Updated July 30, 2019
2018 was a turning point in the real estate markets on the Island. Demand was dropping, however, new listings were slow to recover, thereby not significantly increasing the inventory (active listings). The result was continued upward pressure on price, albeit at a slower rate than 2017.
The second quarter of 2019 saw this trend take a turn. While the rate of price increases has slowed, it is still 6% for the board area. However, the continued reduction in sales, down 21% over 12 months for VIREB (Vancouver Island Real Estate Board) area , has finally resulted in some increases in inventory (active listings).
The Board area inventory level has increased from 45.8% in March to 62.5% in June. See Graph. These recent increases in inventory have taken the pressure off pricing and the rate of price increases has dropped significantly. Most markets are in the 3% to 7% range, down from the double digit range of 2016 and 2017.
My forecast in January that we would end the year in a 4-7% range appears optimistic and will likely be in the 2-4% range with some markets reaching a balance market position of 2%. BCREA has revised its forecast to 1.1% for 2019, which would be a soft buyer's market.
In February 2019, BCREA has revised its forecast for single family home prices in 2019 for the VIREB area to 3.2% (up from 1.1%). This forecast also projected a 2.1% in unit sales for the province. In June it revised its forecast back to 1.1% for 2019. It also revised the unit sales for the province to be down 9% compared to 2018. See BCREA Housing Forecast.
Some changes in the Canadian economy and financial markets have reversed the mortgage rate increases and sub 3% mortgages are back.
Comparatively, the VIREB area remains a good option for retirees moving to the west coast with prices much lower than the mainland and Victoria. People coming from off the Island and retirees represent over half the sales in the board area.
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While sales continue to drop, the rate of decrease is much lower than it was in 2018. However, inventory levels are slow to recover in most markets as the number of new listings remain low. The sell/list ratio also continues to drop with it being at 62% for the Board area. This means that in the last 12 months, 62% of the listings sold. Price increases are still positive, but again lower than 2018. The exemption is Parksville/Qualicum area which had a 1% drop in home prices. The remaining markets were under 10% with the Board area showing a 5% increase in average home prices.
Please note these comments relate to single family homes in markets covered by the Vancouver Island Real Estate Board (VIREB), which covers all of the Island from the Malahat north. The Victoria Board covers Victoria, all of the Saanich Peninsula and west to Port Renfrew and is not covered in these comments. Some comments on the provincial real estate market are also included from time to time. The quick stats above cover major Real Estate Markets in the VIREB area.
Beautiful winter scene in the Beaufort Mountains in the Comox Valley.
The 2018 slow down in demand due to the mortgage stress test continues in 2019. The second mortgage stress test, called B20 (for buyers with 20% or more down payment), introduced in January 2018, is having a more sustained impact.
The slow down continues in 2019 though at a slower rate. In 2018 home sales were down 19% for the VIREB Board area and in 2019 the decline was 9%. However, the number of new listings is lagging and the increase of inventory experienced in 2018 was flat for 2019. In this graph, inventory for the Board area is 50.5% the 2007 to 2014 average. This low inventory has upward pressure on pricing.
The decline in sales is having an impact on price increase. For 2019, home prices increase 5% for the Board area, compared to 10% in 2018 and 15% in 2017. These increases would not have been as high with normal inventory levels, as is experienced in other markets such as the lower mainland.
The following new graph plots the monthly price with the previous year (i.e. June of 2019 compared to June of 2018) on the blue line. Comparing this to the 12 month average for the VIREB area, orange line, a trend emerges. As the unit sales in a month are low (compared to a 12 months period), you can see that the blue line jumps around quite a bit as it is not as statistically accurate. For example, the month to month increase in January 2019 was 9% over June 2018. Two months later it was 0% in March, and back up to 7% in April. Prices just don't jump around that much in a month. The dotted blue line, which is the 3 month average, helps smooth out these inconsistencies.
When graphed over time and the 3 month average line stays above or below the 12 month average for a sustained period, it does suggest a trend in that the long term price changes will follow suit. For 2019 the rate of increase fell accordingly with the last five months being above and below the 12 month average leading to no movement in the rate of price increases.
Unfortunately, the monthly unit sales in the subareas, such as the Comox Valley, are just too low (less than 100) to provide meaningful data.
The sell/list ratio are approaching balanced market territory. In December of 2018 the sell/list ratio was 67% for the Board area and ranged between 80% and 57% for the sub markets. This December the Board area is at 62% and the range is 67% to 57%. See chart for a market by market breakdown.
