Transition Year Expected for BC Housing Market: BCREA 2013 Second Quarter Housing Forecast
Multiple Listing Service® (MLS®) residential sales in British Columbia are forecast to edge up 1.9 per cent to 68,900 units this year. While home sales are expected to trend higher by year-end, relatively weak sales activity during the first quarter will limit the year-end tally to only a modest gain. Stricter credit regulation introduced last summer on high-ratio mortgages eroded the purchasing power of
many first-time and early move-up homebuyers. Unit sales per capita adjusted for inflation hovered at a cyclical low for the last three quarters, suggesting some pent-up demand may be latent in the market.
2013 is shaping up to be a transition year in both the economy and housing market. Slower economic growth over the last two quarters is expected to give way to stronger economic performance beginning in the second half of the year. Persistently low mortgage interest rates are expected to continue to underpin housing affordability and demand. MLS® residential sales are forecast to increase a further 6.5 per cent to 73,400 units in 2014. Home sales are expected to remain below the 15-year average of 79,000 units.
Despite a relatively low level of consumer demand, market conditions in many BC markets have improved. Home prices in Vancouver, for example, stabilized during the first quarter as inventory kept pace with demand. Home prices are expected to remain relatively stable over the next two years. The average annual MLS® residential price in the province is forecast to remain unchanged this year, albeit up by 0.2 per cent to $515,800, before edging up 1.7 per cent to $524,500 in 2014.
Strong new construction activity in 2012 is expected to give way to fewer housing starts this year, as a result of moderate demand, larger inventories and slower household growth. Total BC housing starts are forecast to decline 7.5 per cent to 26,100 units this year. Stronger economic fundamentals and some drawing down of inventory will contribute to a 4 per cent increase to 27,100 units in 2014.
We view 2013 as a transition year for the BC economy in which slow growth through the early months will gradually give way to a strong recovery beginning in the second half of the year.
Modest activity in the provincial housing market, particularly in larger market areas, may dampen residential construction investment while consumer spending will continue to be restrained as households deleverage. Exports may get a slight lift from a significant recovery in the US housing market, but the overall US economy is expected to struggle with slow growth through at least the first half of 2013 resulting from sharp cuts in government spending.
On the export front, growth in the Canadian economy is expected to be sluggish this year which may hinder interprovincial trade growth. Moreover, while BC’s international export markets have diversified towards faster growing developing economies, the BC economy remains largely anchored to slower growing developed economies. Growth in BC’s international exports will be limited by lacklustre economies in the US and Japan along with ongoing weakness in the Eurozone. As a result, the BC economy is expected to post its second consecutive year of relatively slow economic growth.
However, there are many reasons to be optimistic about the second half of 2013 and beyond. The US economy, the largest BC export market, is forecast to turn the corner in late 2013 with growth accelerating above 3 per cent in 2014.
In addition, home prices have started to rise and new home construction has turned sharply upward in the US housing sector following several years of depressed activity. Driven by a strong recovery in the US homebuilding sector, BC’s forestry sector should continue to rebound in 2013.
Wood product exports to the US rose 25 per cent last year, and should continue to expand this year as US home construction more closely matches household growth. Meanwhile, a struggling global economy is expected to give way to a more robust pace of growth in 2014, which will buoy BC’s international exports.
The provincial labour market is also strengthening. The unemployment rate has fallen to its lowest level in four years and full-time employment should eclipse its pre-recession peak this year. A much healthier labour market should provide a boost to consumer spending
and economic growth next year, pushing economic growth to 2.6 per cent.
Homebuilders are likely to scale back new construction in 2013, breaking ground on 26,100 new units, a 7.5 per cent decline from 2012. New
home construction has kept relative pace with household formation in the past few years, but a dip in population growth in 2012 will slow
household formation. Population growth has been slower in recent years as a result of a net outflow of interprovincial migrants, along with a decrease in international immigration. Although the BC labour market strengthened in 2012, the province still posted the largest net outflow of interprovincial migration since 2001 as many workers were drawn to employment opportunities in Alberta, among other provinces.
