Canadian Residential Markets Searching for Valuation Limits

Canadian Residential Markets Searching for Valuation Limits
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By Ron Friesen

Residential real estate sales in June continued to reach volume above the ten-year average in British Columbia provincial statistics but have dropped off 9.6 percent from June 2016. However, with prices continuing to rise, the dollar value of sales dropped by only 5.6 percent during the same period.

“Although home sales remain well off the record pace set last year, demand is still quite robust,” said Brendon Ogmundson, BCREA Economist. “That demand is supported by a strong provincial economy and vigorous job growth.”

For anyone looking at trends in residential real estate for all of British Columbia it is important to notice the unit sales volume year-to-date in 2017 (54,830 units) is 18.6 percent lower than the same period 2016, while the dollar value of those sales ($39.1B) is lower by 21.7 percent.

In Greater Vancouver June 2017 residential real estate sales declined 11.5 percent from June 2016 but again remain 14.5 percent above the ten-year average. The seasonal effect is relevant in the residential real estate market. Comparing month-over-month numbers does not reveal the sales trend as accurately as year-over-year during a seasonal adjustment period such as we have in May to July.

Market behavior is best overviewed by looking at the supply and demand dynamic. In Greater Vancouver this relationship currently sees demand overwhelming supply, especially in the condo market. In June the sales-to-active listings ratio for all residential property types was 45.7 percent, well above the neutral ratio occurring when the market reaches below the 20 percent mark.

Comparing Markets and Market Segments

Breaking the market down into property types we see the ratio for detached single family homes at 24.5 percent, and the buying activity for detached homes seems to be reacting positively as price increases for detached homes has slowed from lack of activity for several months.

The sales-to-active listings ratio for townhouses was a robust 62 percent in June 2017, definitely favouring sellers and encouraging prices in this segment, though the slower summer will likely temper activity.

Condominiums, though, continue to perform at a staggering 93.2 percent ratio, meaning 932 of every 1,000 listed condominium units sold. This is some serious demand, and is very close to stripping the supply. We continue to see multiple offers over asking in July 2017 and suspect similar statistics will prevail when the July 2017 REBGV report is published in early August.

Prices for condominiums throughout the lower mainland, represented by the REBGV Home Price Index (HPI), continue to increase…by 3.1 percent May over April 2017 and by a further 2.8 percent June over May 2017. In June 2017 the year-over-year composite HPI (all residential property types) encompassing all areas of the Lower Mainland is only 9.5 percent higher, perhaps a lower increase than expected due to the modest 3.8 percent increase in detached single family properties. Condominiums contributed a 19.1 percent HPI increase over the same period. This certainly demonstrates the dynamic between the current markets for single family detached compared to condominiums.

In Toronto statistics show a 37.3 percent year-over-year drop in overall residential real estate sales for June 2017 while the listings volume increased 15.9 percent over June 2016. Despite this increased supply and lower demand activity, during the same year-over-year period the Toronto Real Estate Board reports a composite 25.33 percent increase in their Home Price Index.

Where a detached home in the composite Toronto market (area code 416 segment) for June 2017 saw an average price of $1,386,524 the REBGV reports an average price of $1,713,226. Toronto, Vancouver and Victoria markets are seeing healthy activity, though lower than the 2016 record levels.

Victoria, BC had a record breaking year in 2016 and activity remains ‘brisk’ according to the Victoria Real Estate Board. June 2017 sales of residential real estate in the Victoria market were 14.1 percent lower than June 2016 while the number of active listings dropped 16.3 percent during the same period comparison. The real dynamic is revealed by looking at the 15.1 percent increase in HPI for a single family detached home in the Victoria core market. The VREB reported HPI for June 2017 was $829,600 compared to $721,000 in June 2016.

Interest Rates and Other Market Influences

The 0.25 percent rise in the Bank of Canada Key Interest Rate will continue to have a dual effect on the Greater Vancouver residential real estate market, in my opinion. In other words, business will continue much as usual. Some buyers will be motivated to buy sooner in order to be able to qualify for a mortgage before rates continue to rise, as it is expected they will barring any negative economic signals. Other buyers are being cautious and putting off their purchase or are attempting to leverage asking prices downward, mostly unsuccessfully, in light of the expected continuing rise in lending rates. Still others seem to be sidelined waiting for the rising rates to weigh prices lower, though I find it difficult to see this happening given current buyer activity, short inventories and very high sales-to-active listings ratios in the Vancouver market.

We are seeing Sellers listing their homes to downsize, upsize or move sideways into a different community. Some are moving out of the lower mainland and into less expensive markets across Canada. The amount of downsizing from single-family homes into upscale strata properties has created increased demand for the detached market. Downsizers are competing with investment, first-time, up-size and sideways move Buyers to create the high demand and higher prices we are seeing for attached properties in the larger Canadian cities.

While all this activity is occurring in the Canadian residential real estate markets it is interesting to see reports from the US stating Canadians are purchasing record levels of US real estate. China reportedly spent $31.7B in US real estate in 2016. Canada meanwhile contributed $19.0B during for the twelve months ended March 2017. This represents a near doubling over the Canadian investment in US real estate during 2016.

Canadian investors are attracting increased attention and recognition from US and Mexican real estate markets as we continue to participate and influence abroad. The strength of many major Canadian real estate markets and the recovering Canadian economy go hand-in-hand. Successful and significant Canadian investments abroad encourage international investors to invest in Canada. The signals are positive for continued strength in Canada’s urban real estate markets.

I continue to watch with interest and some apprehension the change of government in British Columbia, and the federal Liberals handling of the new tax fairness initiative.

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