By Jack Blackwell, Economist at CPABC
BRITISH COLUMBIA – BC’s investment climate underwent considerable change in 2023, highlighting the complexity of the economic environment. Specifically, higher interest rates and persistent inflation continued to put downward pressure on the economy, while population growth and global pressures challenged affordability.
This volatility was evident in the housing market, for example, where we saw declines in sales, average home prices, and detached housing starts, combined with record-high starts for attached units. On the non-residential side, total building investment grew in 2023, despite a decline in spending on industrial projects.
Looking ahead, the forecast for BC’s economic output in 2024 is bleak, with analysts expecting real GDP per capita to contract over the year, before stabilizing in 2025. On the whole, weak labour productivity continues to plague the BC economy, making policies that boost investment a priority.
Inflation remained above Bank of Canada target
To put 2023’s numbers in context, we need to look back to BC’s economic recovery in 2022, following the easing of pandemic restrictions. Amid this recovery, inflation reached its highest rate in nearly four decades, leading the Bank of Canada (BoC) to increase the policy interest rate from 0.25% to 4.25% over the course of 2022. By December of that year, BC’s annual consumer price index (CPI) growth was 6.6% year-over-year—slightly down from peak levels but still well above the BoC’s 1%-3% target range.
Fast forward to 2023, when the BoC implemented three additional rate hikes, culminating in a policy rate of 5.00% in July—a rate that was maintained through the BoC’s latest decision on January 24, 2024 (see Figure 1).
According to the latest data from December 2023, BC’s inflation rate was 3.4%, matching the national rate; however, the concurrent rise in shelter and food costs—which reached 6.4% and 5.4%, respectively, in December—significantly outpaced the overall inflation rate. Notably, inflation for rented accommodation (+8.5%) exceeded that for owned accommodation (+6.7%), despite higher mortgage interest rates.
Interest rates expected to decline in 2024
While 2023 was largely characterized by softer economic data,1 and the contractionary effect of higher interest rates continued to take hold, factors such as robust wage growth, a significant population increase, and various global pressures made it more challenging to curb inflation. Nevertheless, the key question dominating economic discussions in early 2024 is: “When will the BoC lower interest rates?”
BoC Governor Tiff Macklem has played a pivotal role in setting expectations for monetary policy. In the BoC’s January announcement, Macklem highlighted a shift in the Governing Council’s focus—from determining the height of interest rates to considering their duration at elevated levels—and noted that further rate hikes were unlikely.2 This messaging was echoed by independent forecasters, who anticipate rate cuts by the middle of 2024.3
Home sales slowed in 2023, but prices showed resilience
Higher interest rates continued to dampen the BC housing market in 2023, as both sales volume and average home prices declined. Residential sales fell by 9.2% compared to 2022. At the same time, the average residential sale price decreased by just 2.6% from the previous year, showing some resilience in the face of economic headwinds.4
Residential sales are likely to rebound in 2024, given the expected cuts to interest rates. Prices, however, are expected to show little change during the year.
Trends for housing starts diverged in attached and detached markets
BC achieved a record-high number of housing starts in 2023. This surge was predominantly fuelled by a remarkable upswing in higher-density units, particularly apartments, which drove attached housing starts up by 20.3% compared to 2022, to just under 41,000 units (see Figure 2). In contrast, the detached housing market experienced a significant downturn, recording only 7,009 starts—a 23.1% drop from the number recorded in 2022.
This distinct split in the housing market underscores the complex nature of housing development in the present economic landscape. Factors such as elevated population growth and deteriorating affordability played pivotal roles in driving the demand for high-density living. Meanwhile, the decline in detached housing starts reflects caution among British Columbians grappling with high interest rates and sustained inflation.
A recent TD Economics report forecast that housing construction will falter slightly in 2024, with the number of housing starts expected to drop by nearly 10% from record highs.5
Non-residential investment rose due to strong growth in institutional and government sectors
From January to November 2023, total non-residential building investment in BC reached $7.18 billion, reflecting a 6.6% increase from the same period in 2022 (see Table 1). In particular, institutional and government investment achieved a record high of nearly $2.1 billion. This spike was largely driven by increased spending on health and medical facilities, including a new hospital in Dawson Creek that began construction during the second half of 2023.6
Notably, however, industrial investment—which includes factories as well as buildings related to transportation and utilities, mining, and agriculture—fell for the fifth consecutive year in 2023, totalling just under $700 million.
Table 1: Non-Residential Building Investment in BC
| 2023-YTD* | 1-year change
(2022) |
2 year-change
(2021) |
5 year-change
(2018) |
|
| Total
|
7,179,939,319 | 6.6% | 8.7% | 18.8% |
| Industrial
|
696,557,603 | -8.6% | -12.2% | -28.1% |
| Commercial | 4,404,323,030 | 6.1% | 12.8% | 23.1% |
| Institutional and government | 2,079,058,687 | 14.2% | 9.0% | 39.0% |
Source: Statistics Canada, Table 34-10-0286-01, expressed in 2017 constant dollars, not seasonally adjusted.
*January to November 2023; compared to the same period in prior years. 2023-YTD values do not sum to the total due to rounding.
Moreover, the value of building permits issued—a leading indicator for future building investment—has been on a downward trend in BC from its post-pandemic peak in February 2022. The total value of non-residential building permits issued in November 2023 was $416 million, marking a modest increase of 6.7% from November 2022. Over the same period, the value of residential building permits fell by 31.9%, down to $654 million.
See full report here