Besides a slower rate of household formation, many market areas are dealing with elevated levels of unsold inventory and a large number of units under construction that will hit the market this year. Driven by a significant accumulation of unsold new homes in the Vancouver CMA, new home inventory in BC is currently sitting at its highest level in a decade.
Given moderate consumer demand in the overall housing market, builders and developers are expected to curtail new supply over the next year. Improving economic conditions during the second half of 2013, will provide a boost to new home construction in 2014. We forecast housing starts will rise about 4 per cent next year to 27,100 units.
MORTGAGE RATE FORECAST
Although there have been a number of ups and downs in the Canadian mortgage market over the past 12 months, there was very little movement in posted mortgage rates. In fact, volatility in mortgage rates, as measured by a rolling 52-week standard deviation of posted five-year rates, is at a multi-decade low. With growth and inflation remaining relatively subdued and the Bank of Canada on the sidelines for all of 2013, the unprecedented low volatility in Canadian mortgage rates is likely to continue for much of the year.
While posted mortgage rates remain relatively constant, some chartered banks have recently offered below 3 per cent five-year fixed rates
to help spur springtime demand following a nationwide slowdown in home sales activity. We expect that, disapproval from Ottawa notwithstanding, lenders will continue to offer steeply discounted rates to their most creditworthy borrowers while leaving their official
posted rates constant. We are forecasting that the five-year fixed rate will remain in a range of 5.14 to 5.34 per cent, and the one-year rate will stay at 3 per cent in 2013.
As for variable rate mortgages, current economic weakness and very low inflation have pushed the Bank of Canada away from its previous bias towards rate tightening. Indeed, given the current economic outlook, an interest rate cut would be likely if the Bank had not spent the past year loudly exhorting Canadian consumers to pare back household debt. As it stands, the Bank of Canada is likely to remain on the
sidelines until at least mid-2014.
The primary risk to our outlook is that growth in the global and Canadian economy will outperform current expectations. Faster growth could cause bond yields to quickly rise off of their current near-historic lows, thereby forcing banks to re-price their mortgage offerings.
REAL ESTATE BOARD OF GREATER VANCOUVER
Consumer demand in the province’s largest market trended at a cyclical low during the first quarter. Tighter mortgage credit regulation introduced last summer had the predictable impact of squeezing some first-time and early move-up buyers out of the market. In addition, economic expansion slowed over the last few quarters, pulling back job growth and consumer confidence. In our view, 2013 is going to be a transition year both in the economy and the housing market as the present weakness gives way to stronger economic growth at home and abroad over the second half of this year and into 2014. In addition, after nine months of anemic unit sales, pent-up demand is likely latent in the market. MLS® residential sales are forecast to increase 4.5 per cent to 26,600 units in 2013, and rise by 10.5 per cent to 29,400 units in 2014.
Market conditions in Vancouver improved over the first quarter, with the ratio of sales-to-active listings trending from 9.7 per cent in January to 14.4 per cent in March. In addition, new residential listings were down 13 per cent during the first quarter compared to the same period last year. Balanced conditions, in spite of a cyclical low demand, is strong evidence that Vancouver households are in relatively strong financial shape and that many potential home sellers have been taking a wait-and-see approach alongside homebuyers. The average MLS® residential price is forecast to remain virtually unchanged through 2014.
New home construction in the Vancouver CMA increased 6.6 per cent in 2012 to 19,027 total units, the highest level of building activity since 2008. With consumer demand not rising to meet the supply, some imbalance between supply and demand has led to growing inventories of complete and unoccupied units. An elevated inventory of new homes, combined with tempered consumer demand, will likely lead to some projects being pushed back. As a result, we forecast a decline of 7.3 per cent in multiple starts to 14,500 units this year, with single family units rising modestly to 3,600 units.
If you have any real estate questions or if you are thinking of buying or selling your home, please contact James Louie Chung, Metro Vancouver REALTOR® – Real Estate Agent at [email protected]
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