What you Need to Know About the BC Housing Market

Welcome to our latest update on the BC Housing Market. If you’ve been paying attention to local or provincial news, you’ll be aware that changing macroeconomic factors are having a dramatic effect on the housing market throughout British Columbia. We’re going to start by explaining what we mean by “BC” by looking at how the BC Real Estate Association (BCREA) separates the province based on the operating areas of the different boards. Following that, we’ll explore what changing interest rates means for sellers and buyers and conclude with an outlook on what is to come.

Before we jump into it, we’d like to remind you of the expertise of our Client Care Coordinators. This article is a bit more in-depth, and we are always happy to answer any questions you may have while you read through our interpretation of various data sources and provide predictions as to what is coming.

The Regions of BC

To draw some reasonable conclusions, we will be considering data sources provided by the BCREA. When it comes to BC housing, most of the discussion focuses on the Metro Vancouver region and does not provide much colour for the broader province. The 8 board regions that are represented include Interior, Northern BC, Chilliwack and surrounding district, Fraser Valley, Powell River / Sunshine Coast, Greater Vancouver, Vancouver Island, and Victoria.

Changes from Last Year

Overall sales of all property types dropped 31.89% across the province from June of last year. The most affected areas were Chilliwack (54.1%), Powell River (46.3%) and the Okanagan (38.1%). Greater Vancouver experienced a 35.5% drop. 

Average home prices increased by 11.13% across the province, with the largest jumps occurring in Powell River and Kamloops. The only area that experienced a dip in home prices was South Peace River, with a drop of just 1.6%. What we’re seeing here is the last remaining jump in home prices and the lag between the reality of the current sellers' market and buyers’ expectations. If we follow up in 1 month, we can expect to see a drop in housing prices. Why? Because listings are jumping dramatically. Let’s look at that next.

A leading indicator of the above-predicted changes is the amount of time that homes are taking to sell. We can see this by observing active listings. Across the province, active listings are up by 29.14%. The biggest jump in active listings is in Chilliwack, which is experiencing a more than 100% increase in active listings. Vancouver Island is showing a 62.4% increase. The least affected area is South Peace River which has experienced a decline of 41.5%. 

House offerings are now sitting on the market for months at a time, with average months of supply above 3 in most provinces. A popular rule of thumb for declaring a recession for a country is to experience 2 consecutive quarters of overall Gross Domestic Product decline. The average person can tell you that they are experiencing a recession well before it is formally declared. A similar thing can be experienced in the housing market. For sellers with a less desirable product, they will easily be able to point to qualitative examples of the market shifting. 

The changes in the market shouldn’t be a surprise once you understand how increasing prices and increasing interest rates affect the home buyer. Let’s take an unidentified BC Home that cost $800,000 in June of last year. Now, it costs $890,000 (rounded up for simplicity). If we take last year's rate of, say, 2.5% and a new rate of 5%, this is what we come up with.

• June 2021: $800,000 home, 20% down 5 year fixed rate mortgage, 30 year amortization = $3,415
• June 2022: $890,000 home, 20% down 5 year fixed rate mortgage, 30 year amortization = $3,800.

The same home, for $400/month more. In Vancouver, with home prices regularly stretching above $1M, this difference is even more exacerbated. Buyers are going to need a lot more inventory to come to market and sit to encourage sellers to drop prices further. Looking at the above data, we can see that it takes time for sellers to respond to changing market conditions. As an aside, we could expect to see rents increase as prospective buyers may no longer be able to qualify under these increased interest rates.

Although these changes may not be showing up in the data for sellers, you don’t need to look far to find examples. Check out this article. about an Ottawa family who had to sell their near identical home for $150,000 less than the couple down the street. Regardless of their personal situation (they still experienced a more than two times gain in 7 years), it showcases that things are changing across the country.

What’s Causing the Change?

So, it’s clear that the real estate market across the province is shifting and will continue to shift. What is driving these changes? Primarily, the effect comes from rising interest rates. Headlines over the past weeks and months in the financial sector have pointed again and again to raising interest rates. A big change occurred on July 13th, when the Bank of Canada raised interest rates by 1% (or 100 basis points in financial terms), the biggest increase since 1998! It will take more than a few weeks to see the real ramifications of this kind of change, both on the practical financial side and the psychological side of the indirect declaration of a recession. 

