Metro Victoria Home Price Forecast - July 2020
HIGHLIGHTS
The impact of Coronavirus on Metro Victoria will likely be very significant.
Metro Victoria benchmark home prices have held their value. Curiously, median house prices have risen while the median condo value has dropped.
Homebuyers stayed on the sidelines from March through May, but in June they jumped back into the market with both feet. In the coming months we will learn if this is a trend or 3-months of backed-up demand piled into one month.
Condo listings have risen materially in June, eclipsing previous years, while house sellers have been more reluctant to list.
CMHC identified the Metro Victoria property market as a high-risk market before the Coronavirus Recession became an issue.
We are watching several key risks:
The possibility of a second wave and corresponding lockdown in Canada.
How well the U.S. manages the pandemic - roughly 25% of the Canadian economy relies on exports south of the border. As well, most tourists to Canada are American.
The impact of expiring eviction freezes and mortgage payment deferrals. These are delaying the true impact of the pandemic on housing. They can not be extended indefinitely.
Short-term rentals in Montreal (now vacant due to Coronavirus) may be converted to long-term apartment rentals or sold, and this could add unexpected supply to the market.
This article covers:
Where are Metro Victoria prices headed?
What factors drive the price forecast?
Should investors sell?
Is this a good time to buy?
1. Where are Metro Victoria prices headed?
Home Price Overview
Unfortunately for home buyers, prices have accelerated significantly in the past few months. However, the median price of homes sold has dropped and this is a leading indicator that prices will likely fall.
People planning to sell their home will take heart in the fact that home values are at all-time highs. Given the global recession and pandemic, sellers may want to push ahead and sell now.
There is no guarantee that home prices will regain the current highs any time soon because a Coronavirus induced recession may inflict long-term economic damage.
Coronavirus is now the primary source of uncertainty for home values.
Metro Victoria Detached House Prices
House price growth in Victoria was accelerating in early 2020. The “soft landing” that government policymakers were targeting had become more elusive. We believe politicians were hoping to guide the market toward a typical annual real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
Both the benchmark and the median house price for the Capital Regional District (CRD) are rising. The house market stands in contrast to the condo market.
Metro Victoria Condo Prices
Metro Victoria benchmark apartment prices increased dramatically until April 2018 and, since then, they have drifted sideways. The median condo price is falling and this may, in time, pull down the benchmark. Today, the benchmark Metro Victoria condo is unaffordable without help from family. A Victoria apartment is more expensive than a house in Calgary!
Entering the Coronavirus Recession, there is very little condo supply. When enough supply comes to market, the more expensive, higher quality, and larger (i.e., 2 and 3 bedrooms) apartments will drop in price, and this will depress the values downward for more modest condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos. Not everyone can afford to put their family in a house, and for many parents work-related travel makes it difficult to stay on top of basic upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Still a challenge for first-time homebuyers
Metro Victoria's home prices are not very affordable. A homebuyer household earning $70,000 (the median Metro Victoria household before-tax income) can only get a $250,000 mortgage. For a homebuyer to purchase a benchmark priced condo, they would need to save $265,000 cash for a down payment or receive a very generous gift from family. For most people, that is just not possible.
2021 Metro Victoria House Price Forecast
At the beginning of 2019, RE/MAX predicted house prices in Metro Victoria would remain unchanged year-over-year while Central 1 (the Economists supporting Credit unions) anticipated a slight drop. In the end, these forecasters were right, a benchmark Metro Victoria house value barely budged in 2019, but condo prices rose 3%.
For 2020, the average of the forecasts used in our analysis predicted a modest rise of 2% each of the next two years. CMHC provides a range and their best-case scenario resulted in a price rise of 15% in 2020, but their pessimistic scenario projected prices would drop 2%.
A second wave containment effort?
Two key assumptions underpin the more optimistic home price forecasts:
COVID-19 control measures in in Canada will be gradually relaxed — but not eliminated entirely — over the remainder of 2020. There will not be a second or third “lockdown” in response to new waves of infection.
