Housing Market Update July 2020

Will the Metro Vancouver Housing Market Crash?
VyTri Truong, B.Comm
Mortgage Professional with Mortgage Architects

That headline could’ve been taken from any number of newspapers throughout the 2010s. The answer then, as it is now remains the same: it depends on what happens to the lines on the chart above.

Here’s how the chart works. A market price is where the two lines cross. If demand increases (the line shifts to the right), and supply stays the same, prices will go up. After enough people realize that prices are up, more inventory comes on the market to take advantage, which then brings the price back down.
The problem with Metro Vancouver has always been too much demand. Before the pandemic, traffic had become unbearable, restaurants were always full, and it was impossible to register your kids for anything. It felt like there were more people here than ever before.

And there were. According to Statistics Canada, between 2011 to 2016, over 175,000 new immigrants came to BC from other countries. Between 2014 and 2019, net migration from Alberta was 38,000 and 17,000 from Ontario. In a nutshell, over the past decade, immigration and interprovincial migration dramatically increased the number of people living in BC. And most of those people chose to live in Metro Vancouver.

Compounding matters is the natural aging of Millennials. Remember, we used to call them the “Echo Boom” generation. They’re all grown up now and starting families.

Given all these demand-side pressures, we would have needed to see a huge increase in supply to ensure prices remain low. But that hasn’t happened. Which is why prices have skyrocketed in the last 10 years.

Why hasn’t supply increased as fast as demand?

In short: geography and regulation. Metro Vancouver is surrounded by mountains and rivers. The same factors that give us our economic prowess also limits our ability to build housing. Big plots of land are either protected by regulation or are way out in the Fraser Valley. Given our geography, East is the only direction affordable housing could happen. Unfortunately, most of that commute is along the 4-lane Highway #1. So traffic is bad, which deters people from moving farther away. (With the rise of remote work, this could change, but it would take many years to undo the thinking habits we currently have.)

Furthermore, our system of municipal governments have varying levels of red tape for developers to jump through. Once clear those hurdles, it takes on average 18 months to build a house and 3 years to build a multi-family development. So in the meantime prices are going up.

But why didn’t COVID-19 cause a housing crash?

As the economy shut down and people lost their jobs, that should’ve reduced demand. And it did. And prices would’ve gone down. Except that real estate builders and developers saw the same thing, so they postponed many of their projects, thus removing a lot of the supply that was going to come on the market. Also during this time, people who wanted to sell their home took them off the market, not knowing if they would be able to re-buy. Many people took a wait and see approach. The result was the decrease in supply was even more pronounced than the decrease in demand. Therefore prices stayed high.

So what’s going to happen next?

As I started out saying, that depends on what forces will be exerted on supply and demand. In my view, I see a temporary situation where demand will fall at the same time supply increases this fall.

I can see these factors reducing demand:
* Government regulation. The new CMHC rules were designed to reduce demand by making it harder for newer buyers to qualify for mortgages. What other changes might they try?
* Unemployment. It’s hard to make your rent payment without income. If you’re a landlord, it’s hard to make your mortgage payment if your tenants can’t pay. If a second wave of COVID hits, this could be a very big factor.
* Immigration has all but stopped temporarily. Inter-provincial migration is on pause as people need to find where the jobs are so they can move there.

These factors affecting supply could happen at the same time:
* Removal of government stimulus. Once all the COVID benefits stop, many Canadians could be facing financial hardship. Homeowners and landlords might both have to sell because of low cash flow. Stories like this are already in the news.
* Deferrals ending. Mortgage deferrals, credit card deferrals, tax deferrals all come to an end this fall. In a cash flow crunch will more people sell? They may not sell their primary residence but look for people to offload the second home or the rental property. It’s hard for rental homes to have a positive cash flow in Metro Vancouver so this could be a real possibility.

Taken together, my very cloudy crystal ball tells me there will be a minor dip in home prices this fall. But I don’t think it will be anywhere near the 12% being predicted.

Looking into next year, my even murkier crystal ball says that once a vaccine has been found, house prices will start to explode again. The economy will reopen completely and immigration will be a big factor again.

Like it or not, our stable political environment, high standard of living, and the reputation of being an immigrant-friendly city will continue to make us an attractive destination for anyone looking to change addresses.

And BC will welcome everyone with open arms. We have to. Our economy depends on it.