Growth, Rates, and Housing: Will B.C. s economy continue to outpace? Vancouver, BC May 1, 2018 Bryan Yu, Deputy Chief Economist

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1 Growth, Rates, and Housing: Will B.C. s economy continue to outpace? Vancouver, BC May 1, 218 Bryan Yu, Deputy Chief Economist

2 Topics Global Economic State Canadian Outlook and Interest Rate Trends B.C. Economy Housing Market

3 Global economic growth modest, led by emerging markets Annual Change in Gross Domestic Product (%) 1 World Advanced Emerging and Developing Source: IMF. Latest: 217

4 Mostly synchronous upswings; Europe leads Markit Purchasing Managers Indexes = no change from prior month 1 8 Euro area 6 US 4 2 Japan China Source: Bloomberg. Note: Seasonally adjusted. Latest: Feb. 218

5 Declining yields; recent increase Government 1-Year Bond Yields: Selected Economies Per cent change Latest Source: IMF, Bank of Canada, FRED St. Louis Fed. Note: Annual averages. Latest: Week of Mar. 9, 218 U.S. Canada Germany Japan

6 Domestic demand; mainstay of U.S. economy U.S. Economic Growth Per cent change at annual rate Q1-14 Q1-15 Q1-16 Q1-17 Source: U.S. Bureau of Economic Analysis. Latest: Q4-17 Real Final Sales to Domestic Purchasers Real GDP

7 Declining unemployment rate; wages rising faster Unemployment Rate: U.S. Per cent of labour force Hourly Median Wage Rate: U.S. Per cent change, y/y Jan-14 Jan-15 Jan-16 Jan-17 Jan Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: U.S. BLS. Note: Seasonally adjusted. Latest: Feb-18 Source: FRB Atlanta. Latest: Jan-18

8 Fed rate increases: 3 in 218; 3 in 219 U.S. 1y T-Bond Yield and Fed Funds Rate Per cent Forecast Dec- 15 Jun- 16 Dec- 16 Jun- 17 Dec- 17 Jun- 18 Dec- 18 Jun- 19 Dec- 19 Jun- 2 Dec- 2 Source: U.S. Federal Reserve, WSJ Feb. 218 forecast. Note: Actuals are monthly averages. F = Forecast 1-y Bond Fed funds 1-y Bond F Fed funds F

9 Canada growth surge from oil-recession rebound to slow Canada Economic Growth Per cent change in real GDP Source: Statistics Canada, Central 1 Credit Union.. Actual Forecast

10 Large improvement in 217 Employment: Canada Persons - millions Unemployment Rate: Canada Per cent of labour force Source: Statistics Canada. Note: Annual averages

11 Economy at full capacity Actual and Potential GDP: Canada Chained 27 dollars trillions Chained 27 dollars - billions Q1-7 Q1-9 Q1-11 Q1-13 Q1-15 Q1-17 Source: Statistics Canada, Bank of Canada. Latest: Q Output gap (right) Real GDP Potential GDP

12 Higher interest rates ahead Bank of Canada Target and 1y GoC Bond Yield Per cent Forecast Goc 1y Target GoC 1y Target Q1 24 Q1 27 Q1 21 Q1 213 Q1 216 Q1-219 Source: Bank of Canada, Central 1 Credit Union. Latest actual: Q Forecast Q1 218 to Q4 22.

13 Interest rates on the rise Government benchmark yields United States, % Canada, % US 1 yr US 2 Year CAN 1 Yr CAN 2 Year /1/14 12/17/14 12/2/15 11/16/16 11/1/17. 1/1/14 12/17/14 12/2/15 11/16/16 11/1/17 Source: Bloomberg, Central 1 Credit Union. Note: seasonally adjusted. Latest: March 23, 218

14 Mortgage growth slows Household Mortgage Financial Flow: Canada Dollars - billions Q1 199 Q Q1 2 Q1 25 Q1 21 Q1 215 Source: Statistics Canada. Note: seasonally adjusted. Latest: Q3 217

15 Debt at record highs Household Debt Ratios: Canada Per cent Q1 199 Q Q1 2 Q1 25 Q1 21 Q1 215 Source: Statistics Canada. Latest: Q3 217 Disposable income GDP

16 Households not over-levered Household Debt Leverage Ratios: Canada Per cent Q1 199 Q Q1 2 Q1 25 Q1 21 Q1 215 Source: Statistics Canada. Latest: Q3 217 Net worth Assets

17 CAD forecast to track near 8 cents Daily USD/CAD Outlook.6 1/1/14 12/24/14 12/16/15 12/7/16 11/29/ Source: Bloomberg, Central 1 Credit Union. Latest: 4/13/218