Unemployment will not exceed 15%.
At Mortgage Sandbox, we are placing greater emphasis on the forecasts that include a ‘second wave’ of infection.
Dr. Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, believes the second wave of coronavirus infections is ‘inevitable.’
A study headed by Dr. Kristine A. Moore, medical director at the University of Minnesota Center for Infectious Disease Research and Policy, warns that the pandemic will not be over soon and that people need to prepare for possible periodic resurgences of disease. Optimistically, a vaccine will not be widely available until mid-2021 and 70% of the population would need to be infected to provide herd immunity. Unfortunately, more than 30% of the population have conditions that make them vulnerable.
Our forecast adjustment for COVID-19
In a presentation to the Federal Standing Committee on Finance on May 19th, CMHC’s CEO revealed that the agency now expects average Canadian home prices to fall between 9% and 18%.
In a March interview, Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices.
Using this ratio, a prolonged 2.5% rise in B.C. unemployment to 7.5% would result in a 10% price drop and a 5% rise in B.C. unemployment to 10% would lead to a 20% fall in values.
The ‘official’ unemployment figures unemployed people who are not looking for work (e.g., people who work in industries that have not fully reopened like tourism or hospitality). The ‘true’ level of unemployment is higher then the ‘official’ number.
For a more thorough comparison of the Coronavirus Recession to the Great Recession and the Great Depression and their impacts on property prices, check out our recent article: “Should I sell my home today?”
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because several risks can impact property prices. Risks are events that may or may not happen. As a result, we review a variety of forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. Want to learn more about real estate risk? We've written a comprehensive report that explains the level of uncertainty in the Canadian real estate market.
Our forecast inputs:
2. What forces drive the price forecast?
Mortgage Sandbox 5 Forces Framework
At the highest level, supply and demand set house prices and all other factors simply drive supply or demand. At Mortgage Sandbox, we have created a five-factor framework for gathering information and performing our market analysis. The five key factors are core demand, non-core demand, government policy, supply, and popular sentiment.
In the long-run, the market is fundamentally driven by economic forces, but in the short-run, sentiment can drive prices beyond economically sustainable levels.
Below we will summarize how the five factors result in the current Victoria forecast.
Core Demand
Core demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in one household.
Home Price Changes: Changes in the market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: Your maximum mortgage is calculated using income (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
Home Price Changes
Price growth reduces affordability and creates downward pressure on prices. As a rule-of-thumb, home ownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Victoria home ownership costs were 58% of the median household income. In other words, Victoria home prices had exceeded economic fundamentals, in a low interest rate environment, before the impact of the Coronavirus.
Savings-Equity
Rents were rising faster than incomes, so first-time buyers struggled to come up with down payments.
To add insult to injury, anyone who managed to save a down payment and invested it in ‘blue-chip stocks’ may now find out they’ll need to save for a few more months.
Existing homeowners have benefited from price appreciation, so they had more home equity to use when buying a bigger home.
Financing
Median Victoria incomes have not changed materially, but employment levels are dropping. To mitigate the impact, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Before the Coronavirus, the Bank of Canada believed one of the most critical risks to “Canada’s financial system remain a severe nationwide recession”. We now know that a recession is upon us.
Unfortunately, unemployment in B.C. has more than doubled with the Coronavirus Recession and job losses will have knocked a lot of people out of the housing market. For those who have held onto their jobs, an MNP survey released June 22nd says, a quarter of British Columbians are working reduced hours or receiving reduced pay.
Even after people get re-hired, they will need to be on the job for three months before they will qualify for a mortgage pre-approval. As well, small businesses and commission salesforce have to show 2 years of consistent income to qualify for a mortgage. Unless banks change their lending policies, 2020 will drag down their mortgage qualifying income until mid-2023 (when they file their 2022 taxes).