Usually 50-60% signals a balance market. The sell/list ratio is the number of listings that have sold in a 12 month period. A 60% ratio means that 60% of the listings sold and 40% did not sell. Nanaimo, with a 58% sell/list ratio had a price increase of 2%, which is keeping pace with inflation and a balanced market. Parksville, with a 56% ratio had a 1% reduction in price.
See What are Balanced, Buyer's and Seller's Markets for an explanation on sell/list ratio.
The last quarter has seen several factors working together to further slow the markets further. Unit sales of single family homes, continue to decline by 14% to 26%. With new listings continuing to lag, the inventory levels are now coming up, 62.5% for the Board area in June (was 45.8% in March). The sell/list ratio is falling in all markets and is 62% (down from 73% last year) for the Board area. Campbell River has the highest at 72% (down from 85%). A sell/list ratio of 50% to 60% usually indicates a balanced market, which the markets seem to be heading toward.
These changes can be seen in the June 2019 Comparison. New this month I have added the monthly changes for VIREB in the last line of this chart. Normally I concentrate on the 12 month average rather than the monthly stats. The number of sales in a month are lower which causes these numbers to be less reliable. However, the 12 month average tends to lag behind market changes. When these stats are graphed out over time this can indicate a trend even with less than reliable stats as seen in this VIREB Comparison Graph. This suggests that there will be further reduction in the rate that prices are increasing thereby pushing us toward balanced markets - where price increase are consistent with inflation, around 2%.
Unfortunately, the number of sales a month in the sub-areas of VIREB are just to low (less than 100/month) to have accurate enough data to show similar trends.
All markets remain in a seller's market position, though not as strong as 2018 and pushing toward balanced markets. Other than Port Alberni, which is at 15%, the other markets are in the 3 to 7% price increase range with the Board area being at 6%.
While changes in new listings tend to be low, or negative, the continued reduction in sales is taking its toll and inventory levels are increasing. For the Board area, new listings are down 7% while sales are down 21%.
A woman greets the early morning sun during a yoga pose at Kitty Coleman Beach campground.
BCREA's Housing Forecast, November 2019 notes that provincially sales have trended upward in the last half of 2019. After the shock of the 2018 B20 mortgage stress test and slower economy, BCREA expects home sales to return to trend, rather than the heights of previous years. For most markets they are forecasting prices to keep pace with inflation, which is a balanced market.
For 2019 in the VIREB market, it reports that sales continued to decline and are forecasted to decline a further 10% for 2019 (was 9% in 2019). Part of the reason for this has been weak employment growth mostly in the forestry sector with tariffs and low demand from the US. Active listings (inventory) also remain low, "near historical lows despite softer housing demands. As a result, market conditions continue to favour sellers," the forecast notes.
Looking forward, sales in the VIREB Board area are forecasted to pick up 6% in 2020 and "As stronger home sales in the Vancouver Island region meet low supply (inventory), we anticipate the market conditions will remain fairly tight, leading to a second year of over 4 per cent price growth."
While I can't comment on the 6% increase in sales, I feel that if that is realized and we don't have an appreciable increase in new listing, the resulting low inventory will push prices higher, perhaps in the 7-10% range. While BCREA notes the low inventory, over the years they have underestimated the effect on price increases.
For the economy, the forecast states: "The BC economy, feeling the effects of a policy-driven decline in the housing market (B20 stress test) and a volatile global trade environment, is likely to post a second consecutive year of slowing real GDP growth in 2019." They are forecasting a 2% increase for 2019 and expect the growth to turnaround for 2020 to 2.4% growth, which is the long term trend.
They forecast that the worst of the 2018 housing shock is behind us and a recovery of home sales is underway. In addition, the fall in Canadian bond yields has led to sub-3% mortgage rates for 5 year fixed term mortgages. They do note that the inverted Canadian yield curve is sometimes a pre-cursor to a recession, but are not forecasting that. Construction activity is up both in the residential and non-residential sectors and they are expecting consumer spending to recover.
BCREA Mortgage Rate Forecast Update for June 2019 reports the continued reversal from past activity of rate increases. From the summer of 2017 to October 2018 the Bank of Canada (BOC) raised its overnight rate 5 times to 1.75%. During that time BCREA was forecasting additional increases as the bank strives to bring rates to its estimated neutral level of between 2.5-3.5%.
