Part one of two
Homeowners in B.C. have faced a mixed bag of opportunities and challenges over the past half-decade. On the positive side, near record-low interest rates have helped some homeowners reduce their mortgage costs, giving them the option to either spend more, increase their savings or pay down debt.
But the correction in B.C. housing prices and the slowdown in sales over the past few years have reduced, or even erased, the home equity a mortgaged homeowner might have had when they bought their property.
The impact of falling home prices in B.C. has been a significant contributor to B.C.’s low inflation rate. According to Statistics Canada, the cost of owned accommodation is one of the largest components of the overall consumer price index. It accounts for about 16% of the overall measurement of price changes in the economy.
According to the data, the cost of owning a home has steadily dropped since September 2011. While falling 2.5% in Metro Vancouver, the price declines have been more pronounced in other B.C. markets, leading to a provincewide average decrease of 3.5% in nearly two and a half years. With mortgage rates remaining low for this period of time, much of the fall has come from the dip in housing prices, particularly for condominiums and semi-detached homes.
But the risk of low inflation, or even steady price declines in other parts of the B.C. economy, poses additional risks for homeowners, especially if they’re also carrying high levels of consumer debt.
Doug Porter, chief economist for BMO Capital Markets, noted that a consistent decline in overall prices ultimately means an economy is “freezing up” as goods producers and service providers must cut prices to attract customers. To survive, businesses must cut prices, lay off staff or cut wages to stay competitive. For workers, that can make it difficult to service a once-manageable household debt load.
According to Jock Finlayson, chief policy officer at the Business Council of BC, “Deflation is the worst of all possible worlds for someone who is carrying a significant debt burden, because it means the real economic burden grows.”
Fortunately for the B.C. economy, the likelihood of continued falling prices remains low in B.C. More on this next week.