Overall Core Demand
Despite lower interest rates, due to the impacts of the Coronavirus, short-term core demand for homes will be much lower than it was in 2019.
Non-Core Demand
This represents a short-term investment, long-term investment, and recreational demand (i.e., homes not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Since non-core demand is ‘optional’ (i.e., not used to shelter your own family), it is more volatile than core demand.
Foreign Capital
Foreign capital inflows were already dropping due to a combination of taxes and the ownership registry:
The annual B.C. speculation and vacancy tax rate is 2% for foreign owners and satellite families.
Since some foreign buyers were circumventing the tax using Canadian shell companies and straw buyers, the BC government will launch its corporate beneficial ownership registry in May of 2020.
Now with the travel bans that are part of Coronavirus containment efforts, we can expect there will be very little foreign investment in Canadian real estate.
Long-term Rentals
Rental investments are a significant driver of home prices. As it relates to our analysis, we expect domestic interest in long-term rental income properties will dry up so long as Coronavirus eviction bans are in place. The government has not developed an exit strategy for landlords with rent arrears when social isolation policies are lifted. How will tenants repay three to six months of rent arrears?
As well, recent reports of rents falling across Canada will discourage new rental investment until rental rates stabilize.
Rental investors will simply try to time any future property purchases for the end of the Coronavirus containment period, and they will avoid properties with tenants who have outstanding rent arrears.
Short-term rentals
We are watching short-term rentals closely because international travel bans and the cancellation of the cruise ship season will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). The exception will be oceanfront and lakeside properties which will be attractive to Canadian families seeking a summer getaway.
Few entrepreneurs will be buying real estate for short-term rentals until international travel restrictions are lifted.
House Flipping
With Coronavirus containment efforts underway, house flipping will be very risky so we expect serial flippers will stay out of the market until they see a bottom to the market.
It may be 6 months to a year before the market finds a bottom and the flippers emerge to pick up some bargains.
Dark Money
Dark money is the proceeds of crime or money that is transferred to Canada illegally. This includes money earned legitimately that is illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries who are the subject of international sanctions (e.g., Iran, Russia, and North Korea).
In order to hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes the true owner of the property is hidden by using a Straw Buyer and other times the property is owned by a shell company.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide its true origins. In 2015, a B.C. realtor was caught with hundreds of thousands of dollars in her closet, at home.
$5 billion in illicit cash was laundered through real estate in 2018, and approximately three percent of straw buyers were students, homemakers or unemployed.
An eye-opening report by Royal LePage says that Canadian residents on student visas buy 1 out of 10 homes in B.C. It would appear that the parents of students are using their children to evade the Foreign Buyer Tax.
The beneficial ownership registry may reduce the number of student purchasers if their parents, who are foreign residents, are identified as the ultimate beneficial owners.
We see no evidence of a diminished role for dark money in local real estate.
Overall Non-Core Demand
The net effect of all the recent changes will reduce inflows of capital toward residential real estate for non-core uses, and this will put downward pressure on Victoria and Vancouver Island home prices.
Government Policy
Governments were trying to engineer a ‘soft landing’, but now they are trying to protect against a housing crash by encouraging banks to allow borrowers to defer their mortgage payments up to six months.
Mortgage and Housing Agency Tightens Mortgage Rules
Effective July 1st, CMHC has made changes to their mortgage rules that disqualify roughly 10 percent of potential homebuyers with Fair-Poor credit. The remaining buyers who qualify for a mortgage will qualify for 10 to 8 percent less money.
The purpose of the change is to protect taxpayers from having to cover the costs of bad loans.
COVID-19 Support Measures
Mortgage Payment Deferral
A typical mortgage deferral is an agreement between the borrower and the lender to pause or suspend mortgage payments for one or two months. For the Coronavirus, they have extended this for up to 6 months.
After the agreement ends, your mortgage payments return to normal. The mortgage payment deferral does not cancel, erase, or eliminate the amount owed on your mortgage. The borrower still accrues interest that will have to be paid.
