By Bryan Yu, Central 1 Chief Economist
What a difference a year makes. This time last year home buyers fretted over affordability as strong demand triggered massive price increases in communities across B.C. Now, the tables have turned as activity has turned cold and prices are on the decline.
Nowhere in B.C. was this more prevalent in areas within the Fraser Valley Real Estate Board (FVREB) and neighbouring Chilliwack. At peak, the FVREB recorded a near 70 per cent increase in the MLS® benchmark home value with the largest gains for ground-oriented dwellings. The benchmark value has since retraced by more than 10 per cent, albeit remained 50 per cent above levels observed before the pandemic. The average value has declined 18 per cent from peak.
While several of the drivers of housing demand remain strong, including a tight labour market and rapid population growth this year, there is no surprise what is driving the downturn – mortgage rates have surged by an unprecedented magnitude. Both 5- year fixed rates and increasingly more popular variable rates have moved to 5 per cent from 2.2 per cent and 1.5 per cent early this year. Prospective buyers have seen purchase affordability decimated. Just as low interest rates allowed greater access to homeownership, which was amplified by remote/hybrid work opportunities that allowed demand to flow to more affordable locations, the sharp increase in rates is hitting these markets the hardest. Sales flow has declined more than 40 per cent this year, are a third of 2021 peak, and 25 per cent below the pre-pandemic level. Pricing has pulled back most sharply in Mission and Cloverdale.
The unprecedented shifts in the macro-economic environment, which likely includes an extended period of higher interest rates and threats of an economic recession means this period of low home sales and even lower home prices is likely to continue. While fixed mortgage rates have stabilized, variable rates will continue to rise with further Bank of Canada hikes which we forecast to peak out at 3.75 or 4.00 per cent. Prospective buyers will continue to find affordability the main constraint. We anticipate sales flow to bottom out in the fourth quarter while peak-to-trough benchmark prices to decline by up to 20 per cent from peak.
The housing market is clearly in recession but to the extent it is a crash depends on time of purchase. Homebuyers entering the market this year, particularly first- time and low- equity purchase, are likely to see this as a crash with equity wiped out temporarily. For others, it is merely a fade of illusory wealth as prices hold above early 2020 levels.
Buyers will continue to see some price relief through 2022 but remained constrained by rate induced affordability challenges. Sellers’ will remain loathe to cut prices given levels observed only months ago. Strength in the labour markets and elevated job vacancy rates will mean little panic selling and shuffle sellers to the sidelines. Tight rental markets will amplify this pricing resolve. Expect sellers to remain stubborn in price expectations while buyers wait for incomes to catch up and rates to ease. As a result, sales are likely to remain sluggish through 2023.