BC and Lower Mainland Economic Outlook and Key Trends

presented to:Vancouver Real Estate Forum

April 19, 2006Vancouver, BC

Jock FinlaysonExecutive Vice-PresidentBusiness Council of British Columbiajockf@bcbc.comwww.bcbc.com

BCBC’’s Economy is Booming!s Economy is Booming!

• Economic expansion is broadly-based » most sectors and all regions participating

• Domestic economic activity very strong» housing market & consumer spending» non-residential construction and M+E investment» government fiscal stimulus

• Export sector more resilient than expected» energy (gas and coal) driving growth » but some other sectors also healthy – wood products,

agriculture, machinery & equipment, technology» But…tourism a soft spot, and pulp/paper in crisis

Jobs Are PlentifulJobs Are Plentiful

BC Labour Market

Employment Growth

-0.5

0.5

1.5

2.5

3.5

4.5

02 03 04 05 06

y/y per cent change

Unemployment Rate

4

5

6

7

8

9

10

02 03 04 05 06

per cent

25 yr avg.

Source: Statistics Canada, quarterly averages. Latest: Q1 2006

Stronger Job Growth Outside of Lower Stronger Job Growth Outside of Lower MainlandMainland

Employment Growth by Region

1.62.5

3.5

0.92.6

6.8

4.5

-0.90.2

1.3

-2.6-3-2-101234567

96 97 98 99 00 01 02 03 04 05 Q106

Lower Mainland

Rest of BC

per cent

Source: BC Stats.

Good Times for Retailers Good Times for Retailers

BC Retail Sales, quarterly year-over-year per cent change

-6-4-202468

1012

98 99 00 01 02 03 04 05 Jan.2006

per cent

Source: Statistics Canada.

New Home Construction Picks up Again New Home Construction Picks up Again

BC Housing Starts

Annual Growth

-40

-30

-20

-10

0

10

20

30

95 97 99 01 03 05

y/y per cent changeTotal Starts, monthly

500

1000

1500

2000

2500

3000

3500

4000

00 01 02 03 04 05 06

starts, SA trend

units

Latest: March 2006Source: CMHC.

And NonAnd Non--residential Construction Surging residential Construction Surging

Non-residential Building Permits, BC quarterly S.A.

0

200

400

600

800

1000

80 82 84 86 88 90 92 94 96 98 00 02 04 06*

Source: Statistics Canada.

millions $

*Q1 2006 estimated based on January and February permits

NonNon--Residential Structures and Other Residential Structures and Other Capital Projects Fuelling GrowthCapital Projects Fuelling Growth

• Non-residential building permits jumped 55% in 2005, and remain at elevated levels» led by very strong increases in commercial and

institutional/government building » smaller increase in industrial permits

• Many other large engineering projects underway around the province» Canada Line, Golden Ears Bridge, Sea-to-Sky Highway,

Pitt River Bridge, border infrastructure program» William R. Bennett Bridge, Kicking Horse Pass, various

power generation and transmission upgrades, CaribooConnector (Highway 97 improvements)

• Gateway program – projects in consultation phase

Energy Lifts BC Exports in 2005 Energy Lifts BC Exports in 2005

BC Merchandise Exports, annual

10

15

20

25

30

35

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

TotalExcl. Energy

billions $

Source: BC Stats.

BC Net Migration, quarterly S.A.

-5

0

5

10

15

20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

TotalInterprovincialInternational

Immigration Up, Net Immigration Up, Net InterprovincialInterprovincialMigration DownMigration Down

Source: BC Stats, Business Council for seasonal adjustment.

thousands

Latest Q4 2005

US Tourism Market a Soft Spot US Tourism Market a Soft Spot

Non-resident Tourists to BC, annual

US Tourists to BC

1.5

2.0

2.5

3.0

3.5

4.0

93 95 97 99 01 03 05

millionsTourists to BC, all

other countries

0.4

0.6

0.8

1.0

1.2

1.4

1.6

93 95 97 99 01 03 05

millions

Source: Statistics Canada.

Operating Budget 2000/01 to 2008/09billions $

1.4501.7752.575

-1.275

1.503

-1.187-2.737

0.9500.550

14

18

22

26

30

34

38

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09-4

-2

0

2

4

6

8

BC Fiscal TrackBC Fiscal Track

Expenditures

Revenues*

deficit / surplus & forecast allowance (right scale)

Source: BC Budget and Fiscal Plan 2006/07. * Revenues include net earnings of Crown corporations

Debt Burden Falling Debt Burden Falling

BC Taxpayer Supported Debt Relative to GDP

20.6

17.318.018.218.520.5

21.3

20.6

15.415.7

18.2

16.4 15.8

12

14

16

18

20

22

01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

per cent

Projection in 2006 Budget

Projection in 2005 Budget

Source: BC Budget and Fiscal Plan 2006/07 – 2008/09.

