The correction in the Vancouver condo market is now fully underway after prices peaked at the beginning of 2018.  This should really not come as a surprise given how weak the detached housing market has been for nearly 2 years, and considering the tightness in the mortgage lending space. As as a result, Vancouver condo sales fell to a 10 year low in December with sales plunging 47.5% year-over-year, the sharpest annual decline since 2008. Unlike the detached housing market, price declines in the condo market are easier to quantify. Although once again price declines will vary depending on the metric used. Both the average and the median sales price declined on a year-over-year basis in December. Since prices peaked at the start of 2018 it is a fair assumption to suggest condo prices have dipped about 10%, even across entry-level one-bedroom units. It is important to remember that prices are seasonal with home prices typically decelerating in the winter months. However this should not be used to discount the significant deceleration in condo prices. The average price per square foot for resale condos now shows a 4.5% decline from December 2017. An important catalyst for a continued decline, or

Forecasting with precise accuracy is difficult to do, and nearly impossible to do on a consistent basis. Yet there is no shortage of said forecasts as we head into 2019. Many of these forecasts come from within the Real Estate industry, most with an underlying objective or bias that comes naturally when your job or stock price depends on it. While I will stop short of providing another forecast, I think there are perhaps better indicators to watch moving forward, many of which come from the very regulators who control the policy levers that can move real estate prices on a meaningful level. Recent actions and communication from policy makers including the Bank of Canada, OSFI, and CMHC all suggest a further desire to curb household borrowing and contain the runaway housing market. Here are a few things to watch from policy makers/ regulators in 2019: The Bank of Canada The Bank of Canada has recently taken a step back from the rate hiking path, with market odds suggesting the Bank of Canada could be done for good. While this is certainly possible, it has sent the Canadian dollar into a downwards spiral, dropping about 7% against the US dollar

Home sales activity is generally considered a leading indicator for future price movements, while the overall housing market is considered a leading indicator for future economic growth. Both of which are signalling volatile times ahead. Per recent data from the Canadian Real Estate Association, national home sales fell 12.6% from last year, with total sales falling below the 10 year average for the month of November. Part of the decline can attributed to a strong November 2017 which saw a flood of buyers rushing to enter the housing market before the new mortgage stress test. However, the year to date numbers suggest there is some significant underlying weakness across the nations historically resilient housing market. Year to date sales (January through November) are down 11% from last year, and have fallen below the 10 year average. It is the fewest home sales for this period since 2013. As a result, this is beginning to weigh on home prices. CREA’s HPI home price index has been decelerating rapidly since annual price gains peaked in April 2017. As of November, the index has decelerated to a 2% annual increase. Essentially flat when adjusted for inflation. However, over the past 6 months price

Canada’s mortgage credit growth continued to decelerate in Q3 2018. Per a recent report from RBC, mortgage credit growth decelerated to 3.2%, the weakest pace of growth in 22 years.  The result of banks reigning in loan growth is significant for a number of reasons. Over 90% of new money is created through banks issuing new loans, with a large portion of that growth derived through new mortgage loans. Essentially banks are shrinking the growth of new money supply, which is also called M1 and is considered the most liquid portion of the money supply because it contains currency and assets that can be quickly converted to cash.  As credit growth begins to contract it is effectively reducing aggregate demand, not only for housing but also has a subsequent knock-on effect, slowing new spending and wage growth. This ultimately impacts debt servicing, as wage growth is needed to offset the increasing rise of interest payments. Per RBC, Interest payments rose at their fastest rate (14.8% y/y) since 2007.  This is also important to keep in mind for rent prices. As rents are typically tied to the labour market. Rents rise when the housing boom is in full swing because credit

Per CMHC, Canadians total household debt relative to disposable income slowed to a standstill in Q2 2018. The recent pause comes after years of household debt rising faster than incomes. Unsurprisingly mortgage debt has been the largest contributor, accounting for two-thirds of all outstanding household debt in Canada. While Canadians debt to income ratio has flatlined at 170%, it continued to grow in Vancouver & Toronto. The debt to income ratio climbed to a new high in Vancouver, ballooning to 242%. Vancouver households pushed the mortgage debt-to-income ratio to 177% and the HELOC debt-to-income ratio to 31%. In other words, the debt-to-income ratio tied to real estate in Vancouver sits at an eye watering 208%. With interest rates on the rise this can squeeze households ability to service the debt. This is whats called a debt servicing issue, where the rise in interest payments outpace the rise in incomes. As a result, households could begin to deleverage, which causes credit to contract, consumption to slow, and home prices to drop. While this is certainly not the case in Vancouver at the moment, it appears the Bank of Canada is preparing behind the scenes. In November they announced they would begin purchasing

The sudden shift in the Vancouver housing market has been well documented. In November, home sales across all property types sank to a ten year low for the month. The drop is rather unprecedented considering the current economic backdrop suggests unemployment across Canada has plunged to a 42 year low. And while unemployment may be a lagging indicator, the housing market is certainly not. Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. So too does the yield curve, which continues to flatten. Earlier this week the Canada 2 and 5 year bond yields inverted, the first time since 2007. A flat or inverted yield curve is when short term rates exceed long-term rates. This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins. In simpler terms, this can cause bank lending to further tighter, leaving borrowers high and

