The Home Inspector Economist for 2016

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When it comes to forecasting the future, there are typically three people you turn to: A Psychic, a Weatherperson, or an Economist. All three of which have about the same track record of success. So why would you listen to a Home Inspector about the future of home sales in BC? Well, I can’t be any worse than those three right?

Actually, the reason you should listen to me is I took a course on this in university 20 years ago, and while I don’t remember what my grade was I passed and therefore I’m sure it was good enough to say I’m an expert (did you know 50% of all Bridge Engineers graduated in the bottom half of their class?). Or at least I could fool the Psychic and the Weather forecaster. So let’s get into the meat of the matter.

Readers Caution

The fact that I’m using a comic strip as my picture for this post, the fact I’m not an economist, and the fact that you didn’t pay me for this analysis, should give you a sense of how much stock you should put into the information below. For clarity, the information below gives some of my forward looking thoughts on 2016 which is for thought and discussion only and I accept no responsibility for any action you take based on it. If you want certainty, try investing in a sandwich heavy portfolio  (see youtube link below)

Zoidberg Advice on Investing - I defer to Zoidberg.

Supply and Demand

Chapter 1 of any macro-economics textbook is going to talk about supply and demand. The concept in a nutshell is a market for any product (like housing) will attempt to find equilibrium where supply and demand meet. The combination of available product supply and consumer demand for the product (housing) will determine the number of units sold and will also reveal the price the market will bare. Let’s look at some local BC supply/demand factors:

  • Supply Factors in the Lower Mainland
    • Land - We are out of easy land to build on. North: Mountains, South: USA, West: Ocean, East: Agricultural Land Reserve. This creates a limitation in potential supply.
    • Zoning - Municipalities are trying to increase density on existing land. Single family homes are being replaced with townhouses and condos and there are more downtown ‘cores’ around the lower mainland. This increased available supply (at least in Condo’s and townhouses)
    • Regulations - Condo builders have largely been building bachelor, 1, and 2 bedroom homes as they sell the easiest and make the fastest money. However, this leaves families without affordable options to live in high density areas. We are seeing cities like New Westminster mandating a percentage of condo homes to be 3-bedrooms which will create supply of this product.
    • Building Boom - We are experiencing a building boom in the lower mainland, particularly around condo’s and townhouses as municipalities push for higher density.
  • Demand Factors in the Lower Mainland
    • Population - The lower mainland population is forecasted to continue to grow. A lot of this growth is through immigration although the lower mainland also attracts a lot of BC and Alberta transplants too. Economic downturns (if one comes) will not likely impact this greatly as the BC opportunity is still much better than in say Syria.
    • Investment - Vancouver and the lower mainland has been seen as one of the worldwide ‘safe’ places for real estate investment. I’m not an expert on China, but my understanding is that you can’t ‘own’ land in China like you can here. As a result, the growing classes of wealthy Chinese are looking for places they can ‘own’ land.
    • Interest Rates - We are still enjoying what has been a long run of low interest rates which has kept many buyers in the market to buy new homes. If rates rise, this could tip demand significantly down.
    • Rental Vacancy Rates - Home ownership is important to many Canadians but there will always be a large market for rental properties. The lower mainland has shortages of rental properties pushing people to rent basements and placing many of the new condos built into rental properties.

Cell Phones have often used supply ‘shortages’ to drive pricing and demand.

Shortage of Housing, Home Pricing, and Behaviours

With a rising population base, cheap interest rates, and limited amount of land available for single family houses, it is inevitable that there will be a shortage of houses in the lower mainland. With more qualified buyers available than homes to buy, house prices will continue to rise until there is an equilibrium between available buyers and available houses.

We are seeing some changes in behaviours in buyers though:

  • Drive until you can afford it - This term came from the LA area 20-30 years ago. The idea being you sacrifice your time driving in exchange for a house you can afford. Chilliwack is becoming more popular for first-time buyers looking for a good affordable house.
  • Townhouses are the new house - Townhouses are becoming the new single family house. Townhouses provide an affordable compromise for growing families. They still typically have a garage, a front door, and 3+ bedrooms. You do lose some space and privacy.
  • Urban Lifestyles - Let’s be honest, less people are having kids and when they do have kids, there are less of them. Singles and couples do well in condo sized spaces and even a family of 3 fit in a 2-bedroom condo.
  • Basement Suites - Well more than 50% of houses we see now have at least 1 basement suite for a ‘mortgage helper’. While many (if not most) of these are unauthorized, without them there would be even more critical shortages of homes so municipalities are turning a blind eye.