The housing market has relied heavily on variable rate mortgages, which have averaged more than 1.5% cheaper than the fixed rate mortgages before these changes. New purchases often choose the variable rate, particularly after such a long period of low rates. In the past year, 50% of new mortgage originations have been variable! Many British Columbians chose the variable mortgage rate as a way to enter the housing market, with lower payments providing increased flexibility. With this interest rate rise from the central bank, the typical variable mortgage will increase, as will the stress test. Suddenly, there are fewer and fewer qualified home buyers who would be able to participate in purchasing a home. 

On a regulatory level, we have seen the Provincial government step in with fiscal measures to try and support a more stable housing market. In an attempt to give buyers some additional leeway amidst what was a highly competitive sellers' market, the BC government introduced a 3 business day “cooling-off period” for offers. We’ve outlined that in detail, as well as the controversy around it, here.

So, things are starting to change but haven’t quite yet. Let’s look at what this changing economic and regulatory environment might mean for the BC Housing market in the coming months (or even years).

What Is the Outcome of These Changes?

To consider the future, we’re going to observe more broadly across the country. A significant part of the recent discourse has been the Royal Bank of Canada’s Economics team report that included a cross-Canada market forecast. Generally, they are forecasting a 17% drop in home sales nationwide by 2023. Considering the drops that have already occurred, we would be facing a 42% total drop from the record-high levels experienced in early 2021. Historically, there are four national downturns to compare:

• 1981-1982 experienced a 33% drop
• 1989-1990 experienced a 33% drop
• 2008-2009 experienced a 38% drop
• 2016-2018 experienced a 20% drop

It doesn’t take a mathematician to see that the predicted drop well exceeds some of the most significant historical downturns, reaching beyond even the 2008 Global Financial Crisis that preceded the largest drop in the last 40 years.

RBC cautions that this isn’t going to be a complete collapse of the housing market. Canada has led the Western world in immigration, and our archaic new housing policies (i.e. it’s extremely difficult to build new housing across the country) may finally be a benefit as over-building supply is unlikely.

The above-discussed Bank of Canada’s interest rate hike is a response to this sort of economic shifting. We can see that the effects are already occurring, with much more changes to come. Analysts are also predicting further interest rate hikes throughout the remaining months of 2022.

A direct quote from the report reads, “The Bank of Canada’s more aggressive course has clearly dimmed the outlook for Canada’s housing market. We think both activity and prices are set for a material correction. Still, we’d argue the unfolding downturn should be seen as a welcome cooldown following a two-year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve.” 

The correction will likely last throughout 2022 and into the first two fiscal quarters of 2023. The increased home prices in British Columbia were reflected across Canada, soaring throughout 2021 and 2022. So, although there are drops predicted, they must be considered in light of the incredible bull run that the housing market experienced throughout BC and the rest of Canada. By early 2023, home prices will fall more than 12% across the country.

RBC directly speaks to British Columbians in the report, predicting we and Ontario will be at the centre of this downturn. Our housing market has had some of the most dramatic shifts, and our buyers are generally the most sensitive to rate hikes. Specifically, in BC, RBC predicts home sales will drop by 45%. Long-term residents of British Columbia will recall the massive downturn in the early 1980s, where resales fell by 62% and prices fell by 27%. The bank’s economists do not expect the current expected downturn to exceed this period.

On a broader scale, we can expect not only the housing market to experience a drop but the general economy to take a hit. We have experienced incredible economic growth over the past decade, particularly in the past two years. The report expects provinces like Alberta and Manitoba to take the lead in economic expansion, as so much of our economy is tied up in the real estate sector. The report expects growth, but higher interest rates will slow down the real estate industry enough to drop the economic growth.

“We expect rising interest rates will further moderate home resale activity in the period ahead and broaden the cooling effect to other regions. Rapidly deteriorating affordability – especially in Canada’s most expensive markets – will make it increasingly difficult to sustain recent property values,” RBC economists Robert Hogue and Carrie Freestone said in their analysis.

“In fact, we believe home prices have already reached a tipping point in several markets in Ontario and British Columbia. Slower activity will tamp down the substantial contribution the housing sector made to economic growth during the pandemic.”

The price of a home is likely to remain relatively high. The gains over the past 2 years will not be wiped out by these changes, meaning that the market will remain challenging for new buyers.  

Please feel free to contact us if you are considering this economic information in light of a potential purchase or sale of your condo, townhouse, or home in BC. Our team of Client Care Coordinators will gladly connect you with a local, vetted realtor who shares our high degree of integrity, honesty, and knowledge. They will be able to provide more localized information on how these changes are affecting your market and how you can best navigate the changing environment. We welcome any questions you may have and look forward to updating this report as more information comes out.