The detached housing market remained sluggish in November. In the city of Vancouver detached sales fell 32% year-over-year and trickled in at a ten-year low for the month. Again, to suggest sales are weak would be an understatement. Detached sales were 55% below the 10-year average for the month of November. Sales volumes are incredibly weak with buyers looking for steep discounts and many sellers still unrealistic with their asking prices. However, sellers who need to sell for whatever reason are increasingly having to lower their prices. There is often a rhetoric that “sellers simply won’t sell” if they don’t get their price, and while this may be true the reality is there are still sellers who absolutely need to move on, such as estate sales, divorces or job relocation. These sellers are ultimately setting the benchmark lower. Homeowners who are actually wanting to sell would be wise to create the market, i.e. set an asking price that factors in current conditions and anticipate that prices will move lower, as opposed to slowly cutting prices and constantly chasing the market lower. On a more positive note, new listings actually fell 26% year-over-year, this pushed inventory lower by 6% compared to last

Vancouver’s condo market saw the steepest decline in sales this month. Condo sales in the city dropped a rather concerning 46% year over year in November to a ten year low. While this steep decline may surprise some people, we have been cautioning of this for quite some time. A weakening detached market which has pushed prices noticeably lower has finally trickled down into the condo market. The strength of the detached market was important for a number of reasons. Firstly, most first time buyers are receiving help from Mom & Dad. Per Will Dunning of Mortgage Professionals Canada First time buyers sourced $4 of every $10 of their down payment from the bank of mom in Canada between the years 2015 to 2018. The reality is, mom and dad have lost some equity over the past year or so, at least on paper.  This makes it more difficult to refinance and/or tap home equity lines of credit which are frequently used to help with the down payment for first time buyers (The average HELOC balance in BC sits at $123,797). This may get even more difficult moving forward as OSFI has put pressure on the banks to reign in

December was another quiet month for the Vancouver real estate market. Home sales continued to decline, dropping 44% year-over-year across all property types. Total sales fell to a 10-year low for the month of December, just slightly higher than the post financial crisis lows of 2008. While new listings remain low, suggesting home sellers may be holding off for better times, inventory continues to edge higher as buyers move to the sidelines and liquidity contracts. Despite all the discussion around strong economic growth in BC and robust population growth, Vancouver home sales finished 2018 with the fewest annual home sales in 18 years. I believe there is more to this than a few demandside policies, but rather a draining of global liquidity as the US Federal Reserve continues to unwind its balance sheet and China’s economic growth and money supply decelerates.

The Vancouver Real Estate market which has undoubtedly entered a correction period following home sales dropping to a six year low, and mortgage credit growth sinking to a seventeen year low, is now seeing lower prices across the board. The latest performance in the Vancouver housing market can largely be attributed to OSFI’s mortgage stress test which chopped buying power by 20%. The policy which was designed to de-risk the Canadian banks after dishing out over $1.2 trillion worth of mortgage debt, is now being called an assault on the Canadian dream, limiting one’s ability to leverage themselves into the housing market near peak prices. The removal of mortgage stimulus is hard to fathom, particularly considering how generous Canadian regulators have been over the past twenty years, allowing household debt to balloon to 100% of GDP, the most in the G7. A large portion of which was facilitated by CMHC through securitization and other methods. At one point, from 2007-2008 CMHC was insuring mortgages with 0% down and 40 year amortizations. When lending froze temporarily in 2008, the Canadian Government created the $69 billion dollar Insured Mortgage Purchase Program (IMPP) which allowed banks to exchange illiquid mortgage assets for bonds

BC’s property market continued to slow in October per official numbers released by the BC Real Estate Association. October sales fell 26.2% year over year while inventory increased by nearly 30%. The continued slowdown brings year-to-date residential sales lower by 22.8% compared to the same period last year, while dollar volumes slipped by 22.1% to $49.7 billion. The slowdown can certainly be attributed to a bout of tighter lending conditions, including a mortgage stress test and higher interest rates, both of which have pushed mortgage credit growth to an eighteen year low. However, it appears foreign buyers have also retreated. Year to date foreign buying activity has accounted for $2.2B worth of residential home purchases, a drop of 28.5% from the same period last year. The Dollar volume decline was even steeper in October, sinking 36% year over year. Per BC Government land transfer data, foreign buyers accounted for just under 3% of all transactions, little changed from a year ago. As a result, tax revenues from the foreign buyers tax have also been declining. Year to date foreign buyer tax revenue fell by 19% to $144 million. The BC Government is hopeful the recent shortfall will be offset by

Over the past few years the new development space has flourished. On the backs of an impressive housing boom, developers have been hitting record sales numbers, and sky high prices. However, amidst the changing market conditions in Greater Vancouver, which have pushed sales and prices lower in recent months, the new development space could be in for a bumpy ride. According to research firm Urban Analytics, which gathers data directly from builders, developers and their marketing agencies, from January through September new multi-family dwelling sales in Metro Vancouver declined by 14% compared to the same nine-month period in 2017. Altus Group, a development research firm, has come to a similar conclusion noting the year to date decline in new construction sales for both the single family and multi family housing markets. Despite the decline, sales remain above the historical average, although its the shift in direction which should raise concerns. The ensuing slowdown has resulted in a growing number of unsold inventory, to which Urban Analytics notes there were 4,478 unsold units in Metro Vancouver last quarter. Year to date, new condo inventory has jumped to 3.9 months of inventory, an increase from 2.5 for the same period a year ago. This has