The Impact of Changing House Prices on GDP in BC

Source: https://www.armstrongeconomics.com/markets-by-sector/real_estate/real-estate-in-decline/

Yesterday (11th of July 2018) the Bank of Canada continued to increase interest rates, as many expected. 

Since the increase in the interest rate, the media coverage has been flooded with conversation around the impact this will have on homeowners. Specifically, it is well presented that Canadian households currently have a pile of debt and will have trouble continuing to service their debt if their payments or obligations increased. you can read a Bank of Canada article on the subject here.

Building off of these discussions, although quite separate, I began to wonder. Here in BC the Finance, Insurance and Real Estate (FIRE) industry make up essentially 25% of our provincial GDP.

As governments continue to engage in policies which aim to make housing more affordable (decrease or slow price growth) and as the Bank of Canada continues its upward movement of interest rates (decreasing the demand and supply of real estate); we have some serious headwinds on house price growth. The question of interest then: Given the size of the FIRE industry in BC, for some change in the house price, how does this filter through to impact our provincial level of output?

To answer this I conducted a simple time-series analysis which allowed me to jointly model both house prices (Teranet national bank composite house price index for BC) as well as the provincial GDP (Statistics Canada).

In order to ensure stationarity, these variables have a log-difference transformation applied to them, giving them the interpretation of the annual percent change. Each can be viewed independently below:

With these variables, I then apply a one standard deviation shock to the transformed House Price Index (HPI), which works out to be about a 4.6% point annual change in the index. Observing how this shock filters itself through both the HPI and GDP over time we see the impact of this shock. This impact is presented below.

First, evaluating the impact of a 4.6 percentage point shock to the House Price Index (HPI) on itself. What we witness is no big surprise, the housing price index jumps in the shocked year (year 1) and then slowly returns to it's normal. With a 95% Confidence level, this shock to house prices has been fully absorbed within 2 and a half years.

Recall we are dealing with growth rates here. Imagine the HPI is doing its thing, then, out of the blue, it jumps by 4.6 percentage points. the effect is an immediate increase in the index, followed by 2 and a half years of additional (but slowing) growth before returning to its pre-shock level of growth. 

Looking at the impact of a shock to the HPI on GDP we witness an impact which was expected. Our shock happens in year one, however, this does not filter through to impact our level of GDP until the second year. At this point, the GDP jumps to an estimated increase of 2 percentage points (fairly large given average growth rates of GDP). However, this impact quickly subsides and is showing no statistical effect 2 and a half years after the shock.

Through this, we can determine the elasticity of GDP to the HPI (for some % change in HPI, what is the impact on the % change in GDP). Thus we can determine the elasticity of GDP to be 0.435, meaning that GDP is not overly sensitive to a change in the HPI, that is GDP would be inelastic. Just the same we can take this to mean that for a 1% point change in the HPI, we would expect to witness a 0.435% point change in the GDP.

So, if we do see a collapse of house prices, this may filter into a bad few years for the BC Economy. Keep in mind, in 2014 when oil prices collapsed causing Alberta's GDP to collapse, Oil and Gas (with support services) accounted for aproximately 8% of Alberta's GDP. Given BC's reliance on the FIRE industry (25% of GDP), a collapse in the price of real estate could very well have a major impact on our provincial economy.

What are your thoughts on this, feel free to comment below.

Canadians most indebted in OECD

Stumbled across this CBC Article today, you can find the full article here

I have written and spoken on much of this before, but a brief summary is that Canadians currently are the most indebted of any OECD nation with 101% household debt to GDP. with the link being made that the majority of this debt is being held in real-estate or mortgage debt.

I know the Bank Of Canada has expressed concern about this the last few times they have raised rates to control inflation.

Reason being, here in Canada, majority of mortgage holders are on five year fixed rate mortgages. That is, every five years they need to re-negotiate their mortgage rate with their financial institution. So any borrower who locked in 4 years ago at record low rates, now that they are coming up for renewal, they may be in for a surprise as their mortgage payments drastically increase in order to keep their amortization schedule on track.

If inflation ever rebounds forcing the Bank of Canada to act on interest rate to fulfill their mandate ... many borrowers may find themselves in trouble.

Adding to the problem, the article also notes that house prices in Canada are 50% over-valued in relation to the corresponding rental price for that real-estate. Although there are several ways in which rental prices are tied to real-estate price, if you are interested about the relationship, I have written about one here.

What are your thoughts on the revelation, shocking, or as expected?

Feel free to comment below.

Costs of Emergency Response: Comparing Ambulance in Vancouver with the Vancouver Fire Department.

