Increasing cost of building Vancouver houses puts upward pressure on inflation

The surge in prices for new houses is now nearing the increases of the late '80s housing boom, and analysts are warning that the rise could put upward pressure on inflation in the wake of further surprising evidence of a hotter-than-expected real estate market.

Prices for new housing in Vancouver rose 6.5 per cent in February compared with a year ago, driven by rising construction material and labour costs, Statistics Canada reported Tuesday.

New housing in Canada as a whole rose seven per cent, the steepest year-over-year increase in 16 years. Most cities posted increases well above inflation, now running at 2.2 per cent.

"In fact, new house price gains are moving up toward levels not seen since the real estate boom of the late 1980s," noted J.P. Morgan economist Ted Carmichael, who warned the increases will feed into higher core inflation, which the Bank of Canada scrutinizes for evidence of underlying inflationary pressures.

The report follows on the heels of news earlier this week of a surprising surge in the pace of housing construction in March, which also flew in the face of expectations of a cooling housing market.

"Housing is the ultimate interest-rate-sensitive sector and it's hot but not bubbly, a sign that the Bank of Canada will keep pushing rates upward, but not to levels that undermine housing or the economy," said John Johnston, chief strategist with The Harbour Group at RBC.

According to StatsCan's February New Housing Price Index, price increases in Vancouver did not match the rise in new housing costs in Calgary and Edmonton.

Calgary recorded the sharpest price hike in the country, up 22.8 per cent from last year, while Edmonton was up 12.4 per cent.

Don Drummond, a senior vice-president and chief economist at TD Bank Financial Group, attributed that surge to a tighter labour supply and higher wages in Alberta, compared with the rest of the country.

The survey, which measures against 1997 indices, does not provide actual home price figures.

Drummond added that the results tend to be heavily weighed by the cost of new, smaller housing units in the outskirts of the city, and thus do not follow the same spike in the resale housing market, which includes larger, more expensive homes downtown.

"You're getting quite a big gap between existing homes and new homes," he said.

Earlier this month, TD Bank reported that the average price of a house in the Vancouver area was $490,000 in February, up 26 per cent from $387,000 recorded the same month last year.

Drummond added that Vancouver residents are paying 42 per cent of their pre-tax household incomes to pay mortgages on an average home in the city.

"That's the highest it's ever been," he said. "Absolutely affordability is a big problem."

Housing prices in Vancouver's resale market are expected to continue rising, with double-digit gains forecasted for this year and next, said Carol Frketich, regional economist for the Canada Mortgage and Housing Corp.

"There's just been a lot of demand out there," she said, adding that demand is being fueled by solid job gains and population growth in B.C

Peter Simpson, CEO of the Greater Vancouver Home Builders' Association, added that interest rates may creep upward, but will not likely cool Vancouver's real estate market any time soon.

"That won't be enough to put the brakes on the market," he said.

(prepared by Eric Beauchesne and Wency Leung/Vancouver Sun)