VERICO Economic Update: Q2 2016

VERICO ECONOMIC CONSULTANT:

MICHAEL CAMPBELL QUARTERLY HIGHLIGHTS Q2 APRIL 2016

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

Q2 QUARTERLY HIGHLIGHTS

VERICO Economic Consultant: Michael Campbell

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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Very Significant

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Vancouver and Toronto’s working age population is growing 70% faster than the national average led by well educated immigrants, which means increased demand for residential real estate.

70% Numbers You Should Know

According to the Real Estate Board of Greater Vancouver,

42,326

residential units changed hands last year.

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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$24

billion

Canada was the #1 foreign buyer in US real estate buying $24 billion US in the six months ending March 31, 2016.

National Bank estimates that up to 33% of the total investment in Metro Vancouver homes in 2015 is off-shore Chinese buyers.

(Total value $12.7

Billion)

2.8%

33% Canada’s population between the ages of 20 to 44 is forecast to grow 2.8% over the next 5 years.

(OECD average is negative)

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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Quote of the Month

Donald Trump is the kind of man who goes to the Super Bowl and thinks everyone in the huddle is talking about him.

New York’s Attorney General

Eric Schneiderman

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

What’s Going On Low loonie, cheap oil and record low rates push GDP growth BC and Vancouver lead Canada’s growth Oil is in a price range between $26 and $44 Despite US dollar’s two month correction the Loonie’s only managed the 76 to 78 cent level

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

Canada I don’t know about you but I feel pretty stimulated. Before a nickel of new spending from the Liberal government’s $29.5 billion forecasted deficit is spent, Canada’s GDP will have already grown for seven consecutive months. Stats Can just released very

positive employment numbers for March. Politics aside – the federal government was never going to stimulate a $2 trillion economy by spending $10 billion on social, green and transportation infrastructure.

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

...the federal government was never going to stimulate a $2 trillion economy by spending $10 billion on social, green and transportation infrastructure

The improved GDP has a great deal to do with a low loonie - aided by cheap energy prices, record low interest rates and the inflow of foreign capital. It’s not a big surprise that when everyone takes a 30% plus pay-cut and the price of exports falls compared to our biggest trading partner, business is going to improve.

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The overall economy led

by Greater Vancouver and Toronto is far stronger than most people realize.

The only serious trouble spots in Canada are those regions impacted by the massive drop in resource prices – especially oil producing provinces. But even in Alberta things may be improving if the 19,000 jobs created in March is not just a one off event.

Nationally the good news is that both consumer spending and residential construction, which combined make up 2/3rd of the Canadian economy, continue to be strong thanks to record low interest rates (and inmigration to B.C.). Adding to the momentum is the fact that manufacturing shows signs of picking up

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

with the latest numbers in January beating the previous a record.

Although we need to see a lot of follow through before it’s a trend.

The low loonie along with a continuing US recovery will help grow manufacturing exports. I

also expect big numbers in tourism as Americans take advantage of the Canadian discount, while many Canadians opt to stay home because of the punishing exchange rate. Look for a jump in tourism related employment as we get through the summer.

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The low loonie along with a continuing US recovery will help grow manufacturing exports

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

Federal Budget The Government has made changes to the presentation of its fiscal plan that have made it more difficult for parliamentarians (and the public) to scrutinize public finances.

Click here to read the article on CBC.ca

- Parliamentary Budget Office Report on Budget 2016

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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Interest Rates Here’s the key to know about interest rates – the level of central bank intervention and manipulation is unprecedented.

No other period in history comes close.

BOC

saying no to interest rate hike in 2016 So you want to know where interest rates are headed then listen to the Bank of Canada – and it’s saying no interest rate hike in 2016. There’s no need for one. There’s no inflationary pressure or demand pressure implying a rate hike. Our manufacturing sector may be recovering

but it’s not expanding – hence no upward pressure on rates.

to two – and some analysts are doubting they’ll go that far.

(As for a rate cut that many analysts have talked about. There’s very little chance given the improving employment, retail sales, construction numbers.)

The bottom line is that The Bank of Canada doesn’t want a stronger dollar until our recovery becomes more secure, especially given the precarious global economic environment.

I suspect that in both the States and Canada the central bankers are far more concerned about a global shock impacting their respective economies than anything domestic.

The Bank of Canada is well aware of the role that the devalued loonie has played in helping the economy recover and it’s in no hurry to push the loonie up by increasing interest rates.

The Canadian dollar has already risen 13% from its January lows thanks in large part to the Federal Reserve not following through on their promise to hike rates four times in 2016. They’ve now revised the number

13%

Rate the Canadian dollar has already risen since January

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

The Two Minute Global Economic Drill In other words – nothing’s changed but unfortunately that includes the potentially lethal problems inherent in record debt levels.