Solid Economic Growth On Tap for BC Solid Economic Growth On Tap for BC

Real GDP Growth

Average Real GDP Growth

0

1

2

3

4

avg. 80s* avg. 90s avg. 00s**

BC Can

Real GDP Growth

0

1

2

3

4

5

01 02 03 04 05 06 07

per cent

BC

Canada

per cent

forecast

Source: Statistics Canada for history; forecasts from BC Economic Forecast Council for BC; BMO, CIBC, RBC, Scotiabank and TD for Canada.

* 1982-1989** includes 2006 & 07 forecasts

BC Economic Outlook 2006/2007: BC Economic Outlook 2006/2007: Key Risks/UncertaintiesKey Risks/Uncertainties• Canadian dollar (a stronger currency is negative for

lumber, pulp/paper, agri-food, tourism, film, etc.)

• US economy – a number of risks including the trade deficit, a negative savings rate, consumer spending and the housing market

• Softwood lumber trade dispute – an “upside surprise”is possible

• Oil/natural gas prices – higher prices boost provincial government revenues, but dampen overall growth due to the impact on the global economy and on domestic energy consumers

The Province Faces Some Ongoing The Province Faces Some Ongoing Economic ChallengesEconomic Challenges

• Skill shortages aggravated by a buoyant economy and stiff competition for talent from other jurisdictions

• A long period of sub-par productivity gains

• Reconciling environmental protection with resource development

• Mountain pine beetle (post-2010)

• Boosting electricity supply and improving/expanding transmission infrastructure

• The “Alberta factor”

Employment Growth by Industy, Vancouver CMA (annual average 2000-2005)

3.83.9

4.54.8

5.45.7

6.46.5

7.488.2

8.910.7

11.711.8

0 2 4 6 8 10 12 14

Wholesale TradeFood & Beverage Services

AgricultureUtilities

Fabricated Metal Mfg.Arts, Entertain., Rec.

Business, Building, Support serv.Machinery Manufacturing

Food, Beverage Mfg.Furniture Mfg.

Educational Serv. excl K-12Construction

Arch., Engineering ServicesMining, Oil and Gas Extraction

Rental & Leasing Services

Commodities and Construction Helping to Commodities and Construction Helping to Drive Job Growth in Vancouver Drive Job Growth in Vancouver

Source: Statistics Canada.per cent

Regional Manufacturing Struggling Regional Manufacturing Struggling

Employment Growth by Industy, Vancouver CMA (annual average 2000-2005)

-2.2-2.8-3.0

-3.9-4.4

-5.6-5.8

-6.1-6.9-7.0

-7.8-8.0

-9.9-11.1

-16.7

-20 -15 -10 -5 0

Computer System Design Serv.Non-Metallic Mineral Prod. Mfg.

Federal Gov't Public Admin.Accommodation services

Private household servicesTextile Mills (Mfg.)

Printing and related (Mfg.)Chemical Mfg.Clothing Mfg.

Electrical Equip. Mfg.Transportation Equip. Mfg.

Primary Metal Mfg.Plastics & Rubber Mfg.

Air TransportationPaper Mfg.

Source: Statistics Canada.per cent

GVRD Housing StartsGVRD Housing Starts

Total Number of Housing Starts 2001-2005

1.21.32.02.52.8

3.84.2

6.46.8

8.517.4

24.8

6.8

0 5 10 15 20 25 30

West VancouverPort Moody

DeltaNew Westminster

North Vancouver (C+DM)Port Coquitlam

Maple Ridge / Pitt MeadowsCoquitlam

Langley (C+DM)Burnaby

RichmondSurrey/White Rock

Vancouver

thousandsSource: BC Stats.

Most Household Formation Will be in Most Household Formation Will be in the GVRD the GVRD

Number of Households Formed Over 5-Year Periods

0

20

40

60

80

100

1990-95

1995-00

2000-05

2005-10

2010-15

2015-20

Fraser Valley

GreaterVancouver

Rest of BC

Source: BC Stats.

thousands

Population Growth Projections: Population Growth Projections: GVRD Municipalities* 2006GVRD Municipalities* 2006--2011 2011

7.3

1.7

1.8

2.4

3.9

4.9

6.2

6.7

8.4

11.0

10.0

0 2 4 6 8 10 12

Total

West Vancouver

Delta

North Vancouver

Vancouver

Burnaby

Richmond

New Westminster

Coquitlam

Maple Ridge-Pitt Meadows

Surrey

Source: BC Stats.per cent change

* School Districts

A Housing Bubble? A Housing Bubble? –– reasons for concernreasons for concern

• Prices in Greater Vancouver are above their long run trend (and historically have eventually returned to trend level)

