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Finlayson & Peacock Op-Ed: B.C.’s economic buffer in the energy downturn: real estate (Business in Vancouver)

BC’s economy looks to be in decent shape. The province led the country in economic growth last year and will likely do so again in 2016. In the U.S., just six of the 50 states exceeded B.C.’s 3% GDP growth rate in 2015.

So why is our province faring so well? One reason is that we don’t produce much oil and so have avoided the worst fallout from the worldwide oil price collapse. The weaker Canadian dollar has also helped. Non-resource manufacturing, high technology goods and services, agricultural products, tourism, and film and television production have all enjoyed hefty gains, in part because a feebler Canadian dollar makes them more competitive in the North American market. But other provinces also benefit from a cheaper currency.

In fact, much of B.C.’s recent success reflects the unusual strength of the domestic economy. And supported by record low mortgage rates and steady inflows of migrants and wealth from outside our borders, the residential housing complex has had a starring role in B.C.’s robust domestic economy, via new home construction, high levels of renovation spending and escalating home prices.

Construction of new homes means additional work for architects and engineers, construction workers, interior designers and landscapers. There is also spinoff business: apart from real estate fees, every housing transaction creates incremental demand for legal, home inspection and financing services, along with more work for movers, truck rental companies and so on. Home sales often prompt the purchase of new appliances, furniture, carpets and other household items. The Canadian Real Estate Association estimates that every MLS home transaction in B.C. leads to $62,000 in extra expenditures. Those who derive their incomes from the real estate and home-building industries are also likely to keep their wallets open when times are good.

There is also a wealth effect. A connection exists between rising household wealth and higher levels of consumer spending. When home prices surge, homeowners feel wealthier. Some may extract equity to finance renovations, car buying or other large purchases. Others may sell their homes, pocketing the gains and downsizing or moving to lower cost jurisdictions. There is substantial research attesting to the impact of housing-related wealth effects. A Bank of Canada study found that, on average, $1 of extra wealth from higher home prices led to an additional $0.057 in consumer spending. Metro Vancouver residents have enjoyed more than $100 billion in added wealth thanks to soaring home values in the last three years. Some of this surely has been deployed in the local economy.

In particular, we are convinced the busy residential housing market and the related wealth effects have made a sizable contribution to the growth of retail spending in B.C. since 2013. This is especially so in retail segments closely linked to housing, such as building supply stores, which have seen annual sales climb by more than 20%. Furniture stores have also been doing a brisk business. Meanwhile, sales of new automobiles have posted some of the strongest numbers in two decades.

All in all, we estimate that between 35% and 40% of all economic growth in the province over the last two years is traceable to the direct and indirect impacts of a hot housing sector.

History teaches that a surging housing market and the associated lifts to employment and spinoff business won’t persist indefinitely. Housing markets remain cyclical.

Furthermore, the province has injected uncertainty into the market by imposing a 15% tax on foreign buyers of both new and existing homes in Metro Vancouver. While it is too early to evaluate the tax’s impact, real estate sales do seem to have been affected: the Greater Vancouver Real Estate Board reports a 26% fall in August home sales compared with a year earlier. That decrease cannot be attributed to the tax alone, however, because sales were slowing in advance of it coming into effect.

Nonetheless, analysts will be closely monitoring the housing market to ascertain whether the new tax will significantly dampen activity in this important sector of the B.C. economy. If it does, watch for economic forecasts to be adjusted accordingly.

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.

As published in Business in Vancouver.