Real Estate Market Update – The Tipping Point?
Since Vancouverites like to compare the local market to other global cities, it is important to point out that most of Vancouver’s market indicators are similar to those seen recently in Sydney, Stockholm, London, and Manhattan before their home prices began to drop. That doesn’t guarantee a price correction in Vancouver, but it should cause homebuyers to think carefully before making a purchase offer.
Sales have dropped significantly in 2018. While government intervention is likely a factor, a more likely cause is that home prices have risen beyond the reach of a majority of households and, if prices continue to increase, more buyers will drop out of the market. There are many theories to explain why prices continue to climb, but economic fundamentals aren’t one of them. In April, CMHC, the government agency charged with helping Canadians to achieve home ownership, reported that prices in Vancouver “are higher than incomes, mortgage rates and other fundamentals can justify.”
We looked at both measures of market balance and can tell you conclusively that detached home markets in Metro Vancouver have moved strongly toward abuyers market, whereas condos are still asellers market.
Turning our attention to prices, the overall market saw a price decline in June according to the Teranet-National Bank House Price Index. Their official index, published July 12, rose slightly because it is an average of April, May and June numbers but their raw index for the month of June was slightly lower than May, which may indicate the beginning of a downward trend.
Of course, we know the situation is a bit more complicated because the Eastside and Westside of Vancouver tend to behave differently, as do condos and detached homes.
Detached homes
Looking back to the beginning of 2015, there have never seen more houses for sale in Vancouver than today. We are at “peak supply”, and the value of a benchmark house in the Vancouver Westside has dropped $274,000 (7%) since peaking in July 2017.
Meanwhile, a benchmark house in East Vancouver has only dropped $32,000 (2%) since peaking in November 2017.
It appears that detached home prices in Vancouver hit a ceiling in 2016 and won’t provide much in the way of gains for the foreseeable future.
So, is a hold strategy advisable for baby boomers who have lived in these homes for the past 20 years? That’s a difficult call to make. Over the past year, a home on the Westside lost a quarter of a million dollars in value but that homeowner probably bought the property for less than half a million and is the proud owner of a property with $3 million in land value. A hold strategy seems only to be low risk if the property is likely to be redeveloped into townhomes or condos. If mortgage rates rise closer to 5% or 6% then it may take a long time before we see prices nearing the past peaks.
Condo apartments
The benchmark Vancouver Westside condo has risen in value by $243,400 to $842,600 since the beginning of 2016, and the last peak was this May 2018.
However, from the beginning of 2016 to today, the benchmark East Vancouver condo has risen in value by $200,000 to $573,000 and the last price peak was in March 2018.
Eastside condos have been a better investment, appreciating 54% compared to 41% on the Westside. Both Eastside and Westside outperformed the stock market by a long shot. Buying condos was just as lucrative as buying Google or Tesla over the same timeframe.
Additionally, banks loan you money at interest rates of 2.5% to 3.5% to buy a condo, a cheap way to borrow for a stellar return.
Both Eastside and Westside homes have dropped slightly since peaking earlier this Spring. Although this could be just a pause in the upward trajectory, it could also be the tipping point.
The market has been rocked by a series of government interventions and has always bounced back, but this may be the end of the road.
Recent government interventions (listed on the price chart above) include:
- July 2016, BC government introduces a 15% foreign buyer tax to Metro Vancouver.
- Oct 2016, CMHC adds stress test to mortgages with small down payments, stops insuring mortgages for condo rentals, and stops insuring mortgages longer than 25 years.
- July 2017, Bank of Canada overnight rates rise to 0.75% after 10 years at historical lows.
- September 2017, Bank of Canada overnight rates rise to 1.00%.
- January 2018, Federal Government adds stress test to all mortgages through federally regulated lenders.
- January 2018, Bank of Canada overnight rates rise to 1.25%.
- February 2018, City of Vancouver introduces empty home tax.
- February 2018, BC government raises foreign buyer tax to 20% and expands coverage to Fraser Valley, Capital Regional District, Nanaimo Regional District, and Central Okanagan. Also announces it is establishing a new, publicly accessible registry of who owns real estate in BC and that residential property will no longer be allowed to be held by numbered companies or anonymous trusts.
- July 2018, Bank of Canada overnight rates rise to 1.50%.
Declining sales are another indication that prices may tip. One has to wonder how low they'll tumble as we enter the quieter half of the year.
Further, industry observers have begun to see incentive credits of $30,000 to $100,000 on condo pre-sales in Metro Vancouver.
Low affordability, low sales, rising interest rates, developers offering significant discounts, and government intervention to reduce demand are the reasons we at Mortgage Sandbox believe 2018 could be the tipping point for Metro Vancouver Real Estate.
Conclusion
There is a lot of uncertainty in Canadian real estate markets these days. You could try to time the market, but nobody knows the best time to buy. If you wait, interest rate increases will erode your home buying budget. However, if prices drop further, your budget will buy you more home. Based on the slow sales this Spring, it appears most prospective buyers are taking a “wait-and-see” approach.
If your family is growing and you need a larger space or simply a place to call your own, or you believe timing the market is pointless, then take advantage of these tips to reduce your risk.
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