Housing outlook steady
Residential construction represents the single biggest segment of investment in Canada, and B.C. is no exception. Regardless of where they work, and the industries that employ them, people need places to live.
Small wonder, then, that housing is a much-discussed benchmark for B.C.’s economic fortunes.
With the Canada Mortgage and Housing Corp. (CMHC) projecting 28,300 housing starts for B.C. in 2015, steady with 2014 – stronger than expectations a year ago – the benchmark is decked with roses.
The outlook for Metro Vancouver is similar, with CMHC forecasting 18,700 starts in 2015, down from a forecast of 18,900 for 2014, but both projections 300 units ahead of forecasts a year ago.
Better yet, those projections put the five-year tally of starts at 93,190 units – a figure not seen since 1996.
And for those who would cry “bubble,” a recent report from the Urban Futures Institute indicates that housing demand is growing faster than the population.
The reason is because “household maintainers” (heads of households) tend to be older, in a growing population skewed toward older individuals, and these older households are maintained longer.
“High maintainer rates among the rapidly growing older age groups will see total housing occupancy demand outpace population growth over this period,” the report states. “Forty-three per cent growth in total population would generate a 53% increase in total housing occupancy demand in the region between 2013 and 2041.”
“You have the fastest population growth in the age groups where the household maintainer rates are the highest,” explained Ryan Berlin of Urban Futures.
Moreover, the older maintainers have often built up sufficient equity; as Bob Rennie told the Urban Development Institute last May, Metro Vancouver residents aged 55 years and older are sitting on $163.4 billion worth of clear-title real estate and aren’t afraid to channel the equity into property purchases by younger relatives seeking an entry to the market.
The rate stuff
When will rates rise? It’s been a constant question at real estate panels, and the latest outlooks suggest increases won’t begin until mid- to late 2015.
That’s relatively good news for homebuyers, for whom a rise in mortgage rates would make housing less affordable.
“The combination of gradually increasing interest rates and higher home prices would work to reverse the improvement in housing affordability that took place in the past year and weigh more heavily on homebuyer demand in Canada,” opined the latest housing affordability report from RBC Economics Research, which expects a mid-year hike in rates.
A delay in interest rate hikes also benefits commercial borrowers and lies in the turns of the bond market.
This past fall, Amar Nijjar, a vice-president with Jones Lang LaSalle responsible for its Toronto-based debt capital markets team, expected higher mortgage rates in 2015 thanks to rising bond yields. While commercial lending had become more competitive, with financiers accepting a measure of compression in the spread between bond rates (what capital costs them) and interest rates (what it costs the rest of us), bond rates were marching north faster than the spread compressed. Steady demand for financing would, in turn, come at a higher cost.
But recent roiling of oil and equity markets has reduced bond yields, creating what Nijjar called “a unique window of opportunity” and potentially delaying interest rate hikes.
Spreads are now between 150 and 200 basis points above Government of Canada bond rates, on par with where things stood at mid-year and half what spreads were at the height of the 2008-09 financial crisis.
“Borrowers can now lock in five-year debt at as low as sub-3% and 10-year debt at sub-3.5%,” Nijjar said.
Building momentum
With approximately 3.4 million square feet of office space under construction in Metro Vancouver, and older industrial sites needing makeovers or redevelopment to suit current needs, one focus for commercial and industrial property sectors in the year ahead will be construction prospects.
With demand for trades in Alberta likely to take a hit from a slump in oil prices as development activity slows, B.C. employers won’t find themselves over a barrel when it comes to hiring workers.
This is good news for a construction sector that has seen steady activity since June 2013, with the B.C. Major Projects Inventory logging an average of 469 proposed projects over the period and steady volumes of projects under construction and on hold. The stability looks set to continue into 2015, with Central 1 Credit Union forecasting construction-sector employment to rise 4.8% in 2015 to 195,300 people, reversing a loss of 3.1% this year. •
