The British Columbia government has gone out of its way lately to portray itself as having learned from its neighbour Alberta's hard economic lessons – specifically, the dangers of getting too comfortable with a booming sector that could be prone to an ugly bust. It's high time, then, that it take a hard look at its real estate sector.
Tuesday's B.C. budget paints a generally rosy picture: The government has balanced the books for three successive years and forecasts small surpluses for the next several years to come, fuelled by perhaps the strongest economy in the country. The budget projects real growth (i.e. after inflation) of 2.4 per cent in 2016 – which, prudently, is toward the low end of private sector forecasts. Nevertheless, it should put B.C. at the top of the provincial tables this year.
In his budget speech to the provincial legislature in Victoria, Finance Minister Mike de Jong boasted that the province has "diversified our industrial output so that B.C.'s economy wouldn't be too reliant on any single sector."
But the same budget also took steps to address the elephant in the room: B.C.'s runaway housing market. The measures introduced by the government were pitched as tackling the housing affordability issue in the province, but they also speak to perhaps the biggest risk hanging over this happy B.C. economic story. The province's growth has depended heavily on the real estate boom, and a bursting of the housing bubble would change its economic fortunes pretty quickly.
In 2014, British Columbia's real estate industry – the combination of construction and real estate services (sales, management, rental and leasing) – accounted for nearly one-quarter of the province's gross domestic product, up from 18 per cent in 2000. (In Alberta, the industry's economic share was just 14 per cent in 2014.) Real estate and construction are the only major industry segments whose share of the B.C. economy have grown appreciably in the past decade. And most of that is in the residential sector.
Statscan doesn't yet have 2015 GDP data available on the provincial level, but the continued growth pace in the residential real estate sector (B.C. housing starts were up nearly 11 per cent, sales were up 15 per cent, average prices rose 12 per cent) indicates that the sector continued to be a key source of GDP strength last year.
The wealth generated from those surging housing values spawns consumer spending and business investment, and that, too, is evident in B.C.'s economic growth. Real business fixed capital formation surged 5.4 per cent in 2014; the rest of the country posted a decline of 0.3 per cent. (The bulk of B.C.'s business investment growth came in the form of construction of residential structures, up 7.6 per cent.) Real household consumption in B.C. rose 3.5 per cent in 2014, versus 2.4 per cent for the rest of Canada.
For the first 11 months of 2015 (the latest data available from Statistics Canada), the province's retail sales were up 6.8 per cent from the same period a year earlier; the rest of the country was up just 1.5 per cent.
But as Alberta has demonstrated, spending and investment can evaporate in a hurry if the boom goes bust. B.C. might not be as beholden to its real estate as Alberta is to its oil, but its other supposed growth engines haven't been giving off a lot of sparks. Exports rose just 0.3 per cent in 2015. Manufacturing sales were up 1.7 per cent. The crucial sources of growth have been real estate and consumer spending – and the latter is strongly influenced by the former.
Its budget decision to increase land transfer taxes at the high end of the market may cool speculative real estate investing and property flipping somewhat. But it's notable that Toronto has higher land transfer taxes, and they don't appear to have put any appreciable chill on that market's boom.
The province's plan to require greater disclosure on foreign ownership will give it a greater understanding of the degree to which foreign speculation has been driving the province's real estate boom, especially in the red-hot Vancouver area. It could also serve as a warning shot to foreign investors that it is a precursor to new restrictions on foreign ownership, and that might serve to moderate the flow of foreign money into the B.C. real estate market and moderate the sector to something more sustainable.
Fortunately for British Columbia, it has some factors in its favour that continue to lend support to its real estate market, and provide good reason to think the market could, indeed, achieve the elusive soft landing that policy makers (both within and outside the province) are hoping for. First, the geographical limitations of the critical Vancouver market (with sea and mountains severely restricting the available land) serve to keep a permanent, natural limit on real estate supply. Second, increasing migration into the province – as workers from elsewhere in Canada, especially Alberta, seek its greener pastures – should be a key driver of demand. And continued rock-bottom mortgage rates, which look unlikely to rise substantially over the next two years, will continue to encourage both buyers and builders.
B.C. will need some combination of those factors to remain in place if it's going to achieve the strong economic growth numbers projected in Tuesday's budget. The economy has become too dependent on real estate to expect to thrive without it.