House prices in Greater Vancouver have been on quite a ride in recent years! Detached home prices were steadily falling from 2017 to 2019, and poised to fall even further. However, Federal Government fears of a Covid fuelled recession led them to slash interest rates to virtually zero, driving massive demand for real estate (and indeed, virtually every other kind of asset) and soaring prices. Prices continued their upward trajectory until spring 2022, when the government raised interest rates at an unprecedented rate to curb runaway inflation, causing real estate volumes and prices to decline again. It’s difficult to keep the BC Housing Market down for long, though, and spring 2023 saw the return of rising house prices! Will houses prices drop in 2023 or later?
The Government appears to be trying to return to a more traditional real estate cycle, with prices growing modestly at an annual rate of 1-3%, in line with inflation. So far, they have failed abysmally.
Affordability is very low in Greater Vancouver, limiting the number of buyers who can realize their dream of home ownership. You might think that the shrinking pool of buyers would drive price down, but the number of sellers has dropped at least as fast. Why?
1. Sellers are anchored to the prices from an earlier market peak.
It’s human nature: once you’ve seen a higher price, it’s hard to accept lower. Sellers will often wait, hoping that the peak prices previously seen in the Spring of 2022 will return. A house is only worth what the market will pay for it, but people fundamentally can’t accept it. This phenomenon is so common it even has a name: “anchoring”.
2. Sellers cannot qualify for a new mortgage.
Families wishing to upgrade their home find themselves unable to qualify for a new mortgage at the current high mortgage rates. Worse again, some are unable to port their old mortgage to their new home, and their entire mortgage would be at much higher interest rates. If they can’t buy a new home, they won’t sell their old!
3. Sellers choose to rent their old home.
For many sellers, skyrocketing rental prices make renting out the old home a very attractive investment option. Sellers have traditionally had to sell their old property to be able to afford a new property. However, many sellers are flush with cash! The Federal Government doled out $600 Billion during the Covid pandemic, and all that money quickly finds its way to the people who own the means of production in the economy. The top 10% of the Canadian wealthy suddenly found themselves with an enormous, investable cash windfall – and their purchasing led to rapid rises in prices of homes, stocks and pretty much every other class of investment. Would-be sellers see their homes fetching ever more rent and the prices rising, and decide that they would like to keep their old home as an investment.
Total active listings are well below the long-term average, but are slowly trending upwards. Will this bring more house price reductions in the future? possible…
