Okanagan Valley Home Price Forecast - Apr 2021
HIGHLIGHTS
Okanagan Valley home values are rising across all categories.
Mortgage rates are rising from historic lows, and unemployment is still high.
Current demand and price increases appear to be primarily driven by the effects of pandemic-related restrictions - people are desperate for more living space. Often buyers are moving away from the cities so they can afford a larger home. It is unclear if this will persist after the pandemic is over.
We are in the midst of the third wave of infections, but luckily this is probably the last wave.
This article covers:
What is the state of the Okanagan property market?
Where are prices headed?
Should investors sell?
Is this a good time to buy?
1. What is the state of the Okanagan property market?
Home Price Overview
Okanagan house prices have accelerated significantly in the past few months, which has pushed more potential home buyers out of the housing market. At the same time, condo values have not followed the upward trajectory taken by house values.
This trend can’t continue for too long since condos are traditionally the first step on the “property ladder.” If a condo is the primary source of a house buyer’s downpayment, then the equity gap will eventually pull down house prices, or condo values will need to rise.
A recent CIBC survey found that more than 20% of people currently working from home will be returning to the office. As well, we expect the vast majority of students to return to their schools full-time. This points to a possible bounce back to the migration to the outer suburbs, exurbs, and cottage country. An important question raised by the current demand is:
If work-from-home and school-from-home are temporary market drivers, what will happen when the pandemic is over?
This uncertainty is a core component of risk, and we delve into this later.
People currently planning to sell a home will take heart because home values are at all-time highs and want to push ahead and sell during the pandemic.
People planning to buy a home could wait for a possible market correction, but there’s no guarantee that prices will be lower by the end of 2021.
The recession, high unemployment, and the eventual lifting of restrictions are now the primary sources of uncertainty for home values. Some pundits predict consumer behaviour similar to the ‘roaring twenties’ post-pandemic. Canadians who prioritize newfound freedom, nightlife, and travel will feel less hurry to go home shopping.
Okanagan Valley Detached House Prices
House price growth in the Okanagan has accelerated through 2020. The ‘soft landing’ that government policymakers were targeting has not materialized, nor have promises of a ‘market crash.’
We believe politicians are 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.
To address some of the headlines - this is a demand-driven price surge, not a supply problem. Supply in recent months has been above the historical norm. It had to be to absorb all those purchases and still have listings remaining at the end of the month. However, there isn’t enough supply to quench the insatiable demand.
Metro Kelowna New Construction Home Prices
Since May 2020, Kelowna pre-sales have strengthened, and new construction prices have skyrocketed.
It seems unlikely that record house prices will be sustained through the next 12 months based on economic fundamentals.
People are paying more for new homes, but housing starts haven’t responded. Housing starts are a lagging indicator for pre-sales.
Okanagan Condo Prices
Okanagan condo apartment prices were flat in 2020, but they’ve started rising recently.
Early in the pandemic, people had theorized that condos are no longer a desirable type of housing but that’ has proven incorrect. A lot of condos are being bought, but prices haven’t followed houses because more condo owners are willing to sell. Condo pre-sales also help to absorb demand in this category.
Condo purchases in the first half of 2021 can only be described as stratospheric. 🚀
Purchases are twice as high as most other years. It is breathtaking, exciting, and maybe a bit scary. Population growth has been flat during the pandemic. Perhaps we are burning through all the 2021 purchases in the first half of the year?
With more people working from home, we expect developers will begin marketing larger (i.e., 2 and 3 bedrooms) apartments to meet buyer preferences. As the supply of more generous floor plans comes to the market, it may depress the values for small floor plan condos.
At Mortgage Sandbox, we would like developers to build 4 and 5 bedroom condos because:
Not everyone can afford to buy a house for their family.
Canadians who now work from home need more room to segregate workspace from living space within their homes.
Many Canadians with longer working hours find it challenging to stay on top of necessary house upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Many people prefer to live in higher-density neighbourhoods with all the essential amenities within walking distance.
2. Where are Okanagan Valley home prices headed?
There is a lot of uncertainty in the forecasts for 2021 and 2022. Many of the forecasters we've surveyed have different expectations for:
How long will the third wave of COVID-19 infections and associated restrictions last?
Will Canadians be able to fully return to their offices and classrooms in September or December 2021?
Will the federal government succeed in achieving its aggressive immigration targets during a pandemic and with high unemployment?
Since the mortgage payment deferrals expired in October, will the anticipated distressed home sellers appear in the housing market?
As a result of their varying assumptions, some forecasters expect prices to continue rising, while others expect are more likely prices to drop.
For example:
Re/MAX forecasts Okanagan prices will rise 5% in 2021.
The BC Real Estate Association (BCREA) economist, BCREA is a real estate industry advocacy organization, predicts Okanagan prices will rise 2.6% in 2021 (downgraded from 3% price growth in their previous 2021 forecast).
The highest forecast for Canadian home prices in a September Reuters poll of 16 economists was price growth of 10% in 2021, while the lowest prediction called for a 10% drop. Roughly half the economists anticipated a decline while half expected a rise.
Moody’s Analytics, who develops mortgage risk software for Canadian banks, predicts a 7% ‘peak-to-trough drop in Vancouver values and an 8.5% drop in Victoria. They didn’t provide a forecast for Kelowna, but it’s safe to assume they expect Okanagan values to drop. However, they do “expect greater resilience in lower-density markets outside Canada’s large urban cores.”
Moody's Analytics didn’t attempt to pinpoint the timing of the decline in values. However, our research shows that most past declines in Canadian home values have begun between May and July. Traditionally, there is less supply (fewer listings) between February and May, which puts upward pressure on prices.
CMHC, the government housing agency, predicts a 'peak-to-trough drop of between 6% and 19%. They expected government aid and mortgage deferrals would cushion the blow in 2020 and that unemployment and low immigration would impact the market in 2021 with a 2022 recovery.
There is no consensus among economists. Market sentiment and government stimulus have led to price acceleration and record home purchases even though most economic fundamentals have faltered.
CMHC sells insurance to banks to help limit their losses if a mortgage goes bad, and Moody’s Analytics sells software to banks to help them assess the risk of their mortgage portfolios. These two forecasts help paint the worst-case scenario. There is downside risk in the market.
Curious how we arrive at our forecast range? Check out our full assessment of the five factors that drive these forecasts. These five forces help explain why several forecasters are anticipating price drops.
READ REPORT: 5-FORCES DRIVING BC PRICES
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because many real estate risks can impact prices. Risks are events that may or may not happen. As a result, we review various forecasts from leading lenders and real estate firms. We then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. Do you 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:
3. Should Investors Sell?
From a seller’s perspective, 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.
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 out our Complete Home Seller’s Guide.
4. Is this a good time to buy?
It’s hard to say, prices have been rising, but there is a downside risk. It seems unlikely that prices will be lower in December than they are today.
Prices are still trending upward, but Coronavirus containment efforts are inflating prices. Once vaccinations are rolled out and restrictions are lifted, prices will likely soften in the second half of 2021.
Regardless, the annual real estate cycle usually favours buyers in late summer.
The wild card is the Coronavirus. At this stage, it's difficult to determine how much it will impact the market.
If you are thinking of buying, 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 out 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:
Canadian Immigration Interrupted: A Look Ahead Into 2021 (RBC Economics, Feb 16)
New CMHC report says Canadian housing market could see a 14% plunge (The Star, Jan 21)
These are Canada's fastest growing communities as cities see record exodus (CTV, Jan 19)
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