Thursday, September 29, 2011

BC Population Growth to Q2 2011

BC Stats just released (PDF) its quarterly population estimates and BC is what we would term "sluggish" in terms of population growth. (HT VMD)

Population growth consists of the following bulk components:
  • Natural increase (births - deaths)
  • Net interprovincial migration
  • Net international migration
So let's look at how recent quarters look in a historical context (there is seasonality so quarters are best compared to each other):

The most recent Q2-2011 data indicate the lowest Q2 immigration numbers since 2004, negative net interprovincial migration, and continued below-trend non-permanent resident (NPR) in-migration. (NPRs mostly consist of students and temporary workers.) Since unemployment has remained elevated for over 2 years, there is, unsurprisingly, pressure to employ local residents; as fallout from this, non-permanent residents in-migration has remained subdued. Below are graphs up to 2010:

Weak population growth in Q4-2010 and Q1-2011 has further extended into Q2-2011. These recent population data are what I would characterise as a continuing bearish indicator for BC real estate.

Addendum: There are worrying signs that the inter-provincial migration trends are going to follow patterns seen in the late-1990s. Looking at the data there is some indication that dropping construction investment corresponded to out-migration to other provinces, and cracks (albeit small ones) started appearing before the Asian financial crisis that started in 1997. Construction employment today remains above its long-term average and dwelling formation will start lagging going forward with persistently lower population growth. This would mean that primary industry construction employment would ebb and net population outflows from BC would accelerate.

Looking at historical data from the past 20 years, lower immigration and increased out-migration would portend several effects:
  1. Higher numbers of for-sale houses and lower sales. This will push up months of inventory significantly.
  2. Construction employment will likely drop by over 30% without significant government spending increases.
  3. Unemployment will rise and wage growth will be subdued.
  4. Rental rate growth will remain subdued.
It is unclear whether or not government policymakers fully understand the impact an ebbing of a construction employment and investment boom, and the resultant inter-provincial out-migration, will have on the provincial economy. If China enters a severe downturn in the next few years instead of a "mere" correction, things could be even worse.

Saturday, September 24, 2011

Canada and Fiscal Stimulus Round 2 Fight!

Mark Carney is in Washington this week trying to convince 17 Europeans to agree. He was generous to take 20 minutes of his time to talk to The House's Evan Solomon on Europe's sovereign and banking debt crisis. Europe's woes are interesting -- Carney understands that to keep Greece and other countries a part of the common currency there will need to be large fiscal transfers to enable smooth transitions of these economies to lower their wages until they are competitive again. The more interesting part for Canada's housing market is Carney's comments (or lack of comments) on what Canada's government and central bank will do in case of a European-centred credit crunch giving the rest of the world a cold.

I'll summarise Carney's comments on how Canada will react to a potential impending global downturn (feel free to listen; unfortunately I don't have time to transcribe the most interesting bits):
  • Canada's banking system will remain solvent one way or another.
  • The US and Europe look to be undergoing slow growth for some years to come.
  • Canada's businesses have been investing in capital equipment and need to continue to invest, making up for a chronic productivity gap with other countries.
  • Canada needs to start selling and investing in ventures in the developing world.
  • Elements of the massive fiscal stimulus unleashed in 2008 and 2009 can be retooled for 2011-2012, however many of the measures were less "effective" than desired [By less effective not sure if he means with undesirable side effects].
What Carney didn't say:
  • Household debt issues were not discussed or alluded to.
Even with a massive fiscal stimulus emanating from Europe, which is looking unlikely, we should fully expect another round of fiscal stimulus to aid the Canadian economy. Given Carney's comments over the past year on: high household debt levels , robust house prices and sales despite tightened credit conditions, plum corporate balance sheets, and his relative silence on government fiscal spending, I will formulate some guesses on what fiscal and monetary stimulus will be concentrated on:

Highly probable
  • Accelerating capital cost allowance for businesses
  • Slowing of public sector layoffs
  • Lower corporate taxes
  • Employment insurance hiring incentives
  • R&D tax credits
  • Extending employment insurance benefits
  • Targeted but piecemeal government spending programs, geared towards non-residential infrastructure.
Somewhat probable
  • A second "Canadian Action Plan"
  • Energy efficiency upgrades
  • Reducing Bank of Canada's overnight lending rate
  • Reducing CMHC requirements for loans
When a stimulus of the magnitudes required to stave longer lasting effects of a second recession, my feeling is the government is aware that increasing household leverage risks tipping households into an unsustainable debt spiral similar to what Ireland experienced a few years ago. This does not mean Canada is the next Ireland or Spain but the effects of overleveraged households should be obvious to anyone who has read the literature on these countries' housing busts. It may even be the case that if a stimulus is unleashed that commensurate crimps on residential investment will be required to ensure investment money flows are properly targeted away from the overbought housing market, and instead concentrating more on consumption with broader wage growth.

In summary, I expect the chances of a second fiscal stimulus package from the federal government are high, and we should expect that household borrowing will be carefully watched -- even regimented -- to ensure their debt-to-income ratios are not increased further. This will likely mean higher federal deficits in the next one to two years, and a probability the government misses its "balanced budget in 2014" pledge.