• Price gains outpace household income growth• Price increases have also outstripped rents (real estate P/E

ratios suggest overvaluation)• Current fundamentals don’t fully support recent price gains

» population and income growth stronger in Alberta than BC, yet average home prices in Calgary up 20% (y/y) in Q1 2006 vs almost 22% in Vancouver

• Affordability - debt load is high and BC savings rate sank to an all-time low of -7.9% in 2004 (higher interest rates would impact capacity to service debt)

• Everyone is talking about real estate

• Downturn in US housing market could influence psychology in Vancouver/BC

A Housing Bubble? A Housing Bubble? –– a more sanguine viewa more sanguine view• Distinction between “collapsing bubble” & levelling off/small

correction

• International investment a factor in some segments

• Interest rates are rising, but at a measured pace

• Signs of speculative activity are still fairly muted» number of properties held < 6 months is still relatively low

(about 7% compared to a peak of 15% in 1990/91 and more than 25% in 1980/81)

• A relatively limited supply of product (sales to new listing ratios are high)

• Employment growth and in-migration support housing

• Some pricing premium related to the Olympics

Significant Price Corrections Have Occurred in Significant Price Corrections Have Occurred in the Past the Past

Greater Vancouver Housing Prices

50

100

150

200

250

300

350

400

450

80 82 84 86 88 90 92 94 96 98 00 02 04

thousands $

Source: CREA, average price of homes sold through MLS, real prices deflated by the BC CPI.

Latest: December 2005

from mid 1981 to latter 1982 prices fell 36%(in real terms they dropped 44%)

early 1990 prices drop 15% within a year (20% real $)

real prices

current prices

long-term trend

early 1995 to the end of 1996 prices fall 20%

Greater Vancouver Greater Vancouver –– Ten Key Growth IndustriesTen Key Growth Industries• Transportation/logistics/warehousing (increased trade;

expanding gateway role)• Education services (universities/colleges; private training + ESL)• Information and communication technologies (incl. software,

telecommunications, new media)• Scientific and technical services (engineering, environmental, etc.)• A few segments of manufacturing (machinery, food & beverage,

fabricated metal products)• Transportation infrastructure (ports, YVR, RAV line, etc.)• Film production (except for 2004)• Real estate and other financial services• Biotech cluster (life sciences; health research)• Construction

Some Challenges for the Lower MainlandSome Challenges for the Lower Mainland’’s s Business Climate Business Climate • Transportation congestion

» commuters (moving in all directions within the region)» goods movement (Gateway role)

• Poor regional governance structure • Land supply for commercial & industrial development• Housing costs

» affordability is not just a low income issue

• Property tax disparities• Competitiveness & cost of doing business

» Remote location within North America» Small corporate / head office sector» Cdn$ has eroded most of the US$ cost advantage

• Labour supply / skill shortages• Economic base to support future wage/income growth

An Aging Population An Aging Population

BC's Current and Future Population by Age Cohorts

0

200

400

600

800

1,000

1,200

15-24 25-34 35-44 45-54 55-64 65+

20052026

Source: BC Stats.

thousands

Profile of Participation Rates & Aging Population Profile of Participation Rates & Aging Population Set to Dampen Set to Dampen LabourLabour Force Growth Force Growth

BC Participation Rates, 2005

0102030405060708090

100

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+

MalesFemales

Source: BC Stats.

per cent

Much Slower Growth in Much Slower Growth in LabourLabour Force Force

BC Labour Force Growthhistory and projections

0

1

2

3

4

5

6

76 81 86 91 96 01 06 11 16 21 26

Baseline

Low

High

projections

per cent

Source: Statistics Canada, BCBC.

Implications of Dwindling Labour Force Implications of Dwindling Labour Force GrowthGrowth

• May not bring across-the-board labour shortages, but employers will have to adjust to a world of “relative labour scarcity”

• Potential economic growth will decline» GDP growth = productivity + employment growth (hours

worked)» over the past decade output per worker has increased 1%

per year (and output per hour by 1.2% - 1.3%) » potential GDP growth per year could slow from approx. 3%

to 1.2%-1.6%

• Productivity gains critical to address the challenge of slower labour force growth

SummarySummary

• BC’s economy has turned around and is outperforming Canada on most key metrics

• Real GDP growth of 3.5-4.0% likely in 2006-07

• Lower mainland growth should roughly equal province-wide performance, partly due to expanding population and acceleration of infrastructure projects

• Some short-term risks to be aware of, as well as medium-term challenges to continued growth

For a copy of this presentation, For a copy of this presentation, please contactplease contactVicki Champ Vicki Champ

atatvchamp@bcbc.comvchamp@bcbc.com

or visit our website at:or visit our website at:www.bcbc.comwww.bcbc.com