Economic Update

and Outlook

Mortgage Investment Association of

British Columbia

January 16, 2018

Helmut Pastrick

Chief Economist Central 1 Credit Union

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Economics

Outline:

➢Review of 2017 forecasts

➢B.C. economic and housing trends

➢Macro economic trends and forecasts

➢ 2018 forecasts

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Economics

Review of 2017 economic forecasts

Indicators 2016 2017f 2017a Diff. Trend

B.C. Employment, % change 3.2 2.0 3.7 -1.7 N

B.C. Unemployment rate, % 6.0 5.5 5.1 0.4 Y

B.C. Population1, % change 1.3 1.4 1.3 0.1 N

B.C. Retail sales, % change 7.4 7.0 9.8* -2.8 N

Prime rate, % 2.70 2.70 2.89 -0.19 N

5-yr mortgage rate, % 4.66 4.75 4.76 -0.01 Y

Source: Statistics Canada, C1CU. f = forecast, a = actual, 1. As of Oct. 1. * YTD Oct.

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Economics

Review of 2017 housing forecasts

B.C. Indicators 2016 2017f 2017a Diff. Trend

Housing sales, % change 9.4 -12.0 -7.5 -4.5 Y

Housing starts, % change 33.1 -6.0 4.4 -10.4 N

Average sale price, % change 8.6 -3.0 2.7 -5.7 N

Lower Mainland HPI, % chg. 26.6 2.0 13.9 -11.9 Y

Private rental apt. vacancy

rate1. 1.3 1.0 1.3 -0.3 N

Source: CREA, CMHC, C1CU. f = forecast, a = actual. 1. As of Oct.

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Economics

Growth holds up

0.6

0.8

1.0

1.2

1.4

1.6

Q1-13 Q1-14 Q1-15 Q1-16 Q1-17

Per cent change y/y

Source: Statistics Canada, Central 1 Credit Union. Latest: Q3-17

Population Growth Quarterly: British Columbia

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Economics

International climbs; interprovincial falls

-2

0

2

4

6

8

10

12

14

16

Q1-13 Q1-14 Q1-15 Q1-16 Q1-17

Net international

Net interprovincial

Net natural

Persons - thousands

Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Q3-17

Population Growth Components Quarterly: British Columbia

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Economics

Labour market trends: B.C.

2.35

2.40

2.45

2.50

2.55

2.60

2.65

Jan-15 Jan-16 Jan-17

Labour Force

62

63

64

65

66

67

Jan-15 Jan-16 Jan-17

Participation RatePer cent of pop.15+.

4

5

6

7

Jan-15 Jan-16 Jan-17

Unemployment RatePer cent of labour force

Source: Statistics Canada. Note: Seasonally adjusted. Latest: Dec-17

Persons – mil.

2.20

2.25

2.30

2.35

2.40

2.45

2.50

2.55

Jan-15 Jan-16 Jan-17

EmploymentPersons – mil.

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Economics

Exports stall following large energy gain

2.2

2.5

2.8

3.1

3.4

3.7

4.0

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Current $

2007 $

Dollars - billions

Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted three-month moving averages. Latest: Nov-17

International Merchandise Exports: British Columbia

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Economics

New highs

375

400

425

450

475

500

525

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Persons - thousands

Source: Statistics Canada. Note: Seasonally adjusted. Latest: Oct-17

International Tourist Entries: British Columbia

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Economics

Robust activity this year

5.0

5.5

6.0

6.5

7.0

7.5

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Current $

2012 $

Dollars - billions

Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Oct-17

Retail Sales: British Columbia

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Economics

Investment turning up

Dollars - bil l ions

Private Non-residential Building

Construction Investment: B.C.

275

300

325

350

375

400

425

450

475

Q1-14 Q1-15 Q1-16 Q1-17

Th

ou

san

ds

Current $ 2007 $

Public Non-residential Building

Construction Investment: B.C.

Source: Statistics Canada, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Q4-17

0.8

0.9

1.0

1.1

1.2

1.3

Q1-14 Q1-15 Q1-16 Q1-17

Mil

lio

ns

Current $ 2007 $

Dollars - mill ions

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Economics

Cyclical pattern – sales past peak

20

40

60

80

100

120

140

1976 1981 1986 1991 1996 2001 2006 2011 2016

Units - thousands

Source: Landcor Data Corp. Note: Arms length transactions only. Latest: 12 months ending November 2017

Residential Sales: British Columbia

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Economics

Long term rising trend

0

100

200

300

400

500

600

1976 1981 1986 1991 1996 2001 2006 2011 2016

Dollars - thousands

Source: Landcor Data Corp. Note: Arms length transactions only. 2017 is Jan. to Nov.

