BC's booming building sector

The construction cranes of Metro Vancouver are hard at work, each new downtown condo tower a multistorey monument to the momentum of the Lower Mainland's real estate boom.

Just a few kilometres away is the decades-old panel and fibre mill of Canfor Corp., slated to close in early January after it runs down its inventories. Once it closes, 126 jobs will disappear and exports will take yet another kick.

British Columbia is booming, if you consider broad statistics, but there are two economies in this province. One is the construction-fuelled domestic boom, with condo sales and housing starts displaying continued strength, according to figures released this week. The other is a disastrous export picture, with the forestry and energy sectors - mainstays of B.C.'s resource-fuelled economy - both facing major downturns.

The Business Council of British Columbia has just issued revised economic forecasts, now predicting growth of 3 per cent next year, down from 3.5 per cent. It's tough to be gloomy when the provincial economy is set to expand at a 3-per-cent clip, well above the national average and far better than malingering Ontario. But Jock Finlayson, the council's executive vice-president, manages to do so easily.

According to Mr. Finlayson, the problem is that B.C.'s growth is being driven solely by domestic consumption, with exports and the manufacturing sector steadily weakening. A consumer-driven boom is fine - as long as it lasts - but he questions whether it can be sustained. "It's consumption activity. It doesn't lay the foundation for gains in living standards," he says.

Rising housing prices are, without a doubt, fuelling consumer spending. Housing prices in Metro Vancouver are rising at 12-per-cent rate so far this year, according to Credit Union Central of British Columbia - tens of thousands of dollars in added wealth for even a modest condo or house in urban Vancouver. So long as housing prices keep rising at that clip, B.C. can continue with the Ponzi-like expansion where I pay you to renovate my house so you can spend the money that allows someone else to buy a home, which further inflates housing prices and allows me to once again spruce up my kitchen.

It all adds up to a dangerously familiar economic equation of consumer spending on the rise while wealth creation and investment lag, and the trade deficit soars. Even before the latest drop in exports, B.C. had the most inward-facing economy in the country, with exports accounting for a paltry 46 per cent of gross domestic product. If B.C. were a country, Mr. Finlayson says, it would be a twin to the American economy. Fortunately for the province, the rest of Canada provides an economic cushion for its dismal export performance.

And it's getting worse. In September, exports dropped to their lowest level in three years, down to $2.46-billion from a recent peak of close to $3.2-billion two years ago, according to figures from the Credit Union Central of British Columbia. So far this year, exports from B.C. are down $1.1-billion, a 4.5-per-cent drop, with two sectors, forestry and energy, accounting for virtually all the decline.

Forestry is being pummelled from three sides. First, the U.S. housing market continues to sink, with starts falling by close to 50 per cent. Prices are tumbling - which has the perverse effect of jacking up the export taxes that Canadian companies pay under the softwood lumber accord. Now, the surge in the Canadian dollar has administered the coup de grace, with even the super-efficient mills of the B.C. Interior facing closings. The coastal industry, with high costs and just emerging from a strike, is in an even worse state. "Forestry is in a disastrous situation in B.C. at the moment," Mr. Finlayson says.

The energy sector is not quite as desperate, but B.C. natural gas producers face the same pinch of falling prices and a rising currency. Add in the rising costs of the sector and the result is evaporating profits.

Even a mild downturn in the housing market could quickly dispel talk of a B.C. boom. Mr. Finlayson says it wouldn't take a crash, just a reversion to the long-term average rate of growth. It is only the ability of the housing sector to defy that long-term trend that has pushed the province into boom territory. "If we didn't have it right now, we'd be sucking wind."

So, a lot is riding on those construction cranes continuing to rise into the skyline - and to rise above history.

(prepared by Patric Brethour/Globe & Mail)