"The big news in the Canadian mortgage market is the return to sub 3 per cent five-year mortgage rates. The last year of mortgage rate increases has essentially been erased by an acute repricing of bond market expectations. A slowing Canadian economy and rising global trade tensions triggered a sudden change in bond market sentiment late last year, pushing further Bank of Canada rate increases off the table." (emphasis added)
Despite the reduction of mortgage rates the banks five year posted rate remains at 5.34% while BCREA feels it should be at 4.84%. This lack of recognition in how bond yields and mortgage rates have reduced are not reflected in the posted rate. Which means there is no relief for the mortgage stress test as people must qualify at 2% above their mortgage rate or the posted rate, whichever is higher. I don't understand why the banks are doing this, perhaps it is at the bidding of the government. The end result is pushing buyers out of the housing market.
The national economy and inflation are sending mixed signals. While economic growth struggled during the first quarter, Canadian consumer spending is posting the strongest growth in two years. BCREA forecasts that the Canadian economy will expand by 1.0-1.5%, down from 1.8% last year. Combined with global uncertainty and the impact of the B20 stress test should results in the Bank of Canada refraining from further rates increases.
Financial markets are concerned with this scenario with both Canadian and US bonds yield inverting, which led to lower mortgage rate. This suggests both countries should reverse their course on monetary police and lower rates.
One the other hand, both the bank and federal government are set on bending household dept-to-income curve and lowering rates would lead to more spending. Lastly, inflation is above the 2% target suggesting a tightening of rates.
The table below has the forecasted mortgage rates from the forecast through to the end of 2020.
Mortgage rates are influenced by two things:
An enjoyable outing on a boardwalk in Paradise Meadows near Mt. Washington.
Forecasting by its very nature is not an exact science. Obviously, we can let you know what has happened in the past and what the current situation is today. What will happen in the future can be a difficult thing to predict, hence why most forecasts are updated quarterly. Also, local situations need to be considered. For 2018 we saw dramatic differences here on the Island than on the mainland. On the Island we remained in a seller's market while much of the mainland moved to balanced markets, some with minor price reductions. For 2019 we appear to be moving toward balanced markets here on the Island. Over the last four years the BC economy has out performed the Canadian economy.
Government changes late in 2016 and 2017 had a strong effect in the lower mainland and little effect here on the Island. The new mortgage stress test, which took effect January 1, 2018, plus rising interest rates, reduced demand in 2018. Though had less impact here on the Island at the time, in 2019 we are seeing this impact with slowing markets.
Buying and selling real estate are major financial transactions the net impact of which is difficult to predict over the long term. It is advisable to closely examine your other reasons for making a change. It might be easier to focus on what is happening in your life rather than trying to predict what will happen in the world. And leave yourself some room in case things don’t go as anticipated. Ask yourself some “what if” questions. A conservative approach, some good soul searching, and research could possibly save you some stress down the road.
Ariel view of Courtenay with the Puntledge River flowing into the Comox bay.
Tip: Planning for things that do not happen is better than not planning for things that do happen.
Water Buffalo (Bubalus bubalis) are a new addition on the Comox Valley agricultural scene.
For economists and analysts a balanced market is when the supply (listings) of housing and the demand (sales) are in equilibrium. In other words the supply and demand are such that there is not any real pressures on price, up or down, compared to inflation. Home price increases are keeping pace with inflation (around 2%).
To predict and measure supply and demand in the market we use a sell/list indicator. This measures the number of homes that were listed in a year and compares how many of them sell. A sell/list ratio of 55% means that in a year 55% of the homes that were listed actually sold and 45% did not sell. A sell/list ratio between 50-60% usually results in a balanced market, below this is a buyer's market and above this is a seller's market. Please note that this is an indicator and sometimes markets don’t respond as predicted. What actually happens with price is the true test of the market's status, the sell/list indicator just helps us predict what is likely to happen.
The graph below looks at the number of units listed, the number of units sold, and the sell/list ratio. The left side plots the number of units and the right side plots the sell/list ratio as a percentage. The graph is for the years of 2000 to 2018.
This next graph compares the sell/list ratio to what actually occurred with prices. The left side plots the average home price (orange line) and the right is the sell/list ratio as a percentage (blue line). Again, it is for 2000 to 2018. It is a measure of how effective the sell/list ratio was at predicting changes in price. For the most part, it demonstrates that the sell/list ratio is a pretty good indicator. Only in 2009 did pricing and the ratio not react according to prediction. This is important as it demonstrates that supply and demand are only one component of the housing market. Sudden shifts in the economy or market confidence can have strong influences on the market. For the most part, the sell/list ratio is a good indicator on the pulse of the market.
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