Vancouver Market Update - August

It’s official. Both House and Condo apartment prices in Metro Vancouver dropped in July. RBC Economics says they now believe that the mortgage stress tests applied in January will have larger, longer-lasting dampening effect on home sales than we previously thought.

All levels of government have targeted a “soft landing” but will people lose interest in buying real estate if it only appreciates by 1-3% annually? Will the realization that the party is over lead investors to exit the market? Could this lead to a much “harder landing” than anyone is anticipating?

What are people buying?

In Vancouver, condos are king but fewer people are buying homes of any type while the Metro Vancouver population is still growing and there is chronic undersupply of housing. In fact, population growth has ballooned from to ~30,000 people annually to ~65,000. How can we have more people but sell fewer homes?

Possible causes of the slowdown:

• Reduced Borrowing Capacity: Mortgage stress tests and rising interest rates have effectively reduced the maximum amount people can borrow by 20% while condo prices rose by 20%. Perhaps home prices have surpassed people’s ability to pay? In July, 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.

• Synchronized Global Real Estate Market Correction: Home sales have slowed in Manhattan, Sydney, Stockholm, London and the list goes on. Perhaps global real estate investors have lost their appetite? A recent Bloomberg article said the U.S. could be headed for a dramatic downturn, again. If there were a global real estate downturn, how would this impact Vancouver

• Wait-and-see: Another theory is that homebuyers can buy at today’s prices but are playing-it-cool until they see a turn the market? Low sales volume means the prices of most recent homes are a less reliable indicator of where the market is headed, this is because prices set under heavy sales volume are more representative of the consensus of many buyers. Low volume implies that many buyers believe properties are mispriced and are sitting on the sidelines. Declining volume in a market with rising prices is usually a leading indicator that a price drop will follow.

Where are prices headed?

Metro Vancouver house prices are flat. For detached homes they are the same as August 2016.

The benchmark detached homes on the Westside of Vancouver has lost $310,000 in value since July 2017.

Condo prices have leveled recently (see below), and their longer-term trajectory is uncertain.

This could be a pause like the one in the second half of 2016, or it could be the case that the $175,000 rise (34%) in the benchmark condo price in the year and a half between January 2017 and now wasn’t entirely rational or justified and prices will remain flat or drop off.

Pre-sale homes

You may not know this, but sales of brand-new homes are not included in the statistics published by the Real estate Boards. In Vancouver, pre-sales make up 30% of the market so that’s a pretty big information gap.

A recent report by MLA Advisory shows that developers used to sell a far higher proportion of pre-sales within one month, but since January this figure has been trending downwards. One could say that the market has moved from frenzied to disciplined. Since developers often need to sell 70% of a project to secure the financing needed to break ground on a project, prospective buyers can look forward to seeing developers offer more competitive prices, incentives, and amenities.

Incentives can take the form of free storage lockers, parking spots, home décor store credits worth thousands, and nicer party rooms. Whatever it takes to help you decide faster, so they can begin building.

Conclusion

There is still a lot of uncertainty in Canadian real estate these days. The markets for both houses and condos in Metro Vancouver are trending toward a position where buyers can extract discounts and incentives from sellers. If you are going to try to time the market, then this is a time for sellers to pull the trigger before conditions soften further. For buyers, it seems prudent to wait and see.

Trying to time the market has risks. Some people thought Vancouver real estate was going to tumble during the U.S. financial crisis in 2008 but instead prices continued to rise after a small dip. If you wait, interest rate increase will erode your home buying budget but then prices may drop further so you budget can buy you more home. There is also an outside risk that an unforeseen event could turn prices upward again.

Keep in mind that Metro Vancouver’s chronic under-supply of housing could prevent buyers from ever gaining the upper hand on sellers.

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.