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Market Update – July 1, 2010
With summer officially in session for 2010, the Lower Mainland real estate market activity has finally taken a rest. The market has been very hot since April, 2009, with a solid 12 months of steadily improving price trends.
This 12 month period has delivered one of the quickest and fullest recoveries in real estate values in Canadian history. Some segments have found new highs since the last peak in April 2008, notably single family housing in Vancouver, North Vancouver, Richmond and Burnaby. Other segments have met their previous high points, such as condominiums in Vancouver and single family housing in Delta and Surrey.
However, many market categories have fallen short of a full recovery as supply has simply outpaced demand, which in many cases is due to over construction.
Whenever there is a recovery period, the most desirable real estate always recovers first. This is why the City of Vancouver has fared the best recently. The suburbs immediately adjacent to the City of Vancouver, such as North Vancouver, Burnaby and Richmond have also seen a brisk upward trend in single family home values due to their close proximity. It has been clear that single family home sales have led the way in this recovery, which proves that even though we are largely becoming a culture of condominium living, land is still the most sought after type of real estate.
Sales volume, as of May, 2010, has dropped approximately 35% from the previous month and as June volume numbers become clear, this sales volume drop will be even more. There are five key reasons for the market activity slowdown which has broached use:
1) Soaring Inventories: At the end of the day supply and demand will always dictate market conditions and price. In most categories throughout BC and Alberta, the active listing counts doubled between January and May 2010. This is a result of profit taking and a natural occurrence for the spring market. Regardless, this spike in inventory has changed the tide of the balance to a buyer’s market.
2) Rising Interest Rates: Albeit only very slight, when the Bank of Canada raised interest rates a quarter point on June 1, 2010, it caused a general rush in the real estate market as those who where sitting on the sidelines were encouraged to make a move. Therefore, those who were planning on buying sometime in the next year or two may have advanced their plans forward. This has contributed to the extremely busy months of March/April, 2010. Of course, this has left a dearth of activity for the summer as the demand was “moved”.
3) Olympic Wait: Largely a psychological component, and affecting the City of Vancouver and the immediate suburbs mostly, many people simply waited for the Olympic Games to complete before engaging in real estate activity, buying or selling. Again, this contributed to the busy months of March and April, but largely because December/January/February were slow.
4) HST: The doomsday date of July 1, 2010 and the now present HST also loomed as an upcoming deadline. Home purchasers, particularly with new construction, rushed to complete business before the new tax took effect. For new construction, the HST means tens of thousands of dollars more in cost, while it serves as an annoyance in the $1,000 - $2,000 additional cost mark for the resale market. Either way, it provided yet another reason to buy before July 1. Now that this day is past, it is inevitable and we all must face it. It adds to the overall cost of real estate transactions and therefore, by right, will damper the market to some degree.
5) Seasonal Trends: In the old days of typical market trends, summer was traditionally a slower period. Many of those historic reasons still remain today, such as vacation time (for buyers, sellers, realtors, bankers, appraisers, etc.) and having a breather from a busy spring. In 2009, this seasonal slow down didn’t happen, but that was because we experienced a cataclysmic decline in Fall 2008 and Winter 2009. The summer instead became a recovery period in which was saw record sales volume in many segments.
Having experienced such a rapid and substantial recovery over the last 12 months, we are now at a high price point again. This price point has brought about the soaring inventories mentioned earlier which has presented itself as a barrier to further price increases. As lenders and government have tightened mortgage protocols, this has also affected affordability.
Prices cannot climb much further until wages and personal wealth are present, which means that there needs to be a more general/global economic recovery to continue to propel this market. Although it seems, today, that the USA and Europe are mired in financial troubles, this global economic recovery may still not be that far away. This coming inflationary cycle (which we already see signs of with increased municipal tax rates and the HST) will bring higher wages, but also with it, higher interest rates and prices.
Until then, I foresee real estate prices remaining stable for the near future. Those who think prices are going to burst or crash need to remember, we experienced a worldwide financial meltdown in Fall 2008 and Vancouver real estate prices were ONLY affected by about 30% on average. We are a strong and resilient market with worldwide demand. Investing now for the long term is still a good position as interest rates will not be this low again.
Jason Upton
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