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Residential construction vulnerabilities could erode B.C.’s economic foundation Residential construction accounts for a remarkably large portion of the employment creation and capital investment that has driven B.C.’s recent economic boom. With the U.S. housing market in such turmoil, the question on many people’s minds is whether this province’s residential sector will be struck down too.
U.S. housing markets were already heading down when this summer’s sub-prime mortgage meltdown gave them a big further push. Ongoing developments continue to reveal the depths of this crisis in the U.S., with Merrill Lynch recently reporting $8.4 billion in mortgage-related securities losses. And the impacts are proving to be more widely distributed than many initially anticipated. The U.K. banking sector has been hit with some of the fallout, and during recent travels there, the economic gloom was evident. Housing price drops have now been accompanied by deep job cuts in at least one major sector. The largest Swiss bank, UBS AG, has already written down $3.4 billion in assets from its exposure and warned of potentially deeper impacts. While Japan’s largest bank, Mitsubishi UFJ, recently pegged its exposure to the U.S. sub-prime market at six times the level previously announced. We haven’t been immune from impacts in Canada, some of them striking quite close to home. Witness Canfor’s late-summer announcement of an $85 million exposure to non-bank asset backed commercial paper. ABCP is now widely recognized as a potentially significant source of exposure to U.S. sub-prime mortgages. Billions of dollars of such assets are frozen in Canada, and downgrades have begun. Assurances from the Canadian financial sector of the very modest extent of sub-prime lending to homebuyers in this country appear to be solid. And no comparable wave of foreclosures, with their resulting impacts on housing demand and prices, has emerged. But even the best lending practices can’t entirely insulate us from the broader economic turmoil or the fallout of a deepening U.S. economic downturn. B.C. lumber manufacturers are, of course, already experiencing the impacts of reduced U.S. housing demand. With no expectations of improvement in the short-term, this will be yet another drag on the performance of this still highly significant sector – which is also among the most seriously affected by the Canadian dollar’s dramatic appreciation . Particularly if the U.S. goes into full-scale recession – the likelihood of which has been rated at as high as 70% – the pain will be spread across all B.C. export sectors. Nor is the forest industry alone in already coping with challenging market conditions. Ongoing weakness in natural gas, for example, suggests that the energy “wonder sector” may not have the capacity we might hope to pick up the economic slack. All of this has the potential to translate into reduced employment, income and investment – and therefore less spending, particularly on major purchases like new housing. Additionally, we must factor in what may be long-term impacts on the availability and cost of credit, as an outcome of the sub-prime crisis. This could impair the viability of some major construction projects, including multi-unit residential, the margins associated with which are already often tightly squeezed by recent and ongoing cost escalation. Earlier this fall, the B.C. Real Estate Association forecast declining housing starts this year and next, and a rate of increase in home prices in 2008 that will be less than half last year’s rate. While these are hardly crisis-like projections, the still-unfolding impacts of recent developments may end up accelerating the downward trends. The residential and commercial category accounts for nearly 60% of the approximately 850 major projects that are at various stages of development in B.C. Even as much as a modest retrenchment of 5% in residential construction activity would have a direct capital investment impact of between $1.4 billion and $3 billion. That would be a noticeable impact within the B.C. economy, and there’s no certainty that current circumstances won’t drive residential development down even further. Of course, it’s to be hoped that doesn’t happen, but in this case, the relevant factors are largely beyond our control. • Jackie Hamilton (
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) is the president of Jackie Hamilton and Associates, a Victoria-based regulatory and research consulting firm, and the principal author of the Major Projects Inventory (www.majorprojectsinventory.com), which tracks major construction projects across British Columbia. |
