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Peacock Op-ed: B.C.'s Comparatively Good Economic Performance Should Not Foster Complacency (Surrey Business News)

The provincial economy is in good shape, supported by gains in parts of the export sector, impressive job growth, robust consumer spending and a booming housing market. In fact, B.C. is positioned to outpace all provinces in economic growth this year, and perhaps in 2017 as well. While this is an enviable position to be in, it should not breed complacency. Policy makers need to pay attention to competitiveness and step up efforts to make B.C. an attractive place for companies to invest and create well-paying jobs.

One reason for staying cautious is because B.C.’s ascent to the top of the provincial growth rankings is partly explained by the fact that Canada’s previous growth stars – Alberta, Saskatchewan and Newfoundland – have all been hit hard by the collapse in oil prices. Although B.C. is set to lead the country, we will do so with a very typical or average rate of economic growth compared to what the province has experienced over the past two decades.

Another consideration is the oversized role that strong housing market activity has played. A notable feature of the B.C. growth dynamic is that it is heavily tilted towards domestic activity – residential investment, real estate transactions, and consumer spending. Yes, the lower Canadian dollar is helping some of the province’s major export industries. But the hot housing sector and high levels of retail spending are much bigger factors driving economic growth. Home sales have been running at record levels. Strong demand for homes led to a big jump in new home construction, which is now running at the highest level since the early 1990s. And there is an abundance of spin-off businesses related to housing that are benefitting, including real estate sales, legal services, financing services, design and architectural services and so on. Notably, last year the “Offices of Real Estate Agents and Brokers” was one of the fastest growing industries in the province.

Then in addition to all the economic activity generated by the residential real estate sector, there is the wealth effect of surging home values, which has received little attention to date. Simply put, many economists believe there is a connection between rising household wealth and higher levels of consumer spending. When home prices rise, homeowners feel wealthier. Some homeowners extract equity to finance renovations, car buying, or other large purchases. Alternatively, some people may sell their homes, monetizing the price gains and then downsizing or moving to a lower cost jurisdiction. There is substantial evidence confirming the existence of a housing-related wealth effect. As one example, an earlier Bank of Canada study found that, on average, an additional dollar of wealth associated with higher home prices led to an additional 5.7 cents in household spending. Metro Vancouver residents have enjoyed over $100 billion in wealth gains thanks to escalating home values since 2013. Some of this is showing up in increased consumer outlays.

Growth in retail spending in B.C. has been running at elevated levels for a couple of years. More closely linked to housing, spending at building supply stores has seen annual gains in excess of 20%. Furniture stores have also posted double-digit sales increases for two years in a row. And sales of new automobiles have posted some of the strongest gains in more than a decade and a half.

So although B.C.’s economy is in good shape, in part this reflects an unsustainable housing boom. Policymakers need to focus on improving B.C.’s competiveness and growing the economy beyond its consumption and housing related components, via a better performance in the areas of business investment and exports. Policymakers should also be aware of the distorting impact of a sizzling housing sector. A robust housing market and the related employment and economic activity is good news in the short-term. But housing markets are cyclical. Furthermore, the province has now imposed a 15% tax on home purchases by foreign buyers. Judging from the number of real estate transactions that have been cancelled since the tax was implemented, the additional 15% transfer tax on foreign buyers will likely dampen home sales and take some of the steam out of the Metro Vancouver housing market.

Ken Peacock is Chief Economist and Vice President of the Business Council of British Columbia.

As published in Surrey Business News.