April 15, 2021 | 13:02
Victoria's Economy: In the Sweet Spot
British Columbia’s economy has outperformed on a relative basis through the pandemic, contracting an estimated 4.8% in 2020, less than the 5.4% decline for all of Canada. The province has had a lower health impact overall—it currently has a below-average 2,200 cumulative cases per 100k people (vs. 2,900 for Canada). Nevertheless, a third wave of cases this spring has resulted in the province implementing “circuit breaker” restrictions on indoor dining, group fitness, and religious gatherings. Meantime, the province is in phase three of its vaccine roll-out, setting the stage for resumed strong recovery later in the year.
Due to its comparatively small size, the city of Victoria has had a relatively light caseload—the southern region of Vancouver Island has had only 1,400 cumulative cases so far. The city has not announced major restrictions beyond those ordered by the province, which is largely why we judge the pandemic’s economic impact to be smaller in Victoria than in the province overall.
The labour market has begun to recover as well—in the three months to March, the employment rate was two ppts below its pre-pandemic peak.
The unemployment rate stands at 5.7% in the three months to March, following the first increase in the measure since the summer. That's 1.6 ppts lower than the province overall, but note that the city had posted eight straight months of sub-4% unemployment rates before the pandemic. In the longer term, an aging workforce (the 2016 Census noted that over 25% of workers were over the age of 55) means that Victoria will need to rely on immigration to drive growth.
The city's industry composition has kept it relatively insulated from the effects of the pandemic, despite a heavy reliance on service sectors (88% of jobs). Wholesale and retail trade (14.6% of jobs) has led the way in year-over-year employment growth in the three months to March (+5.9k net jobs). As a provincial capital, the economy has benefitted from the relative stability of the public administration sector through the pandemic—it added 3,900 net jobs since last year and now accounts for 15.2% of employment. At the same time, the city’s exposure to tourism will act as a headwind to its recovery until travel restrictions are loosened: in 2019, over 10% of jobs were in the accommodation and food services and information, culture, and recreation sectors. Given the city's location, cruise traffic is a significant driver of tourism. We judge that this type of activity will particularly lag the recovery given surrounding health concerns. Looking ahead, public services such as healthcare and social assistance (13.2% of jobs) will likely gain importance given the city’s demographic challenges.
Victoria's housing market, like most of the country, has performed exceptionally well through the pandemic. Existing home sales rose 16.9% in 2020 despite the spring void. As of early 2021, sales are running at record levels, surpassing the height of the 2016 boom. The demand strength is due to record-low mortgage rates, a swift job recovery in higher-paying industries, and a sudden shift in preferences toward larger homes outside of major city cores, with the latter aided by remote work. Recreational property demand on Vancouver Island has also surged. More concerning, it's also evident that expectations of higher prices are driving increased fear-based buying and speculation.
New listings are coming to market at a faster rate than pre-COVID norms, but insatiable demand is keeping the market extremely tight. As a result, prices have jumped, with the MLS benchmark rising 10.1% y/y in March to a record high. But, the real story lies below the surface, where single-detached home prices are up more than 12% y/y. Condo prices, on the other hand, are essentially flat as investment fundamentals deteriorated alongside lower rents and a limited short-term accommodation market, as well as a falloff in immigration.
Homebuilding has held relatively steady in the Victoria area in the past year, with the sector only marginally impacted by restrictions.
In the commercial real estate sector, downtown office vacancy rates are moving up across the country. The shift to remote work is clearly having an impact on the market that was extremely tight before the pandemic. Meantime, commercial rent relief has helped keep tenants in place, but there will likely be some long-term scarring in the Main Street commercial segment. Others, such and industrial and warehousing, appear to be coping well. In general, rents could see long-term pressure, and cap rates could remain wider than pre-COVID levels, especially relatively to government bond yields. Multi-family residential is expected to remain strong post-pandemic when nonpermanent resident flows return.
Population growth ebbed in 2020, with growth in the 15+ demographic running at 1.1% in March. While that still marks a solid pace, it is down from almost 2% y/y before the pandemic. A dramatic falloff in immigration during the pandemic has weighed on growth. In particular, a collapse in nonpermanent resident inflows (students, temporary workers, etc.) has taken pressure off of rental housing, which was previously stretched. Canada is sticking to high immigration targets, which bodes well for demand in larger cities, but it remains to be seen how quickly these flows return after the pandemic.
The Bottom Line: Victoria is in a relatively favourable position through the pandemic, thanks to its smaller size, lower caseload and diverse industry base. As the pandemic passes and harder-hit industries rebound, the city should remain an attractive location on the Canadian landscape.