5 Important Issues You Should Know About The Current Real Estate Market
The housing market optics have changed. Home prices and sales are dropping, the pandemic induced exodus to larger homes in the suburbs has diminished, mortgage rates are creeping up, FOMO (fear of missing out) buying has collapsed, the widespread speculation and flipping that we have been witnessing has all but dried out . . . and there is some uncertainty as where the market is heading.
So here are the underlying currents that are affecting the current housing market:
Buyers waiting for lower prices to offset the cost of borrowing
Prices in the suburbs have already dropped around 15% or more. The Bank of Canada has raised lending rates and borrowers will no longer enjoy the historically low rates we have seen in the past few years. The typical 5 year fixed rate mortgage has increased from around 1.75% to 5% and higher. The full impact of the higher interest rates will not be felt for at least 18-24 months.
Impact of immigrants
With borders opening up to the pre-pandemic conditions, Canada will see a huge upsurge of immigrants. The increase in immigration levels was on the cards before the pandemic due to the shortage of skilled and non-skilled workers. Immigration levels are expected to reach over 400,000 per year, and BC, especially the Lower Mainland, is a very popular destination for a large majority of them. Many will come armed with cash and with expectations of buying a home, especially after selling their homes in their previous countries. Add guest workers and international students to this equation, and don’t expect a sharp downturn in price.
Migration impacting the rest of BC
With Vancouver housing prices being unaffordable and in some cases out of control, people have moved out of the city to smaller markets in BC such as the Fraser Valley, Abbottsford, Chilliwack and even Vancouver Island. This has placed demand on those local markets and forced prices to go up considerably. The drop in prices and demand has not been as drastic as that in the Lower Mainland.
Developers less incentivized
The real estate development business is very much about market timing. Developers are out to earn profits and plan their developments when markets are good. So when the housing market takes a downturn (as it is currently doing), their return on investment diminishes. There is less incentive for them to develop unless they are forced and or incentivized by politicians to do so. Less development will put more pressure on existing home prices.
Higher mortgage rates slow down home price appreciation – not as much today however
Higher mortgage rates do bring about affordability issues to homeowners, as monthly payments increase after renewal. Historically, empirical evidence shows that higher mortgage rates tend to slow home appreciation and may weigh on housing market activity. The difference today is that we have an acute housing supply shortage, which could slow down the deceleration in home price appreciation. Again, more uncertainty.
In a market such as what we are currently experiencing, it behooves you to engage with experienced and trusted real estate advisors who can navigate your real estate needs effectively and efficiently. Contact us by phone 604 695 1000 or email us.