Key factors at play in the Vancouver housing market
I was recently asked to provide my perspective on whether Vancouver is at risk for a correction.
In short, yes Vancouver is at risk of a correction but there is no way of knowing if or when it will come. The risk is well known and has been highlighted economists at the Bank of Canada, the IMF, the U.S. Fed, UBS, and CMHC.
As well, an examination of the factors at play in the market reveals a definitive strengthening in the factors influencing the market downward.
The sources of upward pressure on prices are weakening slightly, but not significantly.
Upward pressure
- Non-resident Owners:
As a society we struggle with this. Ideologically, we believe that you should be allowed to do whatever you like with your own property, even if you choose to under-utilize it. In practice, we are concerned that 5% of homes aren't being used to provide shelter when there are people in desperate need of homes. As baby boomers retire we may have more snow-birds. There is an economic engine and an association dedicated to helping retired Canadians live abroad during the winter. Empty home taxes will simply ensure they are away for just under 6 months, but it won't change the trend dramatically.
- Short Term Investors:
These are speculators or "flippers" and are local and foreign. Ironically we have television shows that promote and dramatize this type of real estate investment. The speculation tax proposed by the BC NDP really doesn't address this activity. So long as prices keep rising, this type of investment is rewarded,. Essentially, they are speculating the government can't build enough supply to moderate prices. So far, they've been correct.
- Low Mortgage Rates:
Mortgage rates were at historical lows in 2016, but have since risen over 1%, taking 8% off of home buying budgets.
- Too Little New Supply:
Most people believe there is a severe housing shortage in Vancouver. This is evidenced by very low rental vacancy rates, the prevalence of basement suites, and the absence 4 bedroom apartments from the development pipeline. This is a persistent issue and remains the greatest hurdle. Unfortunately, the government's promise of more supply in 10 years isn't terribly convincing since they only hold office for 4 years.
- Dark Money:
Dark money still flows in the market and is accused of distorting prices. It is hard to assess the impact of dark money but it tends to avoid the spotlight and may tapper off given recent publicity and focused enforcement.
Downward Pressure
The sources of downward pressure on prices are strengthening.
- Mortgage Rules:
The government and CMHC have added stress tests that reduce home buyer budgets by 16% on top of the 8% taken off by rate increases since 2016.
- Rising Mortgage Rates:
Mortgage rates are projected to rise another 1% by the end of 2019 which will shave another 8% off home buying budgets, for a total budget reduction of 32%.
- Government Action:
Government intervention is coming from all sides with the intent to bring about a correction, and governments risk triggering an over-correction. Recent measures include taxes on empty homes, non-resident owners, and luxury real estate.
- Ability to Buy:
Affordability is ridiculously low. Even if prices dropped significantly, affordability would be out of reach for most households. Looking at April 2018 data, 66% of the properties for sale can only be bought by the wealthiest 8% of Metro Vancouver citizens. 81% of the listings can only be bought by the wealthiest 17% of Metro Vancouver households. This imbalance doesn't seem sustainable in the long run.
- Demographic Shifts: We may have reached "peak millennial" a demographic shift that means most millennials have already bought a home. As a result, "Bank of Montreal senior economist Sal Guatieri recently said Canada's housing market potentially faces a decade of stagnation."
- High Debt Levels:
Canadians have record levels of debt and experts are uncertain we can handle payments at higher interest rates without a significant number of people going broke.
A May 3rd Breakfast Television update on the real estate market supports the view that fewer buyers are able or willing to buy at today's prices. Even though prices are up, home purchases are down.
Summary
Prices could continue to rise but the risk of a correction has risen significantly. There is still a critical supply issue so, regardless of home prices, many more homes need to be built in Vancouver.
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