The market has shifted but a lot of questions remain. Where will interest rates go and what will be the impact? What will happen with inventory? And what does this all mean for home prices? This week, BCREA’s Chief Economist, Brendon Ogmundson joins Matt & Adam to discuss where we are at in the current market and, more importantly, where we are headed! Which sub-markets are the most vulnerable? Which property types will be the most resilient? And is now the time to sell? These questions and more on today’s jam-packed episode.
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Who is Brendon Ogmundson?
I am the Chief Economist for the BC Real Estate Association. We produce reports and forecasts, providing monthly data for real estate markets around BC.
How’s the BC real estate market?
It’s a really interesting time in the BC housing market. A lot of markets, especially in the Lower Mainland, saw a big change from March to April 2022. Most of these markets had a strong Q1 and then things calmed down a bit in April. It’s not slow – just adjusting back to normal.
We’ve seen lower total sales for the month in April. And some of that has to do with a very active March when buyers were trying to get in before interest rate increases. Prices are still growing strong and active listings are up in some markets. The Fraser Valley saw the biggest change in the last few months with a big jump in active listings. Sales were below average in that area in April, which was a big change.
Is the BC real estate market entering a slow down?
I think so. And we were expecting a slowdown in BC’s real estate markets. We didn’t think it would happen until the summer, but that’s because we expected more gradual interest rate hikes. Now that rates have gone up 100 basis points since the start of the year, the slowdown has happened sooner.
How should people interpret the BCREA stats?
The stats are a lagging indicator of the market. Sometimes what’s happening at the end of April won’t show up until the May stats.
If the BC real estate market is slowing down, will we see a change in prices?
When a real estate market is at a transition point, expectations of buyers and sellers really diverge. And that’s when it takes longer for deals to happen. Prices are sticky as sellers aren’t motivated to sell and at the same time, buyers are slow to buy because they’re expecting a good deal. It will take some time for deals to happen and for this transition to affect pricing.
In Vancouver, it takes about a year and a half for things to get back to normal. We’re still under 10,000 listings in Vancouver; we need to be much higher to slow price growth. So even if sales are slowing, sales are still quite strong. It’s a longer adjustment process.
What does inventory look like in the BC real estate market?
We still have very low inventory in the BC housing market. We finished 2021 with only 15,000 listings in BC when we need to be at 40,000-45,000 listings for the market to be balanced.
For example, Vancouver finished 2021 with around 6,000 listings and is now at 9,000. So even though listings are up, we have a long way to go. And that’s true across all real estate markets in BC. We’ll get there but it takes a while.
What caused housing inventory in BC to spike in 2022?
I think the increase in active listings we’re seeing in BC in 2022 is all about demand and affordability. A year ago, anyone who wanted space moved out from Vancouver to the Fraser Valley for cheaper and bigger houses. But now that prices have risen in those markets, there’s not as much of an advantage to moving out of Greater Vancouver anymore. A lot of those potential buyers have tapped out, especially with rates rising. That’s taken demand out of the market.
If listings in Vancouver double and we have a healthy market, what does that mean for housing prices?
The way we have it charted right now, we think it’ll be one and a half years until we get back to a healthy number of listings in Vancouver. We don’t tend to see prices declining until we have way more listings than sales.
If we get to the point where we have 20,000 listings in Vancouver and have very low sales, that’s where we get the downward pressure on pricing. We saw that in 2018/2019 but prices in Vancouver only fell about 6%. Big adjustments on the sales side don’t mean big adjustments to pricing.
I could see some submarkets come down 5-10% in pricing but it would be hard to see prices come down a lot or for those low prices to be sustained for very long. We might see temporary softness in pricing but I don’t suspect it will last.
There’s not the same sense of froth or FOMO in the BC real estate market. What happened to the frenzy?
We went from a market with 10 buyers per listing to a much more calm market because of rising interest rates and other market changes. That has taken the frenzy out of the market and made it function more normally.
When the sales to listings ratio comes down from historic levels, there will be fewer bids and less upward pressure on pricing. We see it over and over because that’s how markets are supposed to work.
Which BC real estate markets are the most impacted by rising interest rates? Which BC real estate markets are most resilient against rising interest rates?
The younger your buyer demographic, the more sensitive to rising interest rates that market will be. We’ve seen that in the Fraser Valley and Chilliwack areas where sales have fallen off the most based on April 2022 data. Those populations skew younger and younger buyers usually have lower incomes. The condo market in Vancouver is a similar story, though it’s still doing all right.