Tuesday, September 20, 2011

Increasing Foreign Student Intake

Premier Christy Clark announced today a plan to increase the intake of international students to the province (emphasis mine).

As part of 'Canada Starts Here: The B.C. Jobs Plan', to be released Thursday, Premier Christy Clark announced key steps to increase the number of post-secondary students from other countries studying in B.C.

She also announced how the Province will work with partners to ensure education and training are offered to British Columbians so they can work in the regions where they live and study.

"International students who study in B.C. create thousands of jobs and bring millions of dollars into local economies," said Clark. "Our universities are job creators. We are setting clear targets to dramatically increase the number of international students coming to B.C. These students will also help build strong relationships between B.C., Canada and the rest of the world."

Under the Jobs Plan, the Province is setting a goal of increasing the number of international students by 50 per cent over four years. International students in B.C. currently generate 22,000 jobs and bring an estimated $1.25 billion into the provincial economy. Each 10 per cent increase translates into an estimated 1,800 new jobs and a $100-million boost to the provincial GDP.

To achieve this goal the Province will:

  • Create an international education council to help build strong relationships in both existing and emerging economies, like China, India, Brazil and Saudi Arabia.
  • Leverage B.C.'s trade offices to help connect international students to B.C.'s educational opportunities.
  • Work with communities to prepare them to welcome students from abroad.
  • Strengthen the Province's Education Quality Assurance.
Send more B.C. students overseas to prepare them to work in a global economy.
"Our educational institutions are renowned for their quality, which is what drives nearly 94,000 students a year to B.C. to further their education," said Advanced Education Minister Naomi Yamamoto. "We are currently engaging with institutions and communities on a more targeted, co-ordinated and strategic approach that takes advantage of the growth opportunities and maximizes the economic, social and cultural benefits for B.C. communities to remain successful in what is a hugely competitive environment."

"As a university with nearly two decades' experience, and a student population that reaches every corner of the globe, we know how important having solid international relationships are to building a culturally diverse and stimulating educational experience for all our students," said Alan Shaver, president of Thompson Rivers University. "It's encouraging the Province is taking a leadership role on international education - a strong partnership going forward that works towards top-quality education and good international relationships will position B.C.'s universities and colleges well in an increasingly competitive world."

This blog is generally bearish on housing but we also must acknowledge the realities of the economy and the need for BC to produce items of value. One of these items is education at universities and international students are currently willing to pay big bucks to study in North American institutions.

Note Pmr. Clark introduced this plan in Kamloops, an area with higher unemployment, one with a university hoping to increase its prominence. It is unclear whether spots at the original "big 3" universities will be increased as well or if the government's efforts are geared towards bootsrapping an interior that is facing a prolonged recession, if not already experiencing one now.

The point I wanted to raise here, though, is students' effect on housing and schooling. The province is facing an over-investment in residential construction and bedrooms need to be filled. As families' incomes come under pressure and carrying costs of their dwellings start increasing, the need for supplementary income will increase. One way of doing this is through boarding foreign students, and many families in larger cities do this to help with mortgage payments. The reason they can do this is first that they have available bedrooms and second there is an existing infrastructure of private, public, secondary, and post-secondary schools that certain foreigners find desirable.

If I'm right and the province is oversubscribing in investment, one partial "way out" is to increase foreign student enrollment. The province has what is seen as a healthy and desirable education system, with an abundance of qualified well-trained teachers and existing often-under-utilised facilities, and that resource should be acknowledged as currently having value on the world stage. This means ensuring the education brand the province has produced for itself is maintained, and this goes for all means of schools.

When we look forward to a potential investment recession in BC, there will be attempts to bail out previous over-investments by means of increasing their utility. Filling up vacant accommodations through increased foreign consumption and population growth without displacing existing jobs for residents is going to be something the government will likely look to facilitate with greater urgency should TSHTF.

Monday, September 12, 2011

How Money is Created

I've been fascinated and somewhat confused of late by the concept of how money is created. Given certain developments recently involving the Swiss unilaterally instituting an exchange rate ceiling, summarized by Kash over at The Street Light, Canada's horror and dismay what we would do when "currencies go to war", and the general idea about how Canada "creates" money, I thought I'd link to some thoughts on the subject. This does not necessarily clarify much on the matter, but does indicate the Bank of Canada is somewhat of a black box and there is no ultimate online authority I was able to dig up.

Gilligan's Corner: Canada’s Private Banks have no Reserve Requirements (read the comments too)
First year macro textbook chapters on money in Canada ch10 and ch11 (PDF)

When trying to get information on the basic functions of the banking system and currencies, I am reminded that the web has a few disagreements, and can make things seem rather complicated.

Friday, September 02, 2011

Greater Vancouver Market Snapshot August 2011

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to August 2011.
Commentary: August 2011, as July 2011, has produced more tepid sales numbers than years' past. A continued trend of higher months of inventory (MOI, the number of months it would take to clear month-end inventory at current monthly sales levels), a key indicator of market liquidity and impending price strength, is typical in the second half. Lest we forget that prices are still high by most validated measures and it will take a prolonged period of MOI well above 6 to bring them down to more historic levels. We are currently at about 6.5. Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation: