I have heard and overheard enough recent conversation around coffee houses, bars, social media, and of course real estate offices speculating about a price drop in Victoria’s real estate market that I thought it might be time to take a look at whether the data suggests that our real estate market is indeed in decline.
With the introduction of the B-20 stress test at the beginning of January, and several rounds of increases to mortgage lending rates starting last year, property buyers across Canada have seen their borrowing power (and hence their purchasing power) decrease significantly in 2018 - up to 20% in many cases. As the real estate and financial sectors widely predicted, the market has responded with what the media has widely termed a cool down. Voices from within BC’s real estate industry have tended to characterize the recent trends more as a ‘return to balance.’ In Victoria particularly I believe that assessment fits, as we have seen a levelling off, with significantly lower volume of home sales this year than we saw in the unprecedented activity of 2016-17, allowing inventory levels to build up a bit from where they were, and taking some of the acute pressure off the market.
But are house prices dropping in Victoria?
Take a look at the following two charts:
This first figure compares the average sale price (light blue line) with the number of sales (dark blue area), looking back over 5 years’ worth of market cycles to have a frame of reference. We can see that although volume is down significantly for 2018, the price trend is holding steadily up, keeping above the gains of the past two years and following the general trend line rather than reversing direction. One other note which I found interesting: this level of market volume for 2018 compares closely to 2014, where late 2013 had brought a bump in discounted 5-year fixed rates up to the mid-3% range, just a little under where current 5-year discounted rates sit.
The MLS® Home Price Index® is an amazing tool I use regularly in my practice. It makes plain sense out of a massive mountain of sales data. The composite index trend draws an even more explicit picture of the home price trend in the Victoria market area than VREB’s average sale price data over the same time period - a low-interest-rate-fuelled meteoric rise throughout 2016-17, indeed even into early 2018, with a flattening of that line since spring. By way of explanation on that spring point: bear in mind that every buyer with a 120 day rate hold was still able to apply and be approved under the ‘old rules’ (pre-B-20 stress test) as of December 2017, provided they purchased a property and closed on it before the end of April 2018.
So… definitely not a price drop in either chart. Transaction volume is down, and pricing has flattened, but is holding steady, and may even continue making incremental gains.
Of course, looking at a singular, large-scale view aggregated and averaged out to a single trend doesn’t tell the whole story. Within our market are in fact several smaller markets that sometimes seem to function independently of one another - condos, the luxury market (for the sake of convenience, let’s call that listings over $1m), and those ‘bread and butter’ family homes would be just a few examples. The latter and the former have tended to continue selling well throughout this year, and foreseeably will continue to do so, albeit without the frantic atmosphere and ubiquitous multiple offer presentations.
It’s those listings priced over $1m that have had a harder time moving this year. No surprise, really, considering the higher cost and difficulty in borrowing. Anecdotally, what I’m hearing is that most of these unsuccessful $1m+ sellers preferred to withdraw their listings than slash prices in order to effect a sale. This has come into sharp focus recently, as a number of purchase contracts in the market area have come undone when the prospective purchaser has been unable to complete due to their inability to sell their current property.
The real story here is there was a massive overall massive run-up in the number of higher-priced listings coming on the market in early 2018 in anticipation of seeing the upward pricing trend, low inventory, and high demand of the previous two years continue to extrapolate. Sadly, this significant increase in higher-priced listings was happening directly against those headwinds of tougher borrowing qualifications and higher interest rates. Note that the number of sales for homes over $1m has remained relatively consistent, but where the number of listings has been declining from late summer through fall of this year supports the notion that most of these listings are being taken off the market rather than selling - if they were selling, we would see the number of sales line turning upward to meet that listings line, increasing as the number of active listings declined.
Referring back to the MLS® HPI® benchmark value chart above, there have been instances In the course of the price flattening trend where the HPI® benchmark price shows a slight decrease month-to-month, which can read to consumers like “house prices are decreasing,” but we haven’t seen a single month yet which as posted a year-over-year loss. I personally suspect that what buzz there is in the marketplace about prices coming down is coming as a result of the news filtering in from neighbouring markets in Seattle and Vancouver, where real price declines are indeed underway. I’ve pointed out to a few local inquiries that both of those markets saw even steeper price gains than our own in the past few years - gains which pushed both markets well beyond the margin of affordability from an earnings/housing price perspective - and in turn gave those markets a wider margin for correction. The difference in Victoria is that although the opportunities are admittedly less than abundant, there is still enough product in our market at accessible price points to keep it moving. At this point, the numbers don’t tell me that a price drop has happened appreciably in Victoria in 2018. After the expected December/January slump, we will look for clues heading into the spring market, where if I had to guess, a relatively stable, balanced market awaits.
Why? As positive employment numbers continue to come in, and the Greater Victoria region continues to add new residents, the fundamentals of supply and demand suggest that housing isn’t going to fall off a cliff. Langford remains one of the fastest-growing cities in the country, with Victoria and Saanich each adding nearly equal numbers of residents year over year as well. Tighter financing is going to continue tempering housing demand somewhat, keeping us out of the red-hot selloff of 2016 and maintaining some level of listing inventory and a lower number of transactions than the past two years, but all those new faces are still going to need places to live. A steep incline in interest rates could further stall the market, but it would have to be significant to spur an appreciable price drop.
Do you agree? Disagree? Want to talk further about where the market’s heading and whether it’s the right time for YOU to make a move? Curious for a closer breakdown on your neighbourhood or property type? Send an email now, I’d love to start a conversation with you.