Why Aren't Prices Falling?

(February 08, 2017 )

The Real Estate Market appears to be dealing with a lot of economic variables that should lead to dwindling demand and subsequent price corrections. Some of these variables include the new foreign ownership tax, new Property Transfer Tax structure, tougher lending requirements, increasing mortgage rates, and increasing CMHC fees. However, as I glance at the MLS Home Price Index, the residential composite benchmark price is only down 2.8% in the last 6 months. Hardly a market in free fall. 

I have a few theories as to why the market is holding.

Timing: real estate markets take time to correct. For starters, the low supply of homes is still being absorbed by strong demand. Also, we have to be careful not to confuse volume and price. The statistics often report huge percentage drops in volume (number of sales) and that often gets confused with falling prices. These are different and it's not uncommon to see huge volume drops in August and December when our market goes on holidays. When a market appears to be softening, a lot of sellers will just de-list their homes as opposed to reducing their price. This doesn't lead to price corrections, it does the opposite. As the non-motivated sellers de-list, there is less supply and more upward pressure on pricing. In time, the motivated sellers (the one's that need to sell quickly) will reduce their price in order to entice the 'wait-and-see' buyer off the sidelines. This can take months to materialize; hence the slow and sticky price drops our market is currently undergoing. 

Economy: The BC economy might not be operating at full steam, but it's not exactly in a depressed state either. In my opinion, the only triggers that could cause prices to fall rapidly in Vancouver will be a recession (similar to the one Alberta is facing due to lower oil prices), or a large increase in mortgage rates. Neither of these appear to be in the near term forecast. 

Demand: Our city is growing. We are a relatively small city in global terms and our geography (mountains, ocean, and parks) limit the overall supply of homes. That geography is one of the beautiful features that make our city coveted, and attractive to foreign buyers. On a macroeconomic scale,  It's very difficult for Vancouver to increase the supply of land for new homes. As a result, we are forced to re-develop older homes and assemble land that is already developed. The point is, Vancouver will always struggle with supply side pressure which will help real estate prices grow and remain stable over time. 

No one can argue we are experiencing an affordable housing crisis. Too many hard working Vancouverites are struggling to afford a home in the city they work in, which doesn't add up. Each year we are forced to put more of our disposable income towards our housing costs. If the trend doesn't stop, I would (at the very least) like to see average household incomes start to rise. I support some of the measures the government is taking to curb demand. I just wonder what impact the changes will have in a market that has proven so resilient. Needless to say, It will be interesting to see where our market ends up in 2017. 

If you are considering buying or selling your home, I would love to sit down and discuss how I might be able to help you.  

Thanks for reading, 

Steve Hamer-Jackson
Royal LePage Sussex Realty