Residential Median Sale Price: British Columbia

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Economics

Price cycles

-30

-20

-10

0

10

20

30

40

1977 1982 1987 1992 1997 2002 2007 2012 2017

Nominal $

2002 $

Per cent

Source: Landcor Data Corp., Central 1 Credit Union. Note: Annual data. Deflated by BC CPI.

Change in Residential Median Sale Price: British Columbia

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Economics

Recent housing market trends: B.C.

6

7

8

9

10

11

12

Jan-15 Jan-16 Jan-17

MLS Residential Sales

20

30

40

50

Jan-15 Jan-16 Jan-17

MLS Residential Active ListingsUnits – thous.

10

15

20

25

30

35

40

Jan-15 Jan-16 Jan-17

Sales-to-Active Listings RatioPer cent

Source: CREA, BCREA, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec.-17

Units – thous.

9

10

11

12

13

14

15

16

Jan-15 Jan-16 Jan-17

MLS Residential New ListingsUnits – thous.

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Economics

Prices resume rising

120

140

160

180

200

220

240

260

280

300

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Detached

Composite

Apartment

Townhouse

Jan. 2005 = 100

Source: CREA, Central 1 Credit Union. Note: Seasonally adjusted. Latest: Dec-17

MLS Home Price Index: Lower Mainland

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Economics

Vacancy rates at cycle lows

0

1

2

3

4

5

6

7

8

1992 1997 2002 2007 2012 2017

Abbotsford-Mission

Kelowna

Vancouver

Victoria

Units - thousands

Source: CMHC. Note: Private apartment and row structures, three units and over. As of October.

Rental Vacancy Rates: British Columbia Metro Areas

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Economics

Multi-unit starts surge during 2017

0

10

20

30

40

50

60

Q1-07 Q1-09 Q1-11 Q1-13 Q1-15 Q1-17

Total

Multiples

Singles

Units - thousands

Source: CMHC. Note: Seasonally adjusted at annual rate. Latest: Q4-17

Housing Starts by Dwelling Type: B.C. Urban Centres

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Economics

Scenario for end of current housing market cycle:

Economic recession or crisis event

- Notable economic recessions in 1957, 1960, 1974, 1982, 1990,

2008; housing recessions occurred in each instance.

- Price corrections varied from -10% to -35% depending on severity of

economic recession.

- 70% probability.

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Economics

Scenario for end of current housing market cycle:

Affordability squeeze, soft-landing

- Housing sales increasingly negatively affected by rising prices,

higher mortgage rates, and tighter credit conditions during next two to

four years. Additional federal policy tightening measures possible.

- Market balance steadily shifts to buyers; mild price correction.

- 30% probability.

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Economics

Beyond the cycle: the longer term to 2041

- Demand growth: B.C. 30% population increase; 35% more households.

- Land availability is critical supply constraint in metro areas; densification partial mitigation.

- Fundamental demand-supply imbalance prevails.

- Long-term price uptrend continues – prices double next 25 years.

- Further deterioration in home affordability; prices/rents outstrip incomes; relatively more renters and more multi-units.

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Economics

Global economy improving heading into 2018

-1

0

1

2

3

4

5

6

2015 2016 2017

Services

Manufacturing

0 = no change from prior month

Source: Bloomberg. Note: Seasonally adjusted. Latest: Dec. 2017

JP Morgan Global Purchasing Managers’ Indexes

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Economics

Mostly synchronous upswings in 2017; Europe leads

-4

-2

0

2

4

6

8

10

12

2015 2016 2017

Europe

US

Japan

China

0 = no change from prior month

Source: Bloomberg. Note: Seasonally adjusted. Latest: Dec-17

Markit Purchasing Managers’ Indexes

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Current U.S. recovery is weakest in post-war era

90

100

110

120

130

140

150

160

0 4 8 12 16 20 24 28 32 36 40Quarters from Trough

1949

1954

1958

1961

1970

1975

1980

1982

1991

2001

2009

Real GDP = 100 at cycle trough

Source: U.S. BEA, Central 1 Credit Union. Latest in 2009 recovery is Q3-2017.

Economic Recoveries: U.S.

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Economics

U.S. economy gains momentum from recent lows

-10

-8

-6

-4

-2

0

2

4

6

8

Q1-01 Q1-05 Q1-09 Q1-13 Q1-17

Actual

Smoothed

Per cent change at annual rate

Source: U.S. Bureau of Economic Analysis, Central 1 Credit Union. Latest: Q3-17

U.S. Real GDP

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Economics

Lower unemployment rate; wages rising faster

Per cent of labour force

Unemployment Rate: U.S.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-14 Jan-15 Jan-16 Jan-17

Hourly Median Wage Rate: U.S.

