Last updated November 2, 2018
House and Condo apartment prices in Metro Vancouver continued their downward moves in October, with few exceptions. House prices peaked in September 2017 and are trending downward. Condos on the other hand have only recently seen price declines price declines. That is not yet a long-term trend.
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 isn’t consistently rising in value? Have foreign speculative buyers left the market? Could this lead to a “hard landing”?
In this article we will review the latest trends and provide a forecast for what leading economists expect for Metro Vancouver real estate.
At the end of this article you will understand:
Where prices may be headed
How to use this information to your advantage
In Metro Vancouver, fewer people are buying homes of any type even though the regional population is still growing and there is chronic under-supply of housing. How can we have more people but sell fewer homes?
Houses are feeling the chill of Fall as we head into November. Sales activity has dropped 55% compared to 2016.
Sales are lower than previous years and there doesn’t appear to be a recovery underway.
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 mis-priced 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.
But sales are just an indication of whether real estate agents are busy. What most people care about are prices.
In the charts below, it is clear that prices have dipped in recent months. In the past four months the benchmark home has shed about sixty thousand dollars and the trend is steepening. With owning land, you can take comfort in the fact that over time the supply of detached homes will shrink as houses are torn down to make way for duplexes, apartments, and condos. So in the long run they should appreciate in value.
The drop in condo prices is more interesting because they haven’t really dropped significantly in price since 2008 (the Financial Crisis) and so long as municipalities approve new developments there is no theoretical limit to the number of condos that could be built in Metro Vancouver. So far in 2018, condo prices have dropped 3% off their peak and house prices have dropped 6% from the peak.
The combination of fewer home buyers, due to affordability issues, and an increase in the number of homes for sale has trended most markets toward balanced conditions. This means more selection for home buyers, fewer bidding wars, and less upward pressure on home prices.
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 mid-year 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, lower deposits, 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.
The markets for both houses and condos in Metro Vancouver are trending toward a position where buyers can extract discounts and incentives from sellers.
The market for houses is deep into a buyer’s market. There are almost enough houses for sale to last a year!
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 is a good to finally have some leverage but given the current trend it seems prudent to wait and see.
The condo market is much tighter than the house market. It just recently entered balanced territory. This is likely a welcome reprieve for buyers who have endured years of bidding wars.
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 calls for 6% price growth while the most conservative expects no price appreciation at all.
In late August, the BC Real Estate Association issued a refreshed forecast that calls for a 2% rise in Greater Vancouver prices to $1,050,000 by December 2018.
If we read between the lines then we can expect house prices to drop 1% between August and the end of the year and, since the forecast came from the association of real estate agents, you can expect it is an optimistic perspective.
The brunt of the price drop will likely be felt by higher priced properties (i.e., more expensive neighborhoods and detached homes). For example, on the Vancouver Westside, the benchmark price of a house has dropped 11% from $3.67 million to $3.275 million. The homes are still worth a lot of money, but a $400,000 drop in market value is still significant!
The benchmark price of a Westside condo has dropped 4% from its peak but if we look at the median price the markets has seen a 15% price drop.
If we shift our attention to a lower priced market, like Richmond we can see that the impact is lessened. A Richmond house is down 5% since prices peaked while condo prices have only recently leveled off. Scroll to the bottom of this report for price charts on more Metro Vancouver sub-markets.
Given the price forecasts, the current market weakness, the increased downward price pressure, and we are headed into a slower time of the year for real estate, it is likely that prices will remain flat or drop for the remainder of the year. As well, homebuyers and homeowners shouldn’t expect much price appreciation between now and the end of 2019.
Keep in mind that Metro Vancouver’s chronic under-supply of housing could put a floor on house prices. There are many potential buyers in Metro Vancouver but current prices have simply outpaced their ability to buy.
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 scenario.
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.
We recommend you also read this article on the current risks in the real estate market.
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.
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