This article covers:
Where are prices headed?
Recent buyer trends
Should investors sell?
Is this a good time to buy?
In the 18 months between January 2015 and the Summer of 2016, the price of a Langley house rose 85% ($500,000). To put this in perspective, the median Metro Vancouver household earns $75,000 a year before taxes. After tax, it would take that household 9 years to earn (not save) $500,000. There are no words that accurately describe how incredible that is.
In the summer of 2016, Langley house prices rises paused after the introduction of a 15% foreign buyer tax and subsequently recovered. In 2016, prices barely dropped but these days there has been a consistent downward trend, and it raises a question what truly drives the market. For years, realtors promised population growth and tight supply would lead to ever higher prices but today we are seeing accelerated population growth and sight supply while prices drop. What gives?!
If prices of Langley Houses can jump $500,000 between 2015 and 2018, then drop $90,000 (9%) in less than a year, could they drop by another $400,000 between 2018 and 2020 before a recovery sets in? Another bad year could bring Langley house prices down to $880,000. Still beyond the reach of most locals.
For those townhouse owners who feel they need more space the price gap between a Langley house and a townhouse has narrowed by $50,000 but remains a daunting $500,000. Most families these days can’t qualify for a mortgage that large never mind save-up the difference.
It seems likely that Langley home prices has hit the tipping point. This doesn’t mean you don’t buy a home for your family if it’s within your reach, but it does mean that you’re buying it for shelter and not as a low-risk investment, and it also means you’re driving a hard bargain.
Langley condo prices more than doubled in the 3 years from 2015 to 2018 but never experienced a pause or downturn until last summer.
If you’re looking to buy or sell a Langley condo in the next three years, you’ll want to pay closer attention to recent trends. With fewer buyers in the market, sellers have begun to lower their expectations, and prices have dropped significantly since peaking in 2018.
Falling Langley condo prices are curious because they haven’t really dropped significantly in price since 2008 (the Global Financial Crisis) and, with political will, there is no theoretical limit to the number of condos that could be built in Langley because there’s plenty of underdeveloped land. The drops in Langley condo prices are good news for first-time home buyers.
Unfortunately, a first-time buyer earning $75,000 a year can only get a $320,000 mortgage so without $100,000 cash a run-of-the-mill Langley condo is beyond their reach. Prices would have to drop still more for first-time buyers to get into the market without a substantial gift from the “bank of mom and dad” to make up the difference.
Langley townhomes are following a similar trend to condos, peaking Spring a year ago and steadying in the past couple of months.
The markets for most homes in Langley are trending toward a position where buyers can negotiate discounts and incentives from sellers. This means more selection for home buyers, fewer bidding wars and less upward pressure on home prices.
Langley houses have been flirting with a balanced market since Spring of 2018.
The market for Langley townhomes has been slackening too but is still a seller’s market. That means sellers should be able to squeeze better offers from buyers. Prices steadied as supply of Langley townhomes dropped to 3 months.
The Langley condo market has historically been much tighter than the house and townhouse market, but it is has stalled in its path toward a balanced market. A balanced market is generally considered healthy, yet as soon as the condo market got close to balanced, prices began to drop. This implies there is a risk that current condo prices are not sustainable in a healthy balanced market. If new construction pushed condos into a full-blown balanced market it could lead to deep price discounts in late 2019 and 2020.
Different forecasters have different approaches. Some will only provide a provincial forecast, some a city one, while others forecast by type of dwelling within a city. The chart below depicts 6 forecasts from December 2017 to provide a broad picture of the market. These forecasts don’t differentiate between detached homes and apartments.
The most optimistic forecast called for 6% price growth while the most conservative expects no price appreciation at all. No one predicted prices would drop but in Langley house would drop by $45,000 from January 2018 to today, Townhomes finished the year up $15,000, and condos ended the year at break-even.
Looking forward to 2019, we see most forecasters expect prices to drop.
The brunt of 2019 price drops will likely be felt by higher priced properties (i.e., more expensive neighbourhoods and detached single family homes).
Given the forecasts, the current market weakness, and the increased downward price pressure, prices will likely remain flat or drop for the next few months. As well, homebuyers and homeowners shouldn’t expect much price appreciation between now and the end of 2020.
