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Vancouver real estate downturn has already started

Buyers ponder abandoning purchase commitments in the face of higher interest rates
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Oakwyn Realty broker Steve Saretsky: “It’s interesting to see that we went from having everybody … just frothing at the mouth to get into the housing market four months ago, to all of a sudden, having them say, ‘Oh, hey, maybe I should walk away from a deposit’."

Vancouver’s real estate sector is in a downturn that could steepen regardless of whether the province falls into recession.

How painful the hit to the housing market will be for homeowners is an open question. 

High immigration, and migration from the rest of Canada, may stimulate sufficient demand for housing to prop up the provincial economy and soften any recessionary blow.

Metro Vancouver home prices are falling, Oakwyn Realty Ltd. broker Steve Saretsky told BIV.

He said he is seeing some homes in areas such as Coquitlam’s Westwood Plateau that have sold for about 15 per cent less than similar neighbouring houses did a few months ago. 

Saretsky has also seen some homebuyers consider walking away from their deposits and cancelling purchase commitments. Those buyers have to be told of the risks of such a move, which could scuttle several real estate transactions and invite lawsuits from others involved to compensate for any lost money.

If the home involved in the cancelled sale later sells at a 10 per cent discount, the courts could force the original buyer who walked away from that sale to compensate the original owner for the difference in the home’s value, Saretsky said.

He added that this situation is not yet commonplace.

“It’s interesting to see that we went from having everybody freaking out, just frothing at the mouth to get into the housing market four months ago, to all of a sudden, having them say, ‘Oh, hey, maybe I should walk away from a deposit,’” he said. “It’s a pretty big change.”

It is hard to find a five-year fixed mortgage for less than four per cent today, whereas last year getting that mortgage could be done for about 1.5 per cent, Saretsky said.

Real Estate Board of Greater Vancouver (REBGV) statistics for the benchmark price for all residential properties in Vancouver show a one-per-cent price increase in April compared with March. 

Saretsky dismissed the REBGV’s benchmark index as an unreliable indicator of the current market because of its algorithm for determining what constitutes a benchmark property.

“You won’t see price declines in that home price index for six months, minimum,” he said. “It’s a lagging indicator. It looks in the rearview mirror.”

Saretsky is not alone in believing that home prices will fall.

The Canada Mortgage and Housing Corp. in April forecast that the country’s average home price would be $782,400 by the end of the year, down 1.7 per cent from $796,000 in March.

Economists, such as University of British Columbia Sauder School of Business housing professor Tom Davidoff and Central 1 Credit Union chief economist Bryan Yu, told BIV that Bank of Canada interest-rate hikes are rattling home prices. 

Governments around the world ran large deficits caused by subsidizing workers and businesses during the COVID-19 pandemic. This economic stimulus fuelled inflation, which in Canada was at 6.7 per cent in March – a 31-year high.

In an attempt to wrestle down inflation, central banks around the world are raising interest rates to cool economies. 

Saretsky is convinced that the Bank of Canada will be too aggressive at raising rates, thereby causing a recession.

“I think they will go too far,” he said. “They didn’t see 2008 coming.”

US Federal Reserve Chair Jerome Powell has repeatedly stressed that his goals in raising interest rates, and selling bonds, are “maximum employment and price stability.”

Many residents fear that central banks will raise rates too much and too fast, thereby hiking the cost of borrowing to the point where business owners do not borrow to expand, Davidoff said. 

That scenario would also make mortgages more expensive, thereby reducing the ability for many potential homebuyers to bid as high on properties as they did last year, he added.

Yu said he believes that the economy is strong and that a rosier picture is likely, though he admits the possibility of a recession, which is usually defined as two consecutive quarters where the gross domestic product shrinks. A recession can also comprise very steep GDP declines in two consecutive months – something that happened in 2020, Yu said.

“I don’t think that even a real estate downturn is likely to derail, necessarily, all the other sectors of the economy,” he said.

Statista data shows that real estate, rental and leasing is responsible for 19.6 per cent of B.C.’s GDP, while construction is responsible for another 9.5 per cent. Yu and Davidoff said that while B.C.’s economy is disproportionately weighted more toward real estate and construction than is Alberta’s, the Statista data is misleading because the real estate, rental and leasing component of the economy includes people paying rent – something that would not stop in a recession. 

Real Estate Wealth Lab chief intelligence officer Jennifer Hunt suggested that even if interest rates do rise, most people would be able to cope with increased mortgage payments. 

Hunt said she did not want to diminish the effect higher mortgage rates could have on household budgets, but she did not think that higher rates will lead to much knee-jerk selling. The only real hit for people would come when they renew their mortgages, she said.

Hunt added that the increased flow of immigration and migration from the rest of Canada into B.C. could provide the province with a buffer in a Canadian recession.

B.C.’s population surged by 100,797 in 2021 – the highest single-year inflow of immigrants and inter-provincial migrants since 1961, according to B.C.’s Ministry of Jobs, Economic Recovery and Innovation.

Having more people in the province helps B.C.’s economy because it increases demand for products, she said.

Added buying and spending means that if the province slips into a recession, it will be milder and perhaps shorter than elsewhere, Hunt said. 

“If we’ve got people coming in, we also have people who bring innovation and who are looking to create. They might be starting businesses. Therefore, that’s going to be another mitigator of a recession, because they will be industrious and creating jobs and creating businesses.”

Hunt believes immigration will also help keep B.C.’s real estate sector robust.

“B.C. real estate as a whole is going to stay strong, and it will be on a long, modest expansionary period for at least a decade.” •

gkorstrom@biv.com

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