According to our latest Central 1 Credit Union forecast, British Columbia's housing market is expected to post stronger sales and rising prices in the years leading up to 2017 but remain only a modest source of growth for the provincial economy.
Growth in the broader economy and labour market, a turnaround in recreational housing demand and population gains will underpin stronger housing demand, but gains will be partially offset by higher borrowing costs and the tighter mortgage insurance policies implemented in recent years.
Resale housing transactions are forecast to shift higher after a disappointing few years but will remain subdued. Growth in the median price is forecast to average slightly less than 3% per year, rising to $429,000 in 2017. Builders are expected to slowly ramp up new home construction but remain cautious due to tempered demand and elevated inventories.
Regional performance will vary, with the strongest gains occurring in the Lower Mainland and northern B.C. markets. Interior markets and island markets, which are still recovering from the recessionary decline in housing demand and excess supply, will record relatively weaker pricing conditions.
In past cycles, the housing sector has led economic growth, but a prolonged period of ultra-low interest rates points to a housing market performance that will lag behind broader economic and employment conditions. Following modest expansion in line with the national economy of about 2% in 2013, B.C.'s economic growth remains tempered at less than 2.5% this year. Provincial economic growth is forecast to accelerate to an average of more than 3.5% from 2015 to 2017. Hiring growth will shift to near 2% by 2016, which will underpin housing demand and population gains.
Population growth is a key driver for net new housing demand, but gains are expected to lag behind the economy at about 1% through 2015 before rising in the later years. Net migration will increase this year but remain at a subdued pace near 33,000 people, before moving above 40,000 people by 2016.
The flow of landed immigrants to B.C. has decelerated since 2010, due to weakness in both the local and global economies. On the interprovincial front, B.C. has been on the losing end over the past two years, with more residents relocating to other provinces – Alberta in particular.
Although population expansion is low, net household formation is expected to climb to above 30,000 per year, reflecting an aging population and smaller household size. Population gains will be led by those in the 25-to-34 and 55-plus age groups.
Rising mortgage rates are expected to lean against the housing market over the forecast horizon but will be less of a drag than previously anticipated. In fact, the housing market has been boosted by lower borrowing costs this year. Buyers have seen the posted five-year rate tumble to a record-low 4.79%, a decline of 45 basis points from year-end. Contract rates are much lower, with some lenders offering five-year rates below 3%. Mortgage rate cuts reflect a combination of lower funding costs in bond markets and a bid by financial institutions to increase market share in a soft housing market.
Lower borrowing costs will spur home sales through the summer as prospective buyers take advantage of improved affordability, but we do not expect these rates to last beyond the fall. The posted five-year rate is forecast to stay below 5% through 2014, with a trend to about 5.5% by the end of 2015. An average of 5.75% is forecast for 2017.
Resale housing market
While the trend has perked up and year-over-year gains are strong, absolute sales levels remain a disappointment. Provincial sales held below the 10-year average – a level already weighed down by five years of post-recession weakness. Sales have rebounded off the recent trough but remain near the lowest levels since the late 1990s when adjusted for the growing population. Although record-low mortgage rates will boost activity through the summer months, tempered demand is expected to persist.
Existing home sale trends were uneventful in early 2014 as the decelerating pattern going back to late-2013 persisted. However, mortgage rate cuts have proven to be a powerful catalyst in arresting the slide, incenting more buyers to pull the trigger. Sales through the Multiple Listing Service have shifted higher since the end of the first quarter, led by larger urban areas.
Total resale transactions in the province are forecast to reach about 75,000 units this year, led by a gain in the Greater Vancouver region. While this is a 13% increase from a year ago, it compares to a period of exceptionally low sales in both 2012 and 2013 near 65,000 units. From 2000 to 2010, annual sales averaged above 85,000 units.