A Canadian with a $250,000 mortgage who defers their mortgage by six months adds approximately $4,000 in accrued interest to their mortgage balance.
IMPORTANT: Statistics in May, show that 7 percent of British Columbia mortgage holders applied for mortgage deferrals. Mortgage deferrals expire after 6 months and that means by October many of these deferrals will have expired. Unless these borrowers have found new work they will fall into default.
Eviction Bans and Suspensions
The B.C. government has suspended the enforcement of evictions for non-payment indefinitely.
Short-term Rental Regulation
A recent court decision upheld a strata corporation’s restrictions on short-term rentals. In the case, the condo owner was ordered by a B.C. Civil Resolution Tribunal to pay $46,400 in fines.
Speculation and Vacancy Tax
At the end of 2019, the annual Speculation and Vacancy Tax rate on foreigners quadrupled from 0.5% to 2.0%
Beneficial Ownership Registry
BC’s Corporate Beneficial Ownership Registry came into effect in May of 2020. This may help to reduce dark money in B.C. real estate.
Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes’. They are homes owned by individuals who sell them to upgrade, to move for work, or some other reason. The Victoria Real Estate Board only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Rising supply releases the upward pressure on prices caused by demand.
Months of Supply of Existing Homes
In the past, a lack of active listings was driving the seller’s market. During the pandemic, we expect a lack of willing buyers will shift the market in favour of buyers.
Homebuyers stayed on the sidelines through March, April, and May, but in June they jumped back into the market with both feet. In coming months we will learn if this is a trend or 3-months of backed-up demand piled into one month. Condo listings have risen materially in June, eclipsing previous years, while house sellers have been more reluctant to list.
This year, it will be more challenging to buy homes during a pandemic so only motivated sellers will sell. At the same time, a majority of willing buyers will be sidelined by employment and savings concerns.
Coronavirus short-term rentals sold or converted (short-term impact)
International travel restrictions will make the short-term rental business difficult for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding up to 3,400 homes to the market in the next six months.
We surveyed over 50 Canadian real estate agents and 50% had observed a majority of short-term rentals being listed as long-term furnished apartment rentals and 25% expected Airbnbs owners would sell their homes to cash in the capital gains.
Mortgage Delinquencies and Foreclosures
The most recent data indicates that more Canadians are missing their monthly payments, and job growth has been healthy. Some economists have been warning of a recession, and even without a recession, it appears more Canadians are over-extending themselves. Surprisingly, the increases in delinquencies are led by Ontario and British Columbia, and not Alberta.
According to Equifax, the credit bureau company:
“Mortgage delinquencies have also been on the rise. The 90-day-plus delinquency rate for mortgages rose to 0.18 percent, an increase of 6.7 percent from last year. Ontario (17.6%) led the increases in mortgage delinquency followed by British Columbia (15.6%) and Alberta (14.8%). The most recent rise in mortgage delinquency extends the streak to four straight quarters.”
A recent survey by MNP reported a staggering number of Canadians are stretched to their limits:
“Over 30 per cent of Canadians say they’re concerned that rising interest rates could push them close to bankruptcy, according to a nationwide survey conducted by Ipsos on behalf of MNP, one of the largest personal insolvency practices in the country.”
Baby Boomers Right-sizing?
According to a recent survey, 26 percent of B.C. Boomers who own a home had most of their retirement savings tied up in real estate.
Nationally, a vast majority of Boomers want to live in their homes forever, but for many that will not be possible. Most of them are not on track to have enough savings in retirement. The Coronavirus Recession won’t help.
An RBC survey says, “Over the coming decade, we expect baby boomers to ‘release’ half a million homes they currently own—the result of the natural shrinking of their ranks, and their shift to rental forms of housing, such as seniors’ homes, for health or lifestyle reasons.”
