Last updated January 18, 2019
House and condo apartment prices in Metro Vancouver continued their downward moves in December, with few exceptions. House prices peaked in September 2017 and have been trending downward ever since. Condos prices only turned downward in Mid-2018 and it looks like a longer-term trend.
RBC Economics says they now believe that the mortgage stress tests applied in January will have a 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.
This article covers:
What are recent trends?
Where are prices headed?
Should investors sell?
Is this a good time to buy?
In Vancouver, buyers have almost disappeared when compared to recent years. For a time, condos continued to surge while the house market slowed but now the market is seeing a broad slow down across property types. While fewer people are buying homes of any type, the Metro Vancouver population continues to grow and 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 market for single family detached houses has been contracting since 2015. Purchases (and sales) of houses have dropped 56% compared to 2015. Some real estate agents will be picking up part-time jobs to make up the lost income…can you imagine what it would feel like if your pay were cut in half!?
Sales are lower than previous years and there doesn’t appear to be a recovery underway for houses. Every month in 2018 saw fewer purchases than previous years.
Condos began the year strong but faltered in March and have seen much less buyer interest ever since. Keep in mind the new Mortgage Stress test came into effect on January 1st, 2018.
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.” The Bank of Canada will only stop raising interest rates if the economy is at risk of a recession, so the best case scenario is higher rates and the worst case scenario is a recession. Both scenarios put downward pressure on home 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? If there were a global real estate downturn, how would this impact Vancouver? The fact that house purchases in Richmond and the Vancouver Westside have collapsed more than 50% implies that much less foreign capital is flowing into local real estate.
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.
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 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.
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 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?
Over the past 10 years, the price of a house has doubled. That’s the equivalent of prices rising 7% every year while people’s incomes increased by an average of 1.5% over the same timeframe.
In the summer of 2016, the detached home market tumbled after the introduction of a foreign buyer tax but subsequently recovered. The most recent drop could be a result of an increase in luxury home taxes, additional regulation to prevent money laundering, but it could also be explained by other factors.
The price today is lower than the 2016 trough and it raises a question about the degree of volatility in the market. If prices can jump $600,000 between 2014 and 2016 and then drop $100,000 in 2016 and again in 2018 could they drop by another $500,000 between 2019 and 2020 before a recovery sets in? No one has a crystal ball; however prices are currently trending consistently downward.
Condo prices also doubled over the same timeframe but never experienced a downturn or a plateau. Condo prices have recently dipped.
If you’re looking to buy or sell a home 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 list prices have dropped in recent months. Metro Vancouver detached home prices have dropped by $130,000 in 7 months.
Condos prices dipping is more interesting because they haven’t really dropped significantly in price since 2008 (the Financial Crisis) and with political will, there is no theoretical limit to the number of condos that could be built in Metro Vancouver. Land supply is limited but condos are built vertically. Since peaking in June, condo prices have dropped $40,000.
The markets for both houses and condos in Metro Vancouver 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.
Anecdotally, there are homes on the Vancouver Westside that have been for sale since Spring of 2017 and still haven’t sold. Those listings will stick out like sore thumbs as we enter 2019.
At the beginning of December there were 5,800 houses for sale in Metro Vancouver and roughly over 500 sold in November. So, at the current pace, it would take almost a year to sell all the houses listed today. The chart above shows supply of houses climbing steadily since May 2017. If the trend continues, buyers can expect house prices to trend downward.
The condo market is a lot tighter than the detached home market. It only recently entered balanced market territory with almost 6 months worth of condos for sale. A balanced market is generally considered healthy yet as soon as the condo market balanced, prices began to drop. This implies there is a risk that current condo prices are not sustainable in a healthy balanced market. If we assume that in the future condos will be bought by the 31% of households who earn between $50,000 and $100,000 then most condos should be priced between $200,000 and $600,000 and that means prices have further to drop.
Of course, that assumes that home prices need to be supported by local incomes, employment, and economic fundamentals. Given Vancouver’s recent experience, that is a big assumption.
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 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. 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.
We’ve analyzed forecasts from six analysts an have developed the forecast below.
For the full 2019 forecast analysis and an assessment of the five key factors driving home prices, click on the button below.
The brunt of price drops will likely be felt by higher priced properties (i.e. more expensive neighbourhoods and detached single family homes).
For example, in 2018 the benchmark price of a house on the Vancouver Westside dropped 16% from almost $3.7 million to $3.1 million. It’s still worth a lot of money, but a $600,000 drop in market value is still significant!
If we shift our attention to a lower priced market like Richmond, we can see that the impact is lessened. An Richmond house is down only 6% ($130,000) since prices peaked in July 2016 while condo prices peaked in July 2018 and have only dropped 6% ($40,000).
Homebuyers and homeowners shouldn’t expect much price appreciation between now and the end of 2020.
Forecasts are intelligent guesses and when making investment decisions we often focus on the most likely outcome. Prudent investors also consider 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, then your risk is lessened but if you are not earning enough rental income to cover expenses and you have greater reliance on a price rise in the property then you should move with an abundance of caution.
CMHC, a Government of Canada Agency, has downgraded its forecast for Vancouver and now predicts house prices will drop for the next two years. As well, In October 2018 there were 41,000 homes under construction in Metro Vancouver that are due to be completed in 2019 and 2020. Around 20,000 homes were bought in 2018. If a significant number of new housing stock is added and was 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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