While prospective home buyers appear to be waiting for an ever-elusive real estate bubble to burst in Vancouver, people thinking of selling their homes also appear to be willing to wait.
The most recent numbers show that home sales dollar volumes are down, unit sales are down and average prices are falling in the Lower Mainland.
Typical prices are also falling in some areas, particularly among single-family homes in more expensive areas like the west side of Vancouver or Richmond.
The 10-year average for home sales in Metro Vancouver is 88,000 units per year, while the 15-year average is 79,000 per year. So far this year, 64,000 units have sold and the total could be 68,000 by the end of December.
Alongside sales volumes, the number of new listings has dropped.
“That’s consistent with sellers saying, ‘It’s not a good time to sell, I’m not selling if I don’t have to,’” said Tsur Somerville, director of the centre for urban economics and real estate, Sauder School of Business at the University of B.C.
While prospective sellers are waiting, the numbers indicate that prospective buyers are a bit shy as well. “The market right now is both slow and tentative. There are a lot of people out there being very tentative because they’re not really sure where things are going,” Somerville said. “I can’t say how many buyers are in the market — I want to differentiate between that and the prices they are willing to pay. Maybe there are people who are actually interested in buying, but they’re either waiting for prices to be at a certain point, or they’re making offers that aren’t being accepted. I can’t differentiate between those things.”
Concerns about the global economy may be another reason for the “tentative” market, Somerville said.
“My general sense is that it’s hard to see where a market turnaround is going to come from in the short run until there is more confidence and clarity about the American economy,” Somerville said. “Even without the fiscal cliff, the American recovery is very slow. Given the state of things in Europe and China, you’re not looking at any dramatic economic growth that’s going to pull the Canadian economy along. Part of the story is for the housing market to pick up, there has to be more juice to the economy.”
While a pickup in the market may require more “juice,” a crash would require a significant event, Somerville said.
“To get prices to really tank, you’ve got to have something happen. Either you’ve got to have overbuilding, or you’ve got to have some big change in the world of finance, such as large movement in interest rates or a financial disruption, or you’ve got to have a real negative economic shock,” Somerville said. “You’ve got to have some combination of those, or one of those to make prices drop dramatically.”
Overbuilding of single-family homes in Metro Vancouver is difficult because land is so limited, Somerville said.
“On the condo side, even though starts have picked up, it’s nowhere near where they were during the peak. The yield curve for interest rates is very flat so the market isn’t expecting interest rates to rise dramatically,” Somerville said. “But if I could predict interest rates, I could be really, really rich.”
Cameron Muir, B.C. Real Estate Association chief economist, thinks if buyers are waiting, they could be waiting a long time.
“Three years ago we saw the largest financial crisis since the Great Depression and an ensuing global recession. If that’s wasn’t enough to trigger a correction in an asset bubble, I don’t know what is,” Muir said.
“The condo market in Vancouver has not been ‘hot’ since 2009, and perhaps even earlier than that. Prices on the condominium side have been relatively flat for three years, so that doesn’t signal any kind of asset bubble welling up,” Muir said. “There has also been little speculation in the marketplace over the past few years and home builders have been kept in check in terms of their total units in production.
Like Somerville, Muir said the market won’t crash unless there is a recession or a spike in interest rates.
“In order to have a significant price decline — you’re hearing a 25 to 40 per cent price decline that some pundits have thrown out there — in order to see that materialize, you need to see household disaster writ large, such as what we saw in the United States,” Muir said.
As an example, in the early 1980s, house prices in some areas in Metro Vancouver dropped sharply, but that was after interest rates went up 10 percentage points within a year, Muir said.
“In 1982, the five-year posted mortgage rate was, I believe, 21.5 per cent at its peak. You can imagine what that does to a housing market,” Muir said. “Housing prices fell dramatically — they fell 40 per cent in some markets.
“But are you willing to sell your house at 60 cents on the dollar? Why would you do that? You have to have a reason for prices to fall dramatically. You don’t have to sell and people have to have somewhere to live.”
Muir said he believes the U.S. will find a compromise on the fiscal cliff tax increases and spending cuts before the U.S. is thrown back into a recession.
“I understand (the fiscal cliff) would shave most of the growth out of the Canadian economy, if it happens,” Muir said. “While it all sounds ominous, and it is, barring a meltdown in the U.S. political system, I don’t see conditions here in B.C. warranting such a shock to real estate.”
Muir talked about the late 1990s, a time when he said the economy was in the doldrums, thousands of people were leaving the province in search of jobs and B.C. had a leaky condo crisis.
“That was a localized shock to the real estate market,” Muir said. “We saw prices fall, but they only fell a few per cent a year for a few years and then they came right back.”
Another sign of strength in the Lower Mainland market is that prices bounced back quickly after the recession, Muir said.
“January 2009 was pretty gloomy, with home sales running at low levels we hadn’t seen since the early 1980s, and we ended 2009 approaching record levels of sales. That was quite a turnaround,” Muir said.
Muir expects sales numbers to pick up in 2013, because the market fundamentals are strong.
We’ve seen some pretty strong growth in full-time jobs, we have interest rates at or near historic lows and we still have an expanding population base, Muir said.
“All of those things point to consumer demand running in the longer-term average levels at least, and right now they’re quite far below that,” Muir said.
“My expectation is that next year we will likely see some increased homebuying activity than what we’ve been seeing these last several months, that is more reflective of overall economic conditions. Overall home sales are expected to trend toward their long-term averages,” Muir said, adding that pent-up demand could contributed to increased sales activity in 2013.
Tracy Sherlock December 28 2012