Nobel laureate and economist Vernon Smith speaks in Vancouver. A sudden drop in housing starts seen as the first indicator of a recession.
- Dale Northey/ SFU
By Frank O’Brien
Housing bubbles have been a leading indicator in 11 of the 14 economic recessions since 1929, but based on a formula presented by a Nobel laureate and economist, British Columbia and Vancouver appear bubble-resistant.
Vernon Smith, awarded the Nobel Memorial Prize for Economic Science in 2002 for his work in empirical economic analysis, is a professor at Chapman University in California and president and chair in finance at the International Foundation for Research in Experimental Economics. He spoke to a packed crowd November 14 in Vancouver in an event presented by Simon Fraser University and the Bank of Montreal.
Smith, 87, who recalls his family’s Kansas farm being foreclosed in 1934, said a downturn in the housing market was precursor to the Great Depression, the 2007 “great recession” and virtually every other recession in-between. “It is nearly 100 per cent accurate,” he said.
The key indicator, Smith said, is housing starts. Homebuilders, he said, are much more aware and reactive to changes in the market than typical homeowners, home buyers or lenders. “They see what is happening first,” he said.
Early in 2006, starts of U.S. housing suddenly began falling from record highs while all other economic indicators were still increasing, Smith noted. A year later, home construction had virtually stopped, U.S. home equity had shed $500 billion in value and the world was in the grip of the worst economic crisis in 100 years.
However, in a follow-up interview with Western Investor, Smith noted, “all housing markets are regional.” Housing sales and prices in Prudhoe Bay, Alaska and North Dakota, for example, continued strong right through the 2006-2010 downturn, he said, because of strong job generation and high in-migration.
Using Smith’s formula for housing bubble-burst scenarios, B.C. and Vancouver do not appear threatened, despite record-high prices in the latter. B.C. housing starts this year are up 3.1 per cent from 2013 and forecast to rise a further 1.4 per cent in 2015, according to Canada Mortgage and Housing Corp. In Vancouver, housing starts are up 5 per cent from a year ago and are projected to dip slightly next year, but increase about 3 per cent into 2016.
As well, the B.C. unemployment rate remains low; the province is attracting about 39,000 immigrants annually and, for first time in four years, is seeing a net increase in interprovincial migration.
“We do not see a housing bubble in the Metro Vancouver market, nor elsewhere in B.C.,” said Bryan Yu, ?regional economist with Central 1 Credit Union, which released a fairly bullish outlook for the B.C. housing market earlier this year.
“Currently, inventories are in decline in both the existing and new home market, suggesting a well-balanced market. There are risks, particularly related to external shocks of a sharp increase in interest rates or another recession, but these are generally offsetting risk, and perceived to be low probability.”
Smith cautioned that a huge inflow of easy mortgage credit started the last housing bubble and he sees parallels today in low-cost mortgage money. The award-winning economist concedes experts were “blindsided” by the last recession and don’t know when the next one will appear.
“Prediction is impossible,” Smith said.
