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British Columbia sitting pretty (if it doesn't wreck its cash-cow housing market)

Briefing highlights

  • Why B.C. is sitting pretty
  • Deutsche Bank rejects DoJ demand
  • Manufacturing sales inch up
  • Video: Use of social media in the office

B.C. sitting pretty

British Columbia is sitting pretty. If it doesn’t wreck its housing market, that is.

Indeed, economists are applauding Canada’s westernmost province not just for its fiscal and economic standing, but also the “prudence” built into its budget plan and the amount of updating and information provided Thursday by Finance Minister Mike de Jong.

As The Globe and Mail’s Justine Hunter reports, B.C. revised its fiscal 2016-17 estimated budget surplus to $1.9-billion, or 0.8 per cent of gross domestic product, compared to the earlier forecast of $264-million.

It also projected stronger revenue in the fiscal year to the tune of $2.5-billion, some of that coming from its new 15-per-cent tax on foreign buyers of Vancouver-area properties. A new three-year outlook also painted a bright picture.

“There are some risks, to be sure; the global backdrop is as shaky as ever and the Vancouver housing market warrants close monitoring following the implementation of a new foreign home buyer tax,” said Warren Lovely, National Bank’s chief of public sector research and strategy.

“But the province has built significant (in fact, extra) prudence into its fiscal plans, and by all accounts, we see B.C. continuing to occupy an enviable economic position relative to its provincial peers going forward,” he added in a report on Mr. de Jong’s fiscal update.

“With a buoyant economy and extra revenue flowing in, the government looks nicely positioned to be able to deliver extra tax relief and/or new spending in Budget 2017 before voters head to the polls in a May, 2017, general election.”

It’s not just B.C.’s fiscal standing that has economists excited, but also its outlook for economic growth, which Mr. de Jong believes will now come in at 2.7 per cent this year.

Economists believe B.C. will lead the country in growth this year, with a slightly better showing than the province forecasts, at about 3 per cent. Unemployment is also forecast to run well below the national average.

The fiscal update, said BMO Nesbitt Burns senior economist Robert Kavcic, “further cements the province as the most solid credit on the Canadian landscape (not coincidentally, the last remaining province rated triple-A by both Moody’s and S&P.”

Of course, as Ms. Hunter writes, so much of B.C.’s economy and government revenues are now tied to the housing market, and Vancouver home sales are cooling rapidly. They were even before the new tax, which has a worthy goal of taming home prices and making the market more affordable.

But the government’s move has also sparked extreme uncertainty that is ringing alarms in some quarters. Price growth in Vancouver is now expected to follow the drop in sales.

“Price trends tend to lag changes in the market balance by about six months,” said BMO’s Mr. Kavcic.

“So, if history is any guide, we should see price growth slow to the low single-digit range in the months ahead, if not flatten out completely,” he added.

Housing costs are still wild, to be sure, and still up hugely on an annual basis. But, noted Toronto-Dominion Bank economist Diana Petramala, “the average home price correction in Vancouver has already exceeded our expectations for a 10-per-cent peak-to-trough correction.”

Royal Bank of Canada, for example, has already cut its 2017 forecast for economic growth in B.C. largely because of Vancouver’s cooling housing market, to 1.9 per cent from its earlier projection of 2.3 per cent.

All’s presumably well and good if price gains simply decelerate, or even go flat. The potential to get out of control, though, could be worrisome.

Laurentian Bank’s “best guess” is that there won’t be an extended decline in prices. As chief economist Sébastien Lavoie put it, he’s tempted to label it as “so far so good.”

But a wary eye will be needed going forward.

“Time will tell if local buyers, currently on the sidelines, will soon come back to the market or wait longer to purchase a home,” Mr. Lavoie said.

“Also, it remains to be seen if foreigners will do more than stop buying additional properties in Vancouver. They could decide to sell those they currently hold and move on to other markets.

Such an “outright disinvestment” among foreign buyers would, of course, put more homes on the market but also put “severe” pressure on prices.

“An outright decline in prices would be the worst case scenario, triggering a broad-based loss of confidence among local buyers; also, existing homeowners would have to absorb a drop in the value of their assets,” Mr. Lavoie said.

“Such a situation would also crush growth expectations for the B.C. economy,” he added.

“Of course, such a negative feedback loop is not what authorities had in mine when they introduced targeted measures such as the 15-per-cent foreign tax but there is a possibility that it still could happen.”

Deutsche falls

Shares of Deutsche Bank AG are souring after the U.S. Justice Department demanded $14-billion (U.S.) to settle a probe related to residential mortgage-backed securities in the pre-crisis years.

Deutsche Bank confirmed negotiations with the department but added in a statement it has “no intent to settle these potential civil claims anywhere near the number cited.”

Talks are just beginning, the bank said, and it expects “they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”

Not so fast, warned CMC Markets analyst Jasper Lawler, citing settlements among U.S. banks.

“Just because it’s not a U.S. bank, it doesn’t mean Deutsche Bank will pay less,” he said, arguing it could be just the opposite.

“British lender Barclays and Deutsche Bank were once top-ranked dealers in the U.S. mortgage market,” Mr. Lawler added.

“Tit-for-tat fines between European and U.S. regulators could mean the eventual figure is higher than Deutsche Bank could otherwise have hoped for.”

Factory sales edge up

Sales from Canadian factories inched up in July. Barely.

Shipments rose 0.1 per cent on stronger sales of food, petroleum and coal products, Statistics Canada said.

Sales rose in nine of 21 industries measured, accounting for about 54 per cent of the sector.

Inventories rose 1 per cent to the highest since January, while unfilled orders fell 0.1 per cent and new orders 2.9 per cent, ending a string of increases.

Video: Use of social media in the office

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