Sovereign debt and bank exposure to corporate and individual debt are the stuff of nightmares for central bankers. And as we saw in 2008 with the subprime mortgage crisis – no matter where major debt problems originate they becomes a problem for the entire banking system.

The question that keeps me up at night isn’t “who

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Okay maybe this will take only a minute.

Europe’s economy is still a mess – China’s still managing slowing growth and a massive debt problem – Brazil, Venezuela and other emerging markets are years away from recovering from the decline in commodity prices which exacerbates their debt problem.

The question that keeps me up at night isn’t “who borrowed the money?” but “who lent it.” borrowed the money?” but “who lent it.”

The slowdown in global economic growth along with the huge debt overhang are why the Federal Reserve decided

not to raise interest rates in March as promised and is why the Bank of Canada would rather be a little late to raise rates than too early.

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

Residential Real Estate At last count I’ve seen or heard 2,463 warnings since 2012 about the coming collapse in Vancouver and Toronto’s housing markets. We’re still waiting.

Forgive the glibness but there was so much wrong with that analysis that I don’t know where to begin. Hint: The price vulnerability at the $2 - $3 million plus price range has little to do with affordability as so much analysis suggests.

At the risk of oversimplifying allow me to divide the residential market into two segments – single detached Vancouver homes and entry to mid level condos and houses in the distant suburbs.

Prices of entry to mid level condos and lower priced houses

in the suburbs are principally impacted by low mortgage rates and in-migration. So the question about the price risk is really about the likelihood of falling demand due to rising interest rates and a significant drop-off in the number of people moving to Greater Vancouver (and to a lesser extend Toronto).

There’s no evidence to suggest that those two critical factors are changing. As I mentioned the Bank of Canada has stated rates are going to remain stable into 2017 and the strong BC economy continues

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The price vulnerability at the $2 - $3 million plus price range has little to do with affordability as so much analysis suggests to attract in-migration from Alberta and other parts of Canada.

There’s also no sign that new building supply will be sufficient to meet the demand created by newcomers moving to Greater Vancouver – (and millenials moving out of their parents’ basements.)

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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So What About The Danger of a Big Price Decline at the Upper End? It’s only in the last year that people are starting to understand the impact of foreign buying on the price of single detached houses in Vancouver and the accompanying ripple effect on the immediate suburbs. We still don’t have a lot of data but some firms and financial firms have provided some insight but I suspect most don’t understand the nature of the trend and why the probability is strong that it will keep going.

The foreign buying from China, Iran and other troubled areas is motivated by a lack of confidence in their home government. So they move their capital in search of safety. The list of preferred destinations and investment vehicles is relatively small compared to the amount of capital moving – ($1.2 trillion left China in 2015). US treasury bonds are the first choice followed by other assets

like stocks, real estate and art. And when it comes to real estate – New York and London top the list of preferred markets but Vancouver and Toronto, along with Sydney, Melbourne and Singapore now occupy a close second.

Billions of dollars are pouring into these markets, which has resulted in sharp being increases in prices – along with complaints about foreign ownership.

$1.2 TRILLION left China in 2015

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

While we don’t have the statistics, anecdotal evidence suggests that a big percentage of the upper end purchases are made with cash not credit.

The question about the stability of the $2 - $3 million plus residential markets in Vancouver and Toronto is really about the prospect for continued inflows of foreign capital, especially from China. If that capital stops coming due to escalating efforts by the Chinese government to stop money from leaving the country or the federal, provincial or municipal governments enacting laws that prevent discourage foreign buying, then activity at the upper end will decline significantly. But without that type of push by government – there is no reason to suspect that the inflows will stop because the problems in other parts of the world aren’t going to go away.

But would a price collapse necessarily follow if the inflow of capital slowed and purchases declined due to government intervention. I think the probability is no. Sharp price declines are usually precipitated by forced liquidation as a result of credit problems.

I don’t think that’s the nature of the market in Vancouver or Toronto. While we don’t have the statistics, anecdotal evidence suggests that a big percentage of the upper end purchases are made

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with cash not credit.

For the high-end foreign buyers the whole point is to get as much money out of the home country (China, Iran etc) as possible and out of the reach of their government. The market may cool but unless some event or government action forces liquidation then prices will remain relatively stable due to the large cash component in the purchases.

One more factor - the drop in the loonie versus the Chinese renminbi continues to put our real estate on sale, which further adds to the probability that the current trend of capital moving into the upper end of the real estate market in Vancouver and Toronto will continue.

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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q2 - April 2016

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On a Lighter Note I love football and it’s not like I don’t know that all this talk about economics is more than a little tedious so let me finish with a great quote on the upcoming NFL draft (starts April 29th).

A reporter asked Arizona Cardinal’s GM Steven Keim if he would consider drafting any of the top prospects who’ve had character issues and run-ins with the law. His response “This is the NFL, if Hannibal Lecter ran a 4.3 40 yard dash, we’d probably diagnose him with an eating disorder.”

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