By Al Emid
The Vancouver real estate market encompasses a range of factors, some of them resembling those present in the Toronto market, and like Toronto, demonstrates a mismatch between supply and demand. The supply is very constrained and doesnt nearly match the level of demand in the market, explains Jimmy Jean, senior economist at the Desjardins Group in Montreal.
Vancouver has an older population than does Toronto and, on the demand side, many purchasers are buying at the higher end of the market. It [the population] is not as generalized as you would find in Toronto, comments Jean.
Meanwhile, the effect of the 15% tax on purchases by foreign buyers appears to have worn off. House prices in Vancouver bottomed in January 2017 but at time of writing continue to rise. Ever since then, what we have is a pickup [and] clearly the market is beyond those measures now and moving upward, he says.
Vancouvers reputation as a hedge city with political, cultural, and economic stability also figures in the equation, according to Adil Dinani, a Royal LePage broker there. Individuals from around the world are looking for places to put their money where they can feel safe about it, he says.
Foreign buyers, many from Asia, continue to buy homes in Vancouver; by some estimates, they account for between 10% and 15% of the total transactions.
If, as many believe, the Bank of Canada will soon raise interest rates, that would provide a moderating influence on demand but would not trigger a correction, in Jeans estimation.
The low-interest-rate environment continues driving the market. For the last nine years, that [has] created a sense of affordability in the market, Dinani says, pointing to the traditional inverse relationship between interest rates and house prices.
Rising prices in Vancouver and Toronto have led to unprecedented levels of activity and price increases in nearby communities, according to the 2017 Royal LePage Canadian Recreational Housing Report, released in June.
With a limited impact on the demand side, British Columbias First Time Home Buyers Program reduces or eliminates the amount of property tax or transfer tax for qualified applicants buying their first home. Also, a new program, BC Home Owner Mortgage and Equity Partnership, provides up to $37,500 or 5% of the purchase price as a 25-year mortgage loan on an interest-free and payment-free basis for the first five years. The last thing BC needs now are programs that stimulate more demand, David Madani at Capital Economics says. At time of writing, the program had about 1,200 applicants, half of them in Vancouver.
On the supply side, developers face a long and frustrating approval process that slows down the building of condominiums, a factor made even more distressing since no land is available for new detached homes.
Geography also constrains the supply of new housing stock. Land in Vancouver is scarce and costly: mountains to the north and ocean to the west act as a brake on sprawl from the city.
Also on the supply side, Vancouver is attracting more American buyers than previously as they take advantage of the 30%35% premium on their cash at current exchange rates, thus cushioning the 15% foreign buyers tax.
Taken together, these factors have had several results, including a shift of the product mix in Vancouver. The shortage of land makes it basically impossible to build new detached homes, and so they will become a smaller part of the total housing inventory over time, while the proportion of condominiums will increase.
Moreover, buyers have become more creative and accepting, Dinani says. There is a general sense of understanding now. Initially when the prices started rising, there wasnt as much acceptance that prices were going to be sustainable and that people would have to compromise, he says.
The higher prices and rents have confirmed Vancouvers unenviable title as the most expensive city in Canada, according to Mercers annual Cost of Living Survey, released in June. The survey notes that Vancouver is the most expensive city in Canada and ranks 107th globally, while Toronto ranks slightly behind in 119th place. Montreal ranks 129th, Calgary 143rd, and Ottawa 152nd.
These factors are not static and several remain fluid, including a possible increase in interest rates. Going forward, I think we are going to have a situation where rates will be higher, Jean says. The Bank of Canada has been signaling [that] the era of low rates was probably coming to an end. That could lead to a period of more moderate growth. Those who might have been able to qualify for a mortgage at the current low rates may no longer be able to make the move.
Also unclear is the cumulative impact of Vancouvers Empty Homes Tax, which became effective on January 1 of this year. The law provides a 1% tax of assessed value on homes deemed to be unoccupied. The impact of the tax will become clearer at the end of the year.
Meanwhile, much of the market is being driven by transactions involving condominiums and townhomes, rather than single-family detached homes. Purchasers tend to be first-time buyers and those downsizing from larger homes.
The extent to which interest rates go up will affect home buyers who would barely qualify under present conditions. Some people who might have been able to qualify by a stretch right now will no longer be able to [qualify], Jeans says.
The total cumulative impact of new government mortgage rules should crystallize by fall of this year. Effective last October 17, the rules call for stress testing for new mortgages, including those where the buyer has more than 20% of the purchase price for a down payment. The goal of the stress-testing procedure is to determine whether the borrower can continue to make mortgage payments if rates rise. The buyer has to qualify for a loan at the stipulated bank rate but also at the Bank of Canadas five-year fixed rate, usually a higher rate than the negotiated rate. The stress test also limits a home buyers spending on carrying costs such as mortgages, heat, and taxes to 39% and limits the total debt service ratio to 44% of income.
Tougher mortgage-insurance rules will affect not just first-time buyers now, because the government has really put its foot on the brake for all borrowers. There is going to be an impact on mortgage renewals, and the banks may end up pulling back on their end, Madani projects. Meanwhile, the ultimate fate of the BC Green Partys proposal to double the foreign buyer tax is unknown at time of writing.
Meanwhile, the Chinese government decided to institute new capital controls, which will reduce the ability of Chinese buyers to export large sums of money into Canadian real estate. Under the new rules, individuals are restricted to exporting $50,000 per year.
The demand-supply cost equation foreshadows a worsening of Vancouvers already serious homelessness situation. A survey conducted by the BC Non-Profit Housing Association and released in April showed a total of 3,605 sheltered and unsheltered homeless in Metro Vancouver, a 30% increase from the 2014 survey. Nothing in the current picture suggests the likelihood of a dramatic improvement in the short term.
Meanwhile, Madani at Capital Economics takes a seemingly heretical position, predicting a correction of between 20% and 40% over the next five years. There is going to be a day of reckoning for sure, particularly in Vancouver and Toronto, Madani says. He doubts that the resurgence in Vancouver prices can be sustained and argues that when prices stop rising, speculators will start to leave the market, and that will drive prices down. If Madanis prediction crystallizes, it could mean a downturn in economic growth, which could wipeout price appreciation in home prices. In a worst-case scenario, buyers who bought properties in recent years will have high loan-to-value mortgages, taking them into negative equity on their properties.
Royal LePages Dinani discounts the possibility of a major correction in the near term, given the combination of positive sentiment and low interest rates, and suggests that any of three events might trigger a correction: a huge global financial crisis, a supply-demand imbalance in which there are many more houses than buyers, and sharply rising interest rates.