales it could depress prices.
An offset will come from an ongoing recovery but no significant upturn is likely until after 2013.
Source: FRED, FRB St. Louis. Note: Annual averages Latest: 2016

28. Lower unemployment rate; wages rising faster
Unemployment Rate: U.S.
Hourly Median Wage Rate: U.S.
Per cent of labour force
Per cent change, y/y
On the dollar-side, we expect the CAD to hold below 80 cent
Low oil prices, Canadian growth
Low interest rates, and relatively stronger US economy and rate upcycle will put pressure on Canada currency
Source: U.S. BLS. Note: Seasonally adjusted. Latest: Dec Source: FRB Atlanta Latest: Nov-16

29. Forecasters expect higher rates
U.S. Interest Rates: Actual and Forecasts
Per cent
Employment levels in Canada holding up well, up from a year ago by about one per cent. Mild but not devastating.
Source: U.S. Federal Reserve, WSJ Jan forecast. Note: Actuals are monthly averages. F = Forecast

30. Less oversupply ahead
Source: U.S. E.I.A. January 2017 STEO.

31. Modest price expectations
WTI Oil Price: Actual and Futures
US$ per barrel
Source: U.S. EIA, NYMEX. Futures as of Jan. 13, 2016.

32. Modest growth pickup in 2017
Global Economic Forecasts
Indicator
2014
2015
2016
2017
Global real GDP, % chg.
3.4
3.2
3.1
U.S. real GDP, % chg.
2.4
2.6
1.6
1.9
China real GDP, % chg.
7.3
6.9
6.7
6.5
Japan real GDP, % chg.
-0.1
1.2
0.9
0.8
S. Korea, real GDP, % chg.
3.3
2.7
2.5
EU real GDP, % chg.
1.4
2.3
1.8
1.5
Source: IMF, Consensus Forecasts.

33. Moderate growth in 2017 Economic Forecasts: Canada Indicator 2014 2015
2016
2017
Nominal GDP, % change
4.4
0.2
2.1
4.1
Real GDP, % change
2.5
0.9
1.3
2.0
Employment, % change
0.6
0.8
0.7
Unemployment rate, %
6.9
7.0
6.8
3-mo. T-bill rate, %
0.91
0.65
0.50
10-y GoC bond, %
2.23
1.52
1.25
2.00
U.S.- Canada FX, cents
90.6
78.3
75.5
74.1
Source: Statistics Canada, CREA, Central 1 Credit Union. Note: Annual averages.

34. 2017 Economic Forecasts B.C. Indicators 2015 2016 2017 f
Employment, % change
1.2
3.2
2.0
Unemployment rate, %
6.2
6.0
5.5
Population, % change
0.9
1.3
1.4
Retail sales, % change
6.3*
7.0
Prime rate, %
2.70
5-yr mortgage rate, %
4.67
4.66
4.75
Source: Statistics Canada, C1CU. f = forecast, a = actual. *Oct.

35. 2017 Housing Forecasts B.C. Indicators 2015 2016 2017 f
Housing sales % change
22.0
9.5
-12.0
Housing starts, % change
11.9
32.0
-6.0
Average sale price, % change
12.0
8.6
-3.0
Lower Mainland HPI, % change
10.2
26.6
2.0
Private apt. rental vacancy rate, % , Oct.
1.2
1.3
1.0
Source: CREA, CMHC, C1CU. f = forecast, a = actual.

36. Thank you