We prefer the term '‘right-sizing’ because most boomers selling a house are buying luxury apartments with large floor plans in buildings with shared pools, saunas, gyms, and party rooms. That hardly sounds like a step down.
As baby boomers begin right-sizing and list their million-dollar homes for sale, they will add supply in what is considered the luxury market. If not enough Gen-X and millennial buyers are to buy these expensive homes, there is a risk that this may depress prices at the top of the market, which will then compress prices for townhomes and condo apartments.
In the near-term, supply is tight, but in the medium-term, there are risks of excess housing supply.
Pre-sales and Completions
New Construction
As of May, Victoria is on track to complete 70% more homes than achieved in 2018 or 2019. There are still a lot of buildings under construction and nearing completion. As these buildings complete in 2020 and 2021, and people move out of their rental or sell their current home, this new supply should alleviate some of the pressure in the market.
Pre-sales
Pre-sales, which are purchases of brand-new homes from developers are measured using housing starts. Developers need to sell at least 70% of a project to secure financing and begin construction so the start of construction is an indication of successfully pre-selling the project.
So far in 2020 housing starts indicate that pre-sales have remained strong, however as the recession progresses, we expect pre-sales will trend downward. When social distancing measures are lifted developers will likely try to entice buyers with price discounts, move-in allowances, and cool amenities.
Popular Sentiment
There's no way of predicting popular sentiment, but as witnessed in the past two years, sentiment can shift quickly.
If cases in B.C. rise once again then we can expect sentiment to worsen. In the short-term we expect buyers will hold back while many sellers will move forward.
The Nanos Canadian Confidence Index has shown a noticeable drop in confidence. “Consumer confidence among Canadians remains net negative but continues to be on the rise.’ It is still well below the low that was reached during the 2008 Financial Crisis.
3. Should Investors Sell?
From a seller’s perspective, there are more changes in the market that influence prices downward so now may be a better time to sell than in two years and the annual real estate cycle usually favours sellers in the first half of the year.
With Coronavirus containment efforts, open houses may be impossible. However, you can get a Realtor to help you plan small repairs and improvements to your home so that it will be ready when the real estate market thaws.
Sellers should always consult a mortgage broker early to prioritize flexible loan conditions and reduce the risk of mortgage cancellation penalties. Find out more about the benefits of a mortgage broker.
Planning to Sell? Check our our Complete Home Seller’s Guide.
4. Is this a good time to buy?
With accelerating prices, some homebuyers that took a cautious wait-and-see approach in 2019 got priced out of the market. Prices are trending upward, but Coronavirus containment efforts will muzzle the market. 2020 used to appear to be a favourable time to buy, but now it looks like prices may be lower in 2021. Keep in mind that the seasonal real estate cycle usually favours buyers in late summer.
The wild card is the Coronavirus; however, at this stage, it's difficult to determine how much it will impact the market.
If you are thinking of buying, just be sure to drive a hard bargain and pay as close to market value as you can. As well, when it comes to financing, don't bite off more than you can chew.
Planning to Buy? Check our our Complete Home Buyer’s Guide so we can walk you through the end-to-end process and get you ready to buy your new home! .
Here are some recent headlines you might be interested in:
A Quarter of British Columbians are Working Reduced Hours or Receiving Reduced Pay (MNP, Jun 22)
High unemployment, lower immigration to restrain Canada housing market (Reuters, June 24)
Home price declines will likely depend on unemployment rate: Former CMHC chair (Bloomberg, Jun 8)
Five-year fixed mortgage rate in Canada falls to 1.99% for first time (Financial Post, Jun 8)
CMHC draws fire for tightening mortgage rules (Bloomberg, Jun 4)
Why housing is still the best investment for most Canadians (Bloomberg, May 29)
No Nosedive Ahead for Canadian Real Estate Prices (RE/MAX, May 22)
Residential real estate: a reckoning or just a softening? (Morningstar, May 20)
86% of British Columbians want to curb foreign and speculative investment (Vancouver Courier, May 8)
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