Interest Rate Review

I believe the most important issue for 2016 is if interest rates rise. Let’s compare some 25-year $100,000 mortgages with monthly payments at rising interest rates:

  • Current*: 2.96% - $471.20/mo
  • Plus 0.5%: 3.46% - $497.17/mo (up $25.97/mo)
  • Plus 1.0%: 3.96% - $523.86/mo (up $52.66/mo)
  • 10-Years Ago**: 5.56% - $613.89/mo (up $142.69/mo)

On an $800,000 mortgage, payments go up about $210/mo with a 0.5% rate increase, or $420/mo with a 1% rate increase, or a whopping $1,150/mo if we return to interest rates from 10-years ago.

Another way to look at this is to look at what people can afford. Let’s presume we have a family earning $150,000, with no other debts, and a 5% down payment, the bank will allow a maximum payment per month of $4,000. This is what you can afford at different interest rates:***

  • Current*: 2.96% - Max Purchase Price $650,000
  • Plus 0.5%: 3.46% - Max Purchase Price $625,000
  • Plus 1.0%: 3.96% - Max Purchase Price $600,000
  • 10-Years Ago**: 5.56% - Max Purchase Price $525,000

The Home Inspector Economist 2016 Predictions

If all things stay the same, 2016 will look a lot like 2015. House prices will continue to rise until there are not enough qualified buyers to enter the market. House pricing in the Frasier Valley will increase as buyers from the greater Vancouver area look for affordability. Townhouses and condos, which are in a little better equilibrium, will be more regional in which markets are ‘hot’ or not.

The real gamble here is what will happen with interest rates and across Canada, things like the oil bust in Alberta will effect the national policies on interest rates. We also have a new Government committed to running deficits which may prove a boost to inflation which causes rates to increase.

If interest rates increase, we could quickly see demand come off the low end of the market first. Condo’s and townhouses will sit on the market longer and we may see price decreases as sellers become motivated. Houses will take a little more to take the demand off but we may see the end of the crazy multiple offer situations as less qualified buyers exist. If the market tips too far, people who paid a premium to get into their homes in the last 12-18 months may see their values go underwater which often causes people to hold onto homes (which then creates shortages and keeps pricing up).

So my best guesses for 2016 are:

  • Houses - Prices and sales to increase in 2016 unless there is an interest rate hike in which case we will see prices stabilize but generally still more demand than supply. If there is a ’shock’ in rates, we could see a sharp decline in homes listed, and a price drop which could be problematic for owners in the market. People will still be looking for affordable houses, we could see the $800,000-$1,200,000 take the fastest hit as this is the extended finance range for ‘average’ buyers at the moment.
  • Townhouses - This market will be the most stable in the next year. Local municipalities may have local supply and demand balances but as populations look to raise families affordably in the lower mainland, this trend will continue even with higher interest rates (and possibly because of higher interest rates).rices 
  • Condos - With the shortage of rental inventory in greater Vancouver, it would take a while for condo valuations to decrease along with rent values. However, in the greater Vancouver area, condo prices are much more variable than house prices (1-bedroom in Chilliwack starts at $80,000… in Vancouver minimum $350,000). Condo’s in some local municipalities could go into oversupply quickly and force price drops to sell.
  • Total Volume - If interest rates stay the same, levels will be similar or plus 5-10% from 2015. If we see interest rates climb 0.25% from now into 2016, the market may flatten and prices hold. Anything more, and we could see anything from a ‘correction’ of prices in 2016 to a slow decline. 

Conclusion

For me and my business, I’m going to presume the 2016 market will be roughly the same as 2015 but I’m ready for a little incremental market growth as populations increase. Of course, we expect to serve many more customers in 2016 as we continue to enjoy market share growth.

By James Bell - Author | Owner/Operator of Solid State Inspections Inc


Footnotes

* current rate used is RBC’s online rate Nov 23, 2015 of 2.96% on a 5-year fixed rate closed mortgage

** Nov 2005 from http://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_v122497.pdf)

***https://www.rbcroyalbank.com/cgi-bin/mortgage/tools/howmuch/afford.pl/start