Source: U.S. BLS. Note: Seasonally adjusted. Latest: Dec-17 Source: FRB Atlanta. Latest: Nov-17

3

4

5

6

7

Jan-14 Jan-15 Jan-16 Jan-17

Per cent change, y/y

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Economics

No recession near term

-4

-3

-2

-1

0

1

2

3

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Per cent

Source: Federal Reserve Bank of Philadelphia. Latest: Nov-17

U.S. Leading Economic Indicator

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Economics

Recent firming

92

94

96

98

100

102

104

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Europe

Japan

China

Long-term average = 100

Source: OECD. Latest: Oct-17

Composite Leading Indicator: Selected Areas

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Economics

Key External Economic Forecasts

Real GDP,

% change2015 2016 2017 2018 2019

World 3.4 3.2 3.6 3.8 3.7

United States 2.4 1.6 2.5 2.5 2.2

Japan 1.2 1.0 1.5 1.3 0.8

China 6.9 6.7 6.8 6.4 6.2

European Union 1.9 1.9 2.2 1.9 1.8

EM & DEs 4.3 4.3 4.6 4.9 5.0

Source: IMF Oct. 2017, Consensus Forecasts, Nov. 2017. Note: EM & DEs = Emerging

Markets and Developing Economies.

Global growth upshift to continue

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Economics

Strong rebound from oil recession of 2015/16

4.2

1.7

-10

-8

-6

-4

-2

0

2

4

6

8

Q1-01 Q1-05 Q1-09 Q1-13 Q1-17

Actual

Smoothed

Per cent change at annual rate

Source: Statistics Canada, Central 1 Credit Union. Latest: Q3-17

Canada Real GDP

Moderate growth ahead

Economic Forecasts: Canada

Indicator 2015 2016 2017 2018 2019

Nominal GDP, % change 0.2 2.1 5.9 4.5 4.8

Real GDP, % change 0.9 1.5 3.2 2.2 2.1

Employment, % change 0.8 0.7 1.8 1.2 1.0

Unemployment rate, % 6.9 7.0 6.4 5.8 5.5

3-mo. T-bill rate, % 0.53 0.49 0.69 1.35 1.85

10-y GoC bond, % 1.52 1.25 1.95 2.40 2.85

U.S.- Canada FX, cents 78.2 75.4 77.1 79.0 81.5

Source: Statistics Canada, Central 1 Credit Union. Note: Annual averages.

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Economics

NAFTA:

• After five negotiation rounds no significant progress

• Round six late January in Montreal, round seven in March

• Contentious items – rules of origin, dispute settlement,

supply management, procurement, sunset clause

• If negotiations fail:

• President issues written notice of withdrawl

• Six month notice period

• Congressional approval required?

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Economics

After NAFTA:

• Shift to WTO MFN tariffs: U.S.A. 3.5%, Canada 4.2%, Mexico 7.1%

• Canada-US Free Trade Agreement (CUSFTA) of 1989 remains in

force, though suspended by NAFTA.

• CUSFTA could come back into effect?

Economic impact estimates on Canada:• Real GDP -0.5% to 2023, employment -25k to -50k,

investment -0.9%, CPI -0.3%

• Negative for autos, fossil fuels, petrochemicals, business

services, metal products, M&E, food, and others

• Ontario, Alberta, Saskatchewan, New Brunswick

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Economics

2018 Economic Forecasts

B.C. Indicators 2016 2017 2018 f

Employment, % change 3.2 3.7 2.5

Unemployment rate, % 6.0 5.1 4.3

Population, % change 1.3 1.3 1.3

Retail sales, % change 7.4 9.8* 7.0

Prime rate, % 2.70 2.89 3.60

5-yr mortgage rate, % 4.66 4.76 5.55

Source: Statistics Canada, C1CU. f = forecast, a = actual. *Oct.

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Economics

2018 Housing Forecasts

B.C. Indicators 2016 2017 2018 f

Housing sales % change 9.4 -7.5 -5.0

Housing starts, % change 33.1 4.4 3.0

Average sale price, % change 8.6 2.7 7.0

Lower Mainland HPI, % change 26.6 13.9 12.0

Private apt. rental vacancy rate, % , Oct. 1.3 1.3 1.0

Source: CREA, CMHC, C1CU. f = forecast, a = actual.

Thank you