| || ||Robin Wiebe |
Senior Economist, Centre for Municipal Studies
The ebbs and flows of Chinese commerce have strongly affected housing markets around the Pacific Rim, including Vancouver’s. Although discussion of this relationship has focused on its recent behaviour, the bond stretches back much further. Moreover, casual observation and statistical tests both hint that China’s influence rivals that of three key domestic factors: Vancouver’s population growth, changes in its employment and Canadian mortgage interest rates. The chief implication is that observers need to pay attention to China’s economic health when assessing the outlook for Vancouver’s housing market.
Despite a decent local economy and favourable demographics, Vancouver’s housing market was relatively sluggish during the 1990s. Employment increased an average of 2.3 per cent annually and the population advanced 2.5 per cent per year, both solid figures. Nonetheless, the average resale price rose less than three per cent annually, ending the decade up 24 per cent. The market performed much better during the following ten years. Annual sales of existing homes exceeded 36,000 units, a previously-unheard-of volume, for five straight years between 2003 and 2007. The average transaction price doubled between 2000 and 2009 with a 20 per cent spurt in 2006 alone.
One obvious contributor to the market’s improvement was the big drop in mortgage interest costs. The posted rate for a five-year term mortgage declined from 13.2 per cent in 1990 to below 7 per cent in 1998, before edging up in 1999. Rates were generally lower and continued easing during the 2000’s. The five-year mortgage rate fell to an average of 5.1 per cent by 2009. Cheap financing clearly helped people buy homes.
But, Vancouver’s housing market performance can also be viewed through an Asian prism. The 1990’s started poorly for China, whose economy grew only 3.8 per cent in 1990, following a tepid 4.1 per cent advance in 1989. This represented a big shock since annual expansion had averaged roughly 12 per cent in the prior 5 years. The 1990’s also ended on a weak note, with an annual GDP growth of 7.8 per cent in 1998 and 7.6 per cent in 1999. The 2000’s were significantly better: annual Chinese GDP growth never dipped below 8 per cent.
Now the pendulum has swung again. Despite slightly faster growth in employment (2.1 per cent on average in 2010-12) and population (1.6 per cent), along with even lower mortgage interest rates, Vancouver resale volumes fell 23 per cent in 2012 and the average resale price dropped 6.4 per cent. One clue to this tepid performance is that China’s real GDP growth fell to a 12-year low, estimated at only 7.8 per cent, in 2012.
Statistical analysis confirms the importance of China’s economic health to Vancouver’s housing markets. Standard tests find significant correlations between the country’s real GDP growth and three important market yardsticks: existing home sales, existing home price growth and total housing starts. By contrast, local employment growth is significantly correlated to none of these and the five-year rate related to only the resale variables. This could mean that a substantial proportion of Vancouver real estate purchasers do not need local jobs to buy any home (new or existing) and that many do not need a mortgage to buy a new home. On the other hand, better economic health in China gives its residents wealth to spend on Vancouver housing.
This analysis suggests that Vancouver’s housing markets would perhaps welcome a pickup in Chinese GDP growth more than a rise in local employment and roughly as much as lower Canadian interest rates. If the Chinese economy is indeed improving, this could help rekindle both new and resale demand in the lower mainland.
Listen to Robin's interview about this blog.