The Carney government indicates they are not patient enough for this to materialize; they want immediate progress. They only way to get that is through the existing housing stock.
In this update, building on content in last summer’s Annual Report, we are taking a closer look at the real estate market’s short and long-term prospects due to recent activity and political events.
Housing Market Deep-Dive
I am observing the market closely for early signs of the market turning around. Throughout the winter and spring we observed the condo market demonstrating weakness with historically high listing counts and relatively low sales figures. This resulted in measurable declines in prices, yet the damage was mostly consolidated to new construction and specific neighbourhoods. The rapidly falling prices buyers were looking for have not materialized (at least not yet). In the past few weeks, there has been an observable increase in condo sales, while listing numbers are beginning to ebb. Has talk of the trouble in the housing market spurred some sideline buyers to look for bargains? Has the removal of the GST on new homes for first-time buyers, the First Home Savings Account in addition to the Home Buyer’s Plan (via RRSPs) tilted the math enough for that cohort to begin entering the market? It’s a small sample size, but if it continues it will not reflect in the statistics until prices have already jumped higher and negotiating power tips back in the favour of sellers.
The pattern of rising listings/lower sales transferred to townhouses and single family homes more recently and is persisting at present. In North Vancouver specifically, the last two weeks have seen listing counts rise far faster than the pace of sales. Inventory numbers are rising, but the de-listing of some unsold properties is ensuring that the overall number of homes available doesn’t yet reach unsustainable levels. If the above scenario continues to unfold in the condo market, I foresee the single family market to also follow suit with a similar lag of 6-8 weeks. The window for single family shoppers to control negotiations may close by the end of the summer.
While markets look for sounder footing, my expectation is that policy changes will continue to affect the market. These changes could occur after the market has already turned around, providing fuel to price increases. Rising prices, however, are not the stated goal of either Provincial or Federal governing parties, and should it materialize, drastic counter-policies could be employed to blunt the market. Direct from the throne speech of May 27th, “The Government will drive supply up to bring housing costs down.” Interpreted very literally, there was not specific mention of “new” supply, and I interpret the “housing costs” as a reference to the “shelter” component of the CPI inflation statistic that is used by the Bank of Canada to set interest rates. With a former central banker as Prime Minister, interpreting the throne speech literally is something I recommend – whether you are a supporter of his party or not.
What policy levers might be employed to blunt a rise in prices while also increasing supply for first time buyers to absorb? In this report by a prominent real estate analyst (of progressive political persuasion), it’s suggested that the capital gains rate of 50% on investment properties be raised to 100%, and down payment requirements for investment properties to be increased to 35% – effectively making real estate investment for price appreciation or rental income a very poor proposition (and in the process pushing investment capital toward more productivity-enhancing uses). To pass such legislation would require a grand bargain of sorts, so perhaps enacting this in combination with the Conservative’s platform proposal of a capital gains tax holiday (for money reinvested in Canada by a specified date) it would gain the needed support. Such a move would release huge numbers of investment properties that are currently “locked in” as such because of the high taxation realized upon sale. In many cases, these properties only ever get sold when the owner dies.
This observer struggles to find any other policy lever that could meet the ambitious goals stated in the throne speech. I also don’t see the throne speech, delivered by a former central banker, to be quickly discarded for political expediency – as platform objectives were so often by the last government. Of course, coaxing out existing housing supply by using blunt taxation tools is not going to be popular. Plenty of effort is also promised in delivering new affordable housing by exempting GST, providing financing to “affordable” developers, and cutting municipal development charges in half. These supply-driven policies will take years to show up in completed units of housing. The Carney government indicates they are not patient enough for this to materialize; they want immediate progress. They only way to get that is through the existing housing stock.
Conclusion
Short-term: markets showing early signs of new momentum. With follow-through, the North Vancouver market will continue it’s “relative strength” and outperform other markets like Burnaby and the Fraser Valley (and Southern Ontario).
Medium-term: markets will be affected primarily by policy changes in addition to the direction of interest rates
Long-term: new supply from mega-projects centred around “affordable” rental housing will begin to affect values of resale condos as investors are mostly replaced by rental-purpose buildings.
While prices may become stronger in the near-term, there are headwinds longer term and over a period of time from 2016-2036 we may look back and realize that, adjusted for inflation, real estate has underperformed. The only benefits will have accrued to those who own their primary residence. Investors beware.
Next week, I will return to the regular “Two Minute” market update, looking at other financial markets and their potential impact on housing.
Matthew Stiles
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Disclaimer: The information provided in this column is for general informational purposes only and does not constitute financial, investment, or other professional advice. While I strive to provide accurate and up-to-date information, I make no warranties or representations as to its accuracy, completeness, or reliability. Any actions taken based on this information are at your own risk. Always consult with a qualified financial advisor before making any investment decisions.