With its construction pipeline full and housing demand sliding, the province has entered the late innings of the real estate cycle
Is this a case of be careful what you wish for? As a historic housing boom gripped B.C., where the average sale price has doubled since taking a minor dip in 2008, real estate developers preaching the virtues of more supply urged municipalities to cut red tape and allow widespread densification. The wait is over: after years of moaning and groaning from the development community about long delays and rising construction costs, the province has more new and unfinished housing than ever.
Based on a 12-month rolling average, residential unit completions throughout the province reached about 32,000 this March, according to Canada Mortgage and Housing Corp. That’s the most since May 1994, and there’s plenty more to come. In March, units under construction in B.C. surged to a record 55,692. Our last construction boom topped out at some 39,000 units a decade earlier.
Meanwhile, housing starts, defined as pouring concrete and laying a foundation, have never been higher, setting a 12-month average pace of 40,264 in March. This ensures that a tidal wave of new supply will flood the B.C. real estate market over the next few years.
With the construction pipeline full and housing demand starting to slide—sales fell 12 percent year-over-year in the first quarter, the Canadian Real Estate Association reports—it looks like B.C. is following the textbook boom-and-bust real estate cycle.
Phase 1 of the cycle is recovery, according to Glenn Mueller, a professor at the University of Denver’s Franklin L. Burns School of Real Estate and Construction Management. With unemployment spiking, construction grinds to a halt. Phase 2 is expansion: new construction starts to pick up, the jobless rate improves, and the economy keeps churning along. New opportunities prompt more immigration, and the strengthening business environment helps create jobs.
Phase 3—which B.C. has entered—is hyper-supply. This is when everyone feels like a real estate investment guru and construction fires into overdrive. The result is misallocation of resources and capital, with developers overshooting supply as demand falls. Climbing house prices absorb an ever-larger percentage of income, becoming a drag on consumer spending. Sales drop off, housing starts decline, and construction slows, sowing the seeds of phase 4, recession. Vacancies rise and house prices fall before the cycle begins all over again.
Today’s conditions don’t suggest that B.C. has moved from property boom to impending doom. But they’re a reminder that real estate markets are cyclical—and that this province is no exception.