A large inventory of unsold condos in Vancouver is creating a difficult environment for new construction and causing housing starts to plunge, according to a Canadian think tank.

There were 2,008 housing starts in Vancouver in June, a 34.8% drop year-over-year, according to a July 27 analysis by Signal49 Research, formerly The Conference Board of Canada.

Weakness was concentrated in the apartment category, which saw a 40.8% decline year-over-year to 1,561 units in June. Single-family homes saw a 12.1% decline to 167 units, according to data sourced from the Canada Mortgage and Housing Corp.

Robin Wiebe, lead economist with Signal49, said housing starts are weak in Vancouver partly because of the “extraordinary overhang” of unsold apartments, mainly condos. This prompted the recently announced Canada-BC plan to convert more than 2,200 vacant units into affordable housing.

“That’s the whole message behind the prime minister’s visit out there a couple weeks ago,” said Wiebe, who is based in Toronto.

“Without some clearing of the backlogs, there can’t be new construction, at least that’s what the developers are saying,” he said. “They just can’t carry all these unsold condominiums or unsold apartments on their books and hope to achieve strong starts in the future.”

Another reason for poor housing starts is a falling population and shrinking labour force, he said. Vancouver has historically relied on immigration and foreign demand to fuel its market, but population growth has slowed more dramatically here than elsewhere in the country.

In the resale market, Vancouver’s seasonally adjusted sales-to-new-listings ratio is weak at 41.3%, Signal49 said, citing data from the Canadian Real Estate Association. This contrasts with the national ratio of 50.2% in June.

This ratio is a measure of sales demand versus listings supply, Wiebe explained. If sales rise relative to listings, there is more demand and this should boost prices. By contrast, if listings rise relative to sales, there is more supply and this should depress prices.

Vancouver’s ratio is a “pretty weak number” giving buyers the upper hand in negotiations, he said.

Vancouver’s struggles are partly due to it being Canada’s least affordable city and one of the world’s most unaffordable cities. “That is a definite extra challenge for Vancouver,” Wiebe said.

BC is also facing soft employment conditions and softwood lumber tariffs, though its services-based economy is not quite as exposed to US protectionism as Ontario’s auto sector, he said.

This is on top of nationwide challenges like elevated pressure on interest rates, low consumer confidence and geopolitical uncertainty.

“There are a lot of reasons why Vancouver is some further way away from stabilizing than the rest of Canada. It does look a little tough out there,” Wiebe said.

Jock Finlayson, chief economist with BC’s Independent Contractors and Businesses Association, agreed the Vancouver housing market is weak compared to normal long-term conditions and other Canadian metros due to its declining population and unabsorbed inventory.

“Three or four thousand newly built or recently built empty condos obviously is a cloud hanging over the market,” he said.

“Having a large inventory of empty, unsold condos in a declining market is absolutely a headwind for any kind of recovery, and I think that’s going to persist for some time.”

Still, the Canada-BC plan may not make much of a difference, Finlayson said.

“It might slightly improve the outlook for future condo development, but there’s no population growth,” he said.

“In fact, we’ve got declining populations and fewer households. Until that turns around, I just don’t see much prospect of a meaningful recovery.”

Finlayson said he is projecting homebuilding to decline this year and next year, meaning at least two more years of declining housing starts, including in Metro Vancouver.

“If we’re talking about housing, I should put on some funeral music,” he said.

Think Tank : Unsold Condos Weigh on Vancouver Housing Starts by Jami Makan | BIV