Housing Market Correction in British Columbia

Today we will dive into the significant and ongoing housing market price correction occurring in cities throughout British Columbia. Typical discourse focuses on Metro Vancouver and the associated municipalities such as Langley and Maple Ridge - we intend to provide a broader overview that touches on some of the province’s less-discussed areas. We will dig into some of the recent data that shows changes in some of the core data related to housing prices, integrate the causes of the price changes, and analyze the impact - both today and in the months and potentially years to come.

This piece intends to provide our readers with an understanding of where we came from, where we are at, and where we are headed. There are many interesting, intertwining elements here - rising interest rates and inflation, combined with the general sentiment of an impending economic downturn on a national scale, are contributing to this change. 

Scope of the Correction

Let’s start with understanding the scope of this correction. To get an understanding for the province, we will be analyzing data provided by several of the provincial real estate boards. We will also consider the most recent housing market update (November 2022) provided by the British Columbia Real Estate Association (BCREA). 

There are a few key statistics here: total Unit Sales, Active Listings, and Months of Supply. Although price is the prominent factor to consider, it is not always the most relevant as the previously mentioned data points are leading indicators. They point to trends in housing prices that will likely play out in the months ahead. We will, of course, touch on prices, but they are considered lagging indicators and are typically a result of the above.

Total residential Unit Sales have taken a steep dive since a 10-year peak reached in 2021. The BCREA previously reported that over 124,854 homes were traded in 2021, a 32.8% increase compared to 2020. The beginning of the pandemic affected the total sales, but this is still a 10-year high that smashed previous highs in seven market jurisdictions. This left us starting 2022 with the lowest number of active listings ever. As we approach the end of the year and consider some month-over-month statistics, we are shown a very different picture. Across the 11 different market areas, most unit sales are down more than 30% year-over-year. Chilliwack was hit the hardest and is down 60.9% in terms of sales compared to November 2021. Other strongly affected areas include Greater Vancouver (-45.7%), Powell River (-57.9%) and the Fraser Valley (-53.9%).

Next, we look at the Active Listings. This is a genuinely revealing statistic, with some market areas experiencing a greater than 100% rise in available units for sale! Again, Chilliwack is the hardest hit, showing a 145.9% increase in the number of homes for sale. Active listings are just another way of saying “supply” - as supply grows and demand falls, home prices must decrease to accommodate the reduced number of buyers. The BCREA even includes an analysis of overall market conditions and shows a drop from a market that has strongly favoured sellers for the past two years to a more balanced market. At one point, the market was so strong that the government introduced regulations in an attempt to curb buyers being taken advantage of. The “Cooling Off Period” was implemented to mandate buyers to build time into their contracts to complete due diligence. At one point, the market was so crazy that buyers were forced to forgo the standard time saved for property inspections and financing, which put some buyers in dangerous situations. It’s typical for the government to implement a policy years later, only to become essentially useless as the market corrects. Perhaps we may even see a drop into a Buyers’ Market, a concept that is novel to anyone who has been in the market anytime in the past decade in BC.

Finally, we want to touch on Months of Supply, another statistic core to the BCREA economic analysis. Months of supply refers simply to “the number of months it would take for the current inventory of homes on the market to sell given the current sales pace.” ¹ Generally, higher months of supply mean that more sellers exist than buyers. In all 9 of the 11 market areas, months of supply sit at greater than five months. 

This leaves us with an analytical understanding of the trends that are occurring. Now, we can take this understanding of the lay of the land and discuss the contributing factors to the correction and the impact that has occurred.

Causes of the Correction

So, supply is steadily increasing, unit sales are levelling off, and houses are sitting for longer and longer without offers. What’s the cause of all this? Well, there are two primary factors - a general economic downturn and changes in government policy that have affected borrowers’ buying power. We recently published a deeper dive into Canadian Real Estate Prices Are Down and the Mortgage Rates Are Up: How Does This Affect Buying Power? To summarize, we first noted that the value of homes across the country are dropping. As covered in depth above, a general and consistent demand reduction means sellers must adjust prices downward to accommodate a reduced pool of buyers. Firstly, Canadians are generally tightening their wallets. As reported by the Financial Post, online sales in Canada during Black Friday and Cyber Monday (one of the most significant consumer events of the year) dropped by 8%, bucking the expected trend of a 2% increase. The article is worth reading to understand some of the other factors, including an increased savings rate - indicating a general sentiment towards saving over spending. Consumers who are considering a real estate purchase also realize that with a higher interest rate, increasing their down payment will provide a more favourable mortgage situation.

Let’s talk about those interest rates. On December 7th, the Bank of Canada raised the rate again to 4.25%. This is well timed, as it’s also the seventh time this year that the BoC has raised the rates with an intent to combat inflation. The central rate leads to rapid changes among the Big Five banks, as they quickly announced that they would be announcing upward adjustments to their prime rate. We covered the prime rate and how it affects lenders and potential mortgage holders in a previous Deep Dive into the Difference Between a Fixed and Variable Mortgage. Previous rate hikes throughout the year have been released with announcements indicating planned future raises - this is the first announcement that does not come with such direct language indicating future lifts.

The CBC article gives a succinct example of the individual impact of these rising rates. They report on a woman who has seen her monthly payment balloon from $1,700 to $2,700 per month, putting her and her family in a challenging and unexpected financial situation. As we’ve previously noted, most Canadian mortgages sold in 2021 were variable rates - based on consumer confidence in continuously low, attractive rates that were on offer. 

Impact of These Changes

The first and most obvious impact is a decline in housing prices. In 2021 especially, prices across British Columbia skyrocketed, highlighting an already unaffordable market, particularly in the denser regions of Metro Vancouver and Victoria. In the immediate term, many individuals will face pressure that will either cause them to focus more intensely on savings to sustain their payments or, in some unfortunate situations, they may be forced to sell. With so many people waiting on the sidelines, it’s hard to imagine a true “crash” in any market - Canadian property remains an attractive investment, especially for those simply looking for a secure place to live. 

It will be interesting to see if these changes affect the housing supply on the delivery side. According to Trading Economics, housing starts in Canada declined by 11% month over month. Developers, like individuals, also require loans to finance new property construction. As the interest rate increases, development economics become tighter, making it more challenging to deliver profitable developments. This is particularly concerning for new businesses, who may not have the experience or financial situation to afford unexpected changes to their deal economics. This reduction in new building supply will hedge the price drop caused by an increase in existing supply, 

Conclusion

In conclusion, it’s clear that the British Columbia housing market has undergone significant changes in the past year. One of the key drivers of the changes in the market has been the general economic downturn. As we know, the rising interest rates have profoundly impacted economies worldwide, and Canada is no exception. As a result, many Canadians are tightening their budgets and being more cautious about making big purchases, such as buying a home. This has reduced the pool of potential buyers and put downward pressure on prices. The BCREA’s most recent housing market update shows that the market has shifted from a seller’s market to a more balanced market. Ultimately, although prices are starting to drop, we have yet to see the final outcome of all of the abovementioned factors.

If you are curious about what a home purchase might look like in these changing environments, this may be a good time to connect with our Client Care Coordinators. Our team of experts provides clear, concise advice to British Columbians at any stage of their home-buying journey. This is a good place to start if you are looking for general advice. If you require professional help, our team can also connect you with our extensive network of vetted experts who share our commitment to the highest level of customer service in real estate. Please let us know if you have any questions or feedback on this article - we are always open to learning more from our readers.

¹ Retrieved from National Association of Realtors - Inventory and Month's Supply