18 NAFTA Risks Round eight of negotiations in April; political time crunch looms Steel and Aluminum tariff exemptions expire May 1 st (A) Modernization (tweaks) or (B) U.S. Rebalancing (B)Contentious items rules of origin, dispute settlement, supply management, procurement, sunset clause Some movement on Rules of Origin for auto content is positive NO DEAL? Shift to WTO MFN tariffs: U.S.A. 3.5%, Canada 4.2%, Mexico 7.1% Canada-US Free Trade Agreement (CUSFTA) of 1989 returns Economic impact estimates on Canada: Real GDP -.5% to 223, employment -25k to -5k, investment -.9%, CPI -.3% Negative for autos, fossil fuels, petrochemicals, business services, metal products, M&E, food, and others Ontario, Alberta, Saskatchewan, New Brunswick

19 Other Trump effects China- U.S trade relations Global steel, aluminum, solar panels and washing machines Tariffs on $5B of Chinese goods as retribution for unfair technology practices Trump proposing another $1B China response of tariffs on $3 billion due to steel, $5B warning Deepening trade war could slow global trade and growth Geo-political North Korea, Syria

20 B.C. a key growth driver in recent years Average GDP Growth BC AB SK MB ON QC PEI NB NS NFLD Source: Statistics Canada, Central 1 Credit Union

21 British Columbia: Growth trends historically strong Real GDP and Employment Growth Per cent Real GDP Employment Source: Statistics Canada, Central 1 Credit Union. Note: 217 real GDP is estimate, Forecast.

22 Growth driven by southern B.C. markets Employment Growth (%) Unemployment Rate (%) North Coast & Nechako Northeast Cariboo Kootenay Thompson--Okanagan Vancouver Island and Coast Lower Mainland--Southwest British Columbia North Coast & Nechako 217 Northeast 216 Cariboo Kootenay Thompson--Okanagan Vancouver Island and Coast Lower Mainland--Southwest British Columbia Source: Statistics Canada, Central 1 Credit Union

23 Consumer driven growth in B.C. s Economy. GDP growth by Expenditure Per cent Source: Statistics Canada, Central 1 Credit Union. Note: 217 real GDP is estimate, Forecast. Real GDP Household consumption Residential Investment Government Expenditure Non-Res Investment

24 B.C. strongest amongst peers Employment Growth (%) British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Prince Edward Island Newfoundland and Canada Unemployment Rate (%) British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Prince Edward Island Newfoundland and Canada Source: Statistics Canada, Central 1 Credit Union

25 Hiring surges, labour market tightens up B.C. Labour Market Indicators (%) Indexed Employment, s.a. (s) B.C. Rest of Canada Employee Compensation Growth Emp Ch (L) Unemp Rate (R ) Source: Statistics Canada BC AB SK MB ON QC Atl

26 Retail sales exceptionally strong Retail Sales Growth (%) B.C. retail growth by segment Vancouver CMA Rest of BC Total Furn & Furnishing MV and Parts Gas Excl MV and Gas Source: Statistics Canada

27 Record housing starts Annual housing starts, Units (s) 5 BC Total Vancouver CMA Source: CMHC, Central 1 Credit Union Abbotsford- Mission Victoria Kelowna

28 Exports sectors show plenty of strength Int l Goods Exports $ (billions) Per Cent % change Dollar Exports Source: Statistics Canada

29 Non-residential investment weak in 217 but on rise Non-Residential Building Investment ($ millions) 1,7 1,6 1,5 1,4 1,3 1,2 1,1 Current $ 27 $ 1, Real Growth (%) Total nonresidential Institutional and governmental Commercial Industrial -2-1 Source: Statistics Canada, Central 1 Credit Union.

30 B.C. Forecast Summary Real GDP, % Change Nominal GDP, % Change Employment, % Change Unemployment Rate, (%) Population, % Change Housing Starts (s) Retail Sales, % Change Personal Income, % Change Net Operating Surplus Corporations, % Change Consumer Price Index, % Change

31 Growth profile transitions from consumer to investment led Per cent change year-over-year Household Consumption Government Res Inv Non-Res Inv Gov Investment Source: Statistics Canada, Central 1 Credit Union

32 Positive Drivers Consumer demand remains strong on employment growth cycle and rising wages, but growth to decelerate Housing investment crests, previous starts still supports growth Business investment gears off high growth economy, lifts productive capacity Capital investment to pick up on major public-sector projects, various major private projects Exports to rise on stronger external demand, but growth decelerates Negative Drivers Housing cycle to slow on B-2 measures, provincial tax regime, higher interest rates Commodity investment remains weak

33 B.C. labour market tightening, wage acceleration to continue Per Cent Average hourly wage growth, y/y Per Cent 1 8 Employment Growth Unemployment Rate Source: Statistics Canada, Central 1 Credit Union

34 Interprovincial migration to wane, international steady Persons (s) Net International Immigration Net Interprovincial Migration Net Non- Permanent Source: Statistics Canada, Central 1 Credit Union.

