Reminder: Economy and housing move in cycles

Interesting article from Cameron below......

 

The economy seldom gets better than what we’ve seen in these last few years. While you could argue that one sector or another isn’t firing on all cylinders, headline growth has been nothing short of phenomenal. The BC economy expanded by three per cent or more in each of the last four years, resulting in strong job growth, low unemployment and more recently, rising wages.

Indeed, more than 87,000 jobs were added to the economy last year, an increase of 3.7 per cent. This is nearly double the national rate of 1.9 per cent, while the unemployment rate fell to 5.1 per cent, its lowest level since 2008. As the economy nears full employment, wage growth is also beginning to push higher. The average weekly wage in the province increased at an annual pace of four per cent over the last four months. Households are feeling confident and spending their hard-earned dollars. Retail sales in Metro Vancouver climbed by an impressive 10.5 per cent year-to-date in November, compared to the same period in 2016. All great news.

However, I’m reminded of the standard disclaimer on mutual funds: Past performance is no guarantee of future results. This applies equally to the economy and the housing market. Most economists expect BC economic growth to slow over the next few years, ending up closer to two per cent than three per cent. Employment growth will also slow as a low unemployment rate limits the pool of available workers, while consumer spending simply can’t continue to grow at its current pace in a rising interest rate environment. And then there’s the housing market.

Apartment prices can’t sustain a 30 per cent annual growth rate for long. The horrendous lack of supply isn’t a new norm, but rather a temporary phenomenon. It takes nearly two years to build an apartment project in Metro Vancouver from the time the parking garage is complete, three years in downtown Vancouver. Add to that the time it takes to plan, secure financing, get the necessary permits and approvals and then build the foundation and parking structure, and the timeline to completion stretches even further. Today’s newly completed units have spent several years in the production process and are a response to demand conditions existing at the time the projects were conceived.

This lag between conception and completion has led to rapidly rising prices in the face of surging demand. However, home builders are catching up. There are now a record 42,000 homes under construction in Metro Vancouver. This is 50 per cent above the previous peak recorded in 2008. Over the next several quarters, a marked increase in new home completions will provide much needed supply and help moderate growth in home prices.

It’s prudent to consider the cyclical nature of economies and housing markets when looking toward the future. As the adage says: History may not repeat itself, but it often rhymes. 

 

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