The Winds are Changing - Time to Adjust Our Sails

It was only a matter of time. We were hopeful that these low interest rates we've been enjoying would stick around for another year, but with all that excess printing of money combined with a 30 year high in inflation, rates have been rising at a rapid pace. Some say this 'rising rates to cool inflation' formula is based on old fashioned economics, and  although the Bank of Canada's primary goal of these rate increases is to neutralize inflation, it will inevitably have an affect on the market. Let's dive in a little deeper and talk about where we see the Real Estate Market going.

With each quarter percent rate increase approximately 100,000 buyers lose the ability to buy a home. The average annual income in the city of Vancouver is just shy of $95,000, which qualifies (today) for about $550,000. The average price of a condo in Vancouver (proper) is $850,000.
There is a lot of equity in Vancouver homes, therefore, a lot of credit is being extended from the Bank of Mom & Dad and this will continue to help buyers enter the market and continue to feed the cycle, but with the cost of living at an all time high, coupled with rising mortgage costs something eventually has to give.
Currently the 5 year fixed rate is hovering around 4% with another hike looming this Wednesday, April 13. Add another 2% to that to account for the Stress Test qualifying rate and now buyers need to qualify at 6% to secure a mortgage.
To qualify on the Variable Rate will slightly increase borrowing ability, but with 6-8 rate hikes expected this year, any buyer would be nervous to tread in those rising waters.

So how does all of this shape the market going forward? 
Those who have been pontificating for the past decade about the bubble bursting are no doubt eagerly waiting on the sidelines for the crash to finally happen, but I don't see it. Are we in a highly leveraged society with rising household costs? Absolutely, and that's bound to result in a tipping point somewhere along the way, but to what degree?
What we are experiencing right now is not a structural problem - we are at 100% employment in a world class city with 100,000+ immigrants being landed in BC in 2022 making it the highest level in history.

We have a supply problem, plain and simple, and all the government policies in the world are not going to fix this if they only continue attacking demand. There are so many holes in the Federal Budget when it comes to housing policy I have to address that in a separate blog. What I will touch on here is that the 2 year ban on Foreign Buyers has no start date and so many exemptions that I'm not entirely sure who it actually applies to.

Although media headlines scream the market is down 24% from last year, keep in mind that last March was a record breaking month with the highest monthly sales total ever recorded for the region! Sales for the month this year were still well above the 10 year average by a whopping 31%. The former indicates that we are entering into a calmer market and the latter is a result of buyers racing to secure a property before their rate holds expire.

As purchasing power evaporates resulting in less buyers in the market we should see a leveling off of prices. Are 6 rate hikes in an over inflated economy sustainable? I have my doubts. Reflecting back on 2018 where sales fell below the 10 year average after a run of record high sales and prices the market came to a halt as a result of a multitude of new policies being imposed and similar rate hikes.
Subsequently we saw a sweet spot in 2019. A short lived window of opportunity for buyers to enter the market without having to compete and pay higher prices. We were just starting to see the market pick up momentum toward the end of the year into early 2020 and then Covid hit. After a brief pause the market came back with a vengeance.

If history gives us any indication of how things look going forward, I suspect the market will remain robust until early June when rate holds run out and a quiet summer as exhausted buyers take a break to enjoy a (hopefully) Covid free summer. However, Vancouver is a world class city and all eyes will be on us. When discounted prices start to get noticed the cycle will start all over again.