After six months of stability during the first half of 2012, property sales in the Fraser Valley dropped by 40 per cent in two months. Why the sudden change? How long will the slowdown continue? For answers, we turned to BCREA Senior Economist Cameron Muir.
Q: For six months, our sales to actives listings ratio in the Fraser Valley ranged from 13 to 15 per cent. It dropped to 8 per cent last month. What happened?
A: Home sales in the Fraser Valley began to trend lower at the beginning of the year, with a more significant downturn taking place in August and September. While there is no proverbial smoking gun, there are a number of factors at play in the market:
- The fourth round of high-ratio credit tightening that began in 2008 was implemented in July. All of the credit loosening by the federal government in 2006 has now been pulled back. The big change in July was reducing maximum amortizations from 30 to 25 years. This was the equivalent to a 100 basis point increase in the interest rate for a first time buyer. All four rounds of credit tightening have been followed by a marked decline in BC MLS® residential sales within three months. Sales declined by 11 per cent three months following first round, 25 per cent following the second, 12 per cent following the third, and 19 per cent two months after the most recent round.
- An unusual spike in high-end detached home sales in 2011 was not repeated this year, impacting both sales levels and average price statistics.
- Little gains in equity and real estate markets have stalled growth in household wealth, limiting some of the positive spinoffs of the wealth effect such as second home purchases.
- A negative spillover from an anemic 0.8 per cent employment growth in BC last year may also be exacerbating the lull in consumer demand.
Q: How does it compare to the market downturn after the 2008 recession?
A: To date, seasonally adjusted home sales look remarkably like 2008. However, the financial crisis was just beginning to bubble to the surface in September 2008; homes sales are unlikely to fall to levels recorded October 2008 through January 2009.
Q: How long do you project this slowdown to continue?
A: It's impossible to ascertain exactly when a market turning point will occur. However, per capita home sales are currently underperforming the economic fundamentals. I expect unit sales to rebound back to 10-year average levels over the next few quarters. There are three main reasons we can anticipate improved housing demand:
- BC employment growth was 1.9 per cent through August this year, double the 0.8 per cent growth rate in 2011. More importantly, full-time employment has increased by 3.2 per cent, while part-time employment has fallen 2.5 per cent. This means many part-time jobs are being rolled into full-time work, a strong indicator of business profits and confidence. In Metro Vancouver, full-time employment has increased at a 3.5 – 4.0 per cent pace so far this year, the largest growth rate since the middle of the last decade.
- Mortgage interest rates remain at or near historic lows.
- The population base is expanding. The latest migration figures indicate 11,500 international migrants landed in BC on a net basis during the second quarter, most of whom will reside in Metro Vancouver.
Q: What are you projecting the effect will be on home prices? Why?
A: Home prices are likely to remain flat over the medium term, with some relatively small declines (2 to 5 per cent in the Benchmark) in some markets and product types. Buyers to balanced market conditions are likely to be commonplace over the next 18 months. However, I do not expect any substantial price declines in the absence of a macro-economic shock. Large price declines are typically the result of household financial disaster writ large. The typical culprit is a deep recession. I do not know of any reputable economist in Canada that expects a deep recession ahead.
Cameron Muir is BCREA's Senior Economist. His next forecast will be released at the end of October.