In Metro Vancouver, the real estate prices are moving up for a third straight month and it is picking up steam. The media is keying on multiple offers and units selling above listing price. Though the inventory remains low, the sales volume is picking up.
It is only 15.6% below the 10-year April average. Note the year started with sales 42.9% below the 10-year January average. If prices continue to increase, there will be more people willing to put their property up for sale.
Sales-to-active listings ratio is a measure of supply and demand. As it is increasing, pricing pressure is increasing and when it is above 20% for a sustained period, it is expected that the price will move up. As you can see from the table below, the increase in the ratios in all segments have resulted in significant price increases, especially for detached homes. It is likely that townhomes and then condos will catch up unless the market turns.
But why would it turn? The Canadian government is basically pro real estate prices. Their policies keep the real estate prices high. For the past couple of decades, the artificially low interest rate has been boosting real estate activities. Now Canada’s new exemptions to the foreign buyers ban, the new first home savings accountant and the aggressive immigration policy are all pro-real estate prices.
Another reason why real estate prices have not gone down when the interest rate has soared is the fact that banks are not asking clients to make the proper payments. Currently, many owners are paying less than the interest on the mortgage loans. This means the amortization, the period it will take to pay off the loan, is increasing on many mortgages. Typically, the banks only offer 25 year or 30 year amortization. Last year, TD and CIBC had no mortgages over 35 year amortization on their books. Now each of them has 27%.
So what would cause prices to drop? Job losses. There was some mention of increased business insolvency but if you look at the accompanying charts you see that the level is just a little above pre-covid. And if you compare it to the US and the rest of the world, Canada seems to be doing better. So it is not an issue now, but definitely worth following. Right now it looks like there are more than enough jobs to go around.
Unless the US falls into a hard recession, I don’t see Canada’s real estate prices moving down too much. While many are not expecting this, it is within the realm of possibilities. The Federal Reserve raised the interest rate another 0.25% today. There are still many rate hikes that have not worked its way through the economy. The credit contraction that will follow the bank failures and complication with renewal of loans for office towers will continue to strain the economy. And if you wonder why the US economy can drag us into a recession, I leave you with this neat little graphic. This shows each of Canada’s export destinations in relations to the total export dollar volume. Blue represents North America and the US makes up 73.4% of the total dollar value of our exports in 2021.
Mother’s Day is coming soon. Spend some time with your mom if you can. At least give her a call.
Have a great month!
John
