Interest rates continue to go up and Vancouver real estate continues to drop, in price and sales volume. In September the sales were 35.7% below the 10-year September average. As new listings come online and the sales slow, inventory is slowly building and adding to the downward pricing pressure. This is reflected in the sales-to-active listings ratio. As you can see from the table, there has been a 6 months declining trend in all categories of housing with detached homes being the weakest. As a result, this is the 5th month of declining prices. Detached houses continue with the largest month over month price decline of 2.4%. Townhomes dropped 1.9% while apartments dropped 1.6%
What is expected in the months ahead?
The key to predicting the direction of the real estate market and also the stock market is knowing when the central banks will stop raising rates. Higher rates make borrowing money to buy real estate or to fund businesses more expensive. Also, as rate creeps ever higher, fixed rate investments such as GICs and bonds start to draw money away from stocks, maybe even real estate. For conservative investors, a 5% – 5-year GIC is looking pretty attractive. Sit back and collect the interest without any risks. Meanwhile this September by some measures was the worst September for the US stock market in 20 years. The S&P 500 lost 9.3%. Nasdaq dropped 10.5%. The Dow fell 8.8%.
Last month the Federal Reserves came out with some very direct messaging in regards to their determination in controlling inflation by increasing interest rates. They will not stop until the job is done and this is only the beginning. This is the main reason the stock market did so poorly in September because up until then many people did not believe the Federal Reserve was willing to push the US economy into a recession or let the stock market fall drastically. They never did it in the last 30 years. Why do it now? Because we never had such an inflationary environment with such low interest rates. The Federal Reserve has no choice. It is either pain now or more pain later. Regardless, some people still believe the Federal Reserve will not follow through because the economy will collapse before then. A scary thought.
An important note is that the Federal Reserve is fighting inflation in the US. Looking at US data. The fact that the Japanese government needed to intervene to protect their yen, or the UK government had to intervene to buy their own bonds to prevent their market from collapsing do not seem to affect the Fed’s course of action. But these are signs that the global economic system is cracking. The modern financial system is so interconnected and so leveraged with derivatives, nobody can predict how things can break. Because most global business transactions, debts and commodities are priced in US dollar, raising rates in the US affect every economy in the world. Luckily for Canada, our economy seems to be equally strong, so we are not as detrimentally affected as other countries. Being a natural resource rich country helps. Look at the inflation Europe has to deal with as prices of commodities and energy spike.
With the narrative changing from “inflation is transitory”, “rates will be low for a long time” to “rates will be higher for longer”, most are shifting their prediction of a rate pull back more likely in 2024 than 2023. But no one knows for sure. Not even the central banks because they have to look at the inflation data to decide. What is known is that rate increases take many months to work through the economy. For example, consumers can hold an interest rate for a period of 120 days. This means the effect of the rate increases is delayed for up to 120 days for potential purchasers. Considering most believe the Bank of Canada and the Federal Reserve will continue their rate hike on Oct 27th and Nov 2nd respectively, the real estate market should continue to be slow well into the first quarter of 2023.
Happy Thanksgiving and Happy Halloween😊