35 Housing market conditions have changed B-2 Measures having significant impact on early-218 sales Mortgages rates on the rise Provincial government speculation tax and other property taxes negatively impacting consumer sentiment Access to credit impeded, impacting top end of the market, pushing purchasers down the housing ladder Strong market conditions continue for apartment and townhomes Worsening relationship between BC and Alberta may impact recreation and retirement market

36 Lower Mainland home sales drop 3% in early 218 Lower Mainland MLS Sales Units 8, 7, 6, 5, 4, 3, 2, 1, Seasonally-Adjusted (L) Units 3,5 3, 2,5 2, 1,5 1, 5 Det TH Apt Source: CREA, Central 1 Credit Union. Note: seasonally adjusted. Latest: Feb-18

37 Detached home values creep higher, multi-units strong Vancouver CMA, Median Resale Price ($) ($s) 1,4 y/y % change 1,2 4 1, Detached Apartment Attached Source: Landcor, Central 1 Credit Union. Note: seasonally adjusted. Latest: Mar-18 5

38 Sales to Active Listings Ratio Housing Price Index, 214=1 8 Lower Mainland: Demand cools, multi-family market strong Per Cent Index 2 $656,2 7 Detached $78,3 Attached 18 6 Apartment $1,335, Detached Attached Apartment Source: CREA, Local Real Estate Boards, Central 1 Credit Union

Divergence in cycle Detached Market 6 Apartment Market 5 5

3 4 5 6 7 8 1 2 3 4 5 Sales-to-Active Listings Source:

39 Divergence in cycle Detached Market 6 Apartment Market annualized % change annualized % change Sales-to-Active Listings Source: Landcor, REBs, Central 1 Credit Union. Sales-to-Active Listings

40 New Listings Inventory still low, strong economy limits upward momentum Active Listings 5, 4,5 4, 3,5 3, 2,5 2, 1,5 Detached 1, 5 Apartment , 12, 1, 8, 6, 4, 2, Detached Apartment Source: CREA, Local Real Estate Boards, Central 1 Credit Union

41 Speculation climbs with price momentum in apartment sector Vancouver CMA Holding Periods, (% of resales transactions) 7% 6% 5% Apartment Condos less than 1-year less than 2-years 7% 6% 5% Detached Units less than 1-year less than 2-years 4% 4% 3% 3% 2% 2% 1% 1% % % Source: CREA, Central 1 Credit Union. Note: seasonally adjusted. Latest: March

42 New home inventory similar trend, but lots in the pipeline New home inventory Units under construction 6, 5, 4, 3, 2, 1, , 4, 35, 3, 25, 2, 15, 1, 5, Source: CREA, Local Real Estate Boards, Central 1 Credit Union

43 Land base highly constrained, density drives land prices Land Area, Square kilometres 7, 6, 5, 4, 3, 2, 1, Calgary Toronto Victoria Vancouver Densification reflects size of Metro Vancouver land base which has not changed in 35 years Population growth is about 4k per year, which will continue to put upside on the land base The region will build up not out. Little opportunity to build outwards U.S. constraints Southern expansions, North is constrained by mountains, west by the oceans, leaving on the east Adding to this is an agricultural land reserve which makes up 2% of the land base Source: Statistics Canada, Central 1 Credit Union

44 ALR makes up 2% of the land base in Greater Vancouver Source: Metro Vancouver, Central 1 Credit Union.

45 Metro Vancouver land utilization to increase Persons per square km. 1,2. 1, Source: Statistics Canada, BC Stats forecast, C1CU. Latest actual : 211. Housing pressures will not alleviate as demand rises Higher density housing required, cities need to rezone multi-family Families looking for the white picket fence will flow east Improved transit is necessary for the region More housing availability is key

46 Outlook Indicator f 219f Lower Mainland Southwest Development Region Employment Growth (% ch.) Unemployment Rate (%) Lower Mainland Southwest Development Region Resale Transactions (Units) 57,873 64,527 58,245 54,8 54, % change Median Price ($) 54, 6, 64, 665, 687, % change

47 Questions? Bryan Yu Deputy Chief Economist

48 New home inventory similar trend, but lots in the pipeline Apartment completions Units under construction 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 2Q1 212Q1 45, 4, 35, 3, 25, 2, 15, 1, 5, Source: CREA, Local Real Estate Boards, Central 1 Credit Union

49 Detached homes and increasingly rare commodity Units (s 3, Per Cent 25, 2, 15, 1, 5, Total Vancouver CMA Housing Starts (L) Single-Detached Share (R ) Densification is the key trend for Vancouver CMA Affordability challenges is due largely to constrained geography, shifting market to apartment and townhome units Only 2% of new home construction is detached product, over time, scarcity will intensify Municipalities are focused on building out multi-family supply Source: CMHC, Central 1 Credit Union Latest: 217

The Economic & Financial Outlook

The Economic & Financial Outlook Beata Caranci SVP & Chief Economist TD Economics September 217 Key Themes Synchronized global economic acceleration has put monetary policy normalization in focus Canada