At Mortgage Sandbox, we break down our market analysis to five key factors: affordability, capital flows, 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.
At the moment, real estate prices in Metro Vancouver are dropping and the market is weak. Here is why the market is weak and likely to stay that way.
Canada may be headed into a recession: A recession would reduce employment and lead to forced home sales and which puts downward pressure on home prices. The Canadian economy shrank in December 2018 as a result of slowing home sales. In a terrible self-reinforcing problem, the economic slowdown could cause the housing market to slow further.
Reduced borrowing capacity has pushed out family homebuyers: 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 achieve home ownership, reported that prices in Vancouver “are higher than incomes, mortgage rates and other fundamentals can justify.”
Home prices outpaced people’s ability to buy: There are very few markets in Metro Vancouver with houses available for less than $1 million, yet only 8% of income earning households in Vancouver can afford a million-dollar home. Is it possible that the constrained supply has meant that only the top 8% wealthiest people in Vancouver have been buying, and now that they’ve filled their boots, there’s no one left to buy at the current prices?
A Synchronized Global Real Estate Market Correction has dampened Foreign Buyer activity: Home sales have slowed in Manhattan, Sydney, Stockholm, London, and the list goes on. Perhaps global real estate investors have lost their appetite? Has the Chinese government been successful in their campaign to prevent citizens from taking money out of the country? If there were a global real estate downturn, how would this impact Vancouver?
If Vancouver is simply caught up in a global real estate correction, then at least there is no one to blame for the turn in the market. If this is the case, then it means that Canadian policies and government intervention will be powerless to change the global flow of capital and investment, and that’s a scary thought.
Foreign direct real estate investment has left Vancouver: Seeking better value in other cities because Metro Vancouver house prices are some of the highest in the world (i.e., foreign investors believe you should buy low and sell high). Evidence for this shift in investor interest is seen in the dramatic drop in Vancouver home purchases and simultaneous upswings of activity in Toronto, Montreal, and Ottawa. Homes in Richmond, BC are very popular with foreign speculators so they are a great indication of the trend in capital flows.
All levels of government are coordinating to bring about a “soft landing”
Changes to Mortgage Rules to prevent Canadians from taking on too much debt also reduce their purchasing power.
5-year fixed mortgage rates are 0.5% higher than in 2016 so they aren’t really a factor.
BC foreign buyer tax and speculation tax intended to discourage speculative purchases by non-residents.
City of Vancouver empty home tax intended to increase supply of homes for rent.
Some industry advocates blame the January 2018 stress test for causing a slowdown in the market but the slowdown began in 2016.
While fewer people are buying homes, the Metro Vancouver population continues to grow: There is still a chronic undersupply of housing. In fact, population growth has ballooned from ~30,000 people annually to ~65,000. As a result, we are left with an inherent contradiction. How can we accept so many more people but sell fewer homes? The problem is we didn’t build enough to satisfy the wealthy and the middle class, so the wealthy (and their bankrolled children) are the only ones buying homes.
In 2018, 23,000 new homes were built in Metro Vancouver and a record 41,000 homes were under construction at year-end. Those new homes will help alleviate the extreme supply shortage in Vancouver. Keep in mind, rental vacancy needs to reach 3% before Metro Vancouver can be considered to have enough supply, and vacancies are currently below 1%.
A change in buyer sentiment has led to a Wait-and-see Strategy: Another theory is that homebuyers can buy at today’s prices but are playing-it-cool until they see a turn in 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.
Here are some recent headlines and a video you may be interested in:
Sales slump could signal tough times ahead for B.C. realtors (Vancouver Sun)
Canadian Housing Market This Bad Normally Means Recession (Huffington Post)
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