Look at Langley house sales (the busiest part of the Langley market) and you’ll see how the market has shrunk to a third of it’s 2015 activity levels. Fewer houses are now sold than Langley condos.
The worst hit house markets in the Lower Mainland include Richmond, the Vancouver Westside, and West Vancouver. We at Mortgage Sandbox interpret this to mean that foreign buyers and speculators are no longer placing money in the Metro Vancouver market. Scanning news outlets across Canada and reviewing realtor marketing materials, it becomes clear that any foreign money still coming to Canada seems to be directed toward Toronto, Ottawa and Montreal.
Although foreign direct investment helps Canada with the construction and house price boom, investors who treat housing as a commodity bring commodity-like price volatility (e.g., gold, oil, coffee) to housing which can be very disruptive for people who believe homes should be used primarily as shelter for the people who live and work in the local community.
You may not know this, but sales of brand-new homes (“Pre-sales”) are not included in the statistics published by the real estate boards. In Vancouver, pre-sales make up over 30% of the market, so that’s a 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 this figure has been trending downwards. One could say that the market has moved from frenzied to disciplined. According to MLA Advisory, current pre-sale activity levels “reflect a more normalized pace of sales for the Lower Mainland.” 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.
Developer 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.
At Mortgage Sandbox, we break down our market analysis to five key factors: affordability, capital flows, government policy, supply and popular sentiment.
Canada may be headed into a recession: A recession would reduce employment and lead to forces home sales and that 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 November, CMHC, the government agency charged with helping Canadians to achieve home ownership, reported that prices in Metro 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, but perhaps only 8% of income earning households in Langley can afford a million-dollar home. Is it possible that the constrained supply has meant that only the top 8% wealthiest people 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 Langley?
If North Van 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 Metro 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.
All levels of government are coordinating to bring about a “soft landing”: Whether it’s federal mortgage, provincial foreign buyer taxes or local empty home taxes, the government will not rest until prices drop another 10 to 20%.
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 1,000 condos were bought in Langley (down 20% from 2017) and 1,000 condos were under construction at the beginning of 2019. If the market is struggling to absorb existing stock then additional projects will put more downward pressure on prices. Those new homes will help alleviate the extreme supply shortage in Langley but rental vacancy needs to reach 3% before Langley 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)
Forecasts are intelligent guesses, and when making investment decisions, we often focus on the most likely outcome. Prudent investors also consider for the worst-case and best-case scenarios.
To benefit from the best-case scenario, a home buyer should talk to their mortgage broker about prioritizing flexible loan conditions. These allow you to get approved for more money, move quickly to close, and have lower fees, rather than focusing solely on rates. Every lender has very different lending rules, and most people underestimate how these impact:
How much you can borrow.
How easy it will be to meet all their conditions by the closing date.
How quickly you can pay off your debt.
The penalties and fees charged to pay-off the mortgage or move it to another lender.
To mitigate the risk of a worst-case scenario, try to buy a home at a price that allows financial breathing room, and plan to live in it for 5 to 10 years.
If you are investing to earn rental income rather than counting on price gains then your risk is lessened, but if you are not earning enough rental income to cover expenses then you should move with an abundance of caution.
CMHC, a Government of Canada Agency, predicts house prices will be flat or drop for the next two years. As well, in October 2018, there were 41,000 homes under construction in Metro Vancouver and due to be completed in 2019 and 2020. Just under 20,000 homes were bought in 2018. If a significant number of those homes under construction were pre-purchased with the intention to flip, they could overwhelm the market with supply.
From a seller’s perspective, likely now is a better time to sell than in two years.
Buyers of houses certainly have more negotiating power. So long as you aren’t taking on an uncomfortable amount of debt, and this is your “forever home,” 2019 will be a good time to buy, but 2020 may be even better.
At the end of the day, a home is a place to live more than it is an investment. If you feel you need a home to have the lifestyle you’ve always wanted, then now is the best time since 2008 to be a buyer. Just be sure to drive a hard bargain and keep in mind that prices will likely continue to drop after you buy your home. It’s impossible for everyone to perfectly time the peaks and troughs of the market.
We recommend also you also read this article on the current risks present in the real estate market.
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