Image Source: http://www.bcehs.ca/PublishingImages/BCAS_VAN_033012_113.jpg

A while ago I stumbled across this dataset which outlined the call volumes and types of calls which BCAS (BC Ambulance Service) responded to in the lower-mainland. Although I have plans to use this dataset for some future analysis. At an initial glance, what popped out at me was that the fire department responds on average to about 5% of BC Ambulances calls in the entire lower mainland but, close to 50% of calls in Vancouver itself. (in 2014)

This piqued my interest and got me wondering. What is the cost structure of the fire department? what is the cost structure of BCAS?

From a cost perspective, I have always wondered how cost effective it is to send 6 firefighters and the large fire truck to that many calls - both from a wage and capital cost perspective. Keep in mind, both BCAS and the Fire Department are paid for with public funds, just at different levels of government, provincial and municipal respectively.

Now, luckily the Vancouver fire department provides an extremely detailed breakdown of their previous years' activities in each municipal budget, these can be found here.  Unfortunately, BCAS provides a much less detailed public budget, as a result, I have had to do my best, scrounging together information from the above dataset, the BCAS 2014 annual report, which can be found here, and the BCAS 2014 Vancouver demand analysis which can be found here.

Compiling all this information I obtain the following table, which has also been augmented with wage data from workbc.ca

The big disclaimer here is that the BCAS expense data for Vancouver and the Lower mainland is entirely estimated at 25% and 50% based off of call volumes in relation to the provincial level. As such these are entirely arbitrary and may have no bearing on reality, but at least provide an insight into these areas.

While the expenses are estimated, the call volumes and labour information is accurate and obtained from the above-noted BCAS reports.

The second disclaimer is that Vancouver Fire provides their staffing information in terms of FTE, while BCAS provides it in terms of regular full-time, irregular full-time and part-time.

Through hear-say I understand that many of these "part-time" paramedics in Vancouver can, and often do, work more than a full-time schedule. But, at the risk of underestimating, I assign each part-time employee only 0.5 FTE while each full-time 1 FTE in calculating the FTE for BCAS in each region.

Finally, for the per crew information, BCAS generally operates in crews of 2 while I understand Vancouver Fire generally operates in crews of 4. (thank you, Brian, for this update! Also recognizing that Vancouver Fire will operate with as little as 2 for some medical calls. While this changes the number of FTE crew, this does not change the total expenses/call)

Now some discussion of the actual results of the above table.

My first surprise was that only 3% of the Vancouver fire departments calls are actually to deal with fires. Another 25% of their calls are fire inspections, to finish off with 72% of their calls being medical in nature, supporting BC ambulance. That means despite being a fire department (with their budget being about twice the estimated Vancouver BC ambulance budget) they primarily act in a capacity of being first responders to medical calls.

Now in a bit of preliminary research on this topic. I looked into the importance of first-responders, and empirically it appears that having a fast response time, all else equal, greatly increases the viability of the patient. My question then; does society benefit more when the first responder is from the fire department? or given the cost of fire response, would a modified response structure with BCAS be more cost effective and provide the same patient benefit?

Clearly, the Fire Department provides an extremely valuable service, especially in cases of vehicle accidents and hazardous materials. Unfortunately, I have not yet worked out from the above dataset, what percentage of Fire calls are due to hazmat or MVI (Motor Vehicle Incident), or just medical, with the request of a first-responder (Fire) crew. This will definitely, be the area of future follow ups! (followed-up here)

To finish off this post, as it has gotten a little long, If we evaluate the cost per call and the wage cost per call between calls in Vancouver for BCAS and the Fire Department we see that:

• Vancouver Fire has a wage cost per call almost 8 times larger than BC ambulance.
• Vancouver Fire has a total cost per call almost 3 times larger than BC ambulance. 

Although this data is already 3 years old and pre-fentanyl crisis, I find it fascinating that most of the news coverage on the crisis comes from the fire department, resulting in calls for more department funding when perhaps a more cost effective solution would be to increase ambulance funding and staffing.

But then again, these observations are just from a quick back of the envelope calculation. Perhaps there is much much more to the story. 

As I said my interest has been piqued and I now have a good chunk of data to pour over. 

Move over real-estate market, I have found a new topic for the next little while.

What are your thoughts? feel free to comment below.

EDIT: In retrospect, this article may seem like I have decided to pick a side in an emergency services battle for supremacy. This is not the case! Rather the above article is purely motivated by my curiosity and surprise based on the results and through this hopefully stir some thought on how these essential services may be provided in a more cost-effective manner!