Contrast that to the Kootenay or Victoria real estate market, which are older with more retirees. Those markets are steadier and better able to withstand changes to the overnight interest rate.
Where do we end up with interest rate increases in Canada?
It’s not a surprise that the Bank of Canada has been a lot more aggressive with their interest rate increases in 2022 due to our current record level of inflation. Unfortunately, a lot of the factors driving inflation are not under the control of the Bank of Canada. But they can try to set expectations better. They’re telling us they’re going to aggressively attack this problem.
I expect the Bank of Canada will increase the overnight interest rate another 50 basis points in June and continue adjusting faster than we had thought to get to their desired neutral rate. This neutral rate will allow inflation to return to its target of 2%. It’s kind of a goldilocks scenario but they think that the neutral rate for Canada is around 2.5-3%. That’s probably where we’re going: a 2.5% overnight interest rate.
A 2.5% overnight rate probably means a 4.5-4.8% fixed term five year mortgage rate, which translates to an almost 7% stress test rate. We’re headed for uncharted territory, at least compared to recent history.
How do interest rates compare to people’s purchasing power and carrying costs?
With the combination of higher rates and the stress test in 2018/2019, people’s purchasing power decreased by 25-30%. But prices only fell about 6%. So sadly, it’s not a one-to-one comparison between what you can afford to carry and what the prices will be.
We model, and markets tend to work, based on supply and demand. If your purchasing power drops a lot, which seems to be where we’re heading, it doesn’t equate to an equivalent change in prices.
BCREA recently released a report on the impact of increased supply on BC housing markets. Can you tell us more about that?
There’s friction in BC because we have a lot of 55 year olds who are well-housed and not looking to sell, as well as a lot of 30 year olds who don’t have a house and want to buy. So there are not enough new listings happening. The only way to get out of this is to expand the housing stock.
It’s easy to say we need to expand housing supply. But we want to put numbers around what kind of policies might work and how effective they’ll be. We found that a 10% increase in completions leads to a 2.5% increase in new listings – it’s not a huge impact but it does help. If we can get supply to market faster, we can expand choice and free up some of the existing housing stock. And if we build more, we can keep price growth closer to the rate of inflation.
What do you say to skeptics who don’t think we need more housing supply in BC?
There are a lot of myths out there. Some people say we’re already building enough housing in BC because dwelling rates and population rates are in line. But dwelling growth determines population growth; you can’t move to a city if there’s nowhere to live. So no, we’re not building enough housing in BC. We need to build a lot more.
The second myth is that if we do build, it’ll only be for investors and they will keep the units empty. This is also untrue. Foreign investment in BC made up only 0.3% of sales in the last year. Only 0.15% of units in BC are vacant and held by foreign investors.
We’ve had over a dozen policies aimed at dampening demand over the last decade. And the result has been the average home price in BC is over $1 million. So clearly, we need to be doing something else. So why can’t we try? Let’s try increasing supply. The worst thing that would happen is we have too much supply.
Interest rates, demand shocks and supply affect housing markets. How can governments impact housing supply?
At the municipal and provincial level, we have very little power to affect interest rates or housing demand. We are set to have more people who will need housing in BC than we have had in the last 40 years. We have always had unpredictable demand shocks and we can’t do anything about those, nor should we in some situations.
What we do have control over is supply policy. Things like approving projects faster and allowing more units to be built on single-family lots can be implemented by local governments to help increase housing supply. We need to concentrate on what we can actually control.
What are your predictions for the BC real estate market in the next 1-3 years?
Right now, things are actually pretty good in BC. The economy is growing, unemployment is low and households have accumulated a lot of savings. But we can see a slowdown on the horizon in the next 1-2 years. Over the next three years, there may be a lot of disruptions. But if we do slow down, interest rates will come down too. And that will start the cycle all over again.
In a five year window, you’ll have ups and downs. But if you average out over that period, you’ll probably be in a better place.
How will house pricing change in the next few years?
Right now, everything is determined by interest rates. If the Bank of Canada gets more aggressive and overshoots its neutral rate of 2.5%, then I think we could see prices down 5-10%. That’s what our models tell us.
From a baseline, we predict prices will flatten out and slow down over the next two years. But that’s still a major adjustment compared to some markets that have seen 25% growth in a year. So it will take some time to go from 25% to flattening out.