With interest rates rising, transactions in the Tri-Cities’ real-estate market have significantly slowed from record highs in March.
Prices have seen a steady decline, but estimates on how far Canadian home values will sink vary depending on where you are, or who you ask.
“We were living in a world of 1.5 percent interest rates, and now we’re at like 5.5 percent (for mortgages). That’s a huge difference,” said Thomas Davidoff, associate professor at UBC’s Sauder School of Business.
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“That could really affect value. So you know, a 20 percent drop, it could be much worse than that. I’m not saying it will be, but it’s not out of the question.”
After two years of a low 0.25 percent interest rate through COVID, the Bank of Canada has cranked the dial in the opposite direction to fight an annual inflation rate of 7 percent.
Five rate hikes have been made since the first small bump on March 2, taking borrowers to a 3.25 percent rate. The central bank has signaled another 0.5 percent increase may come at the end of October.
Cumulative real estate sales peaked in the Tri-Cities in March, with 644 properties sold. Total sales were down 263 percent in September with 244 sold, according to the Real Estate Board of Greater Vancouver’s (REBGV) monthly statistics, which is on par with the region.
It was the lowest sales month in the Tri-Cities since May, 2020, and the declines are on par with regional averages.
The pace of sales is running around 25 percent below normal, said Brendan Ogmunds, chief economist for the BC Real Estate Association.
“We’re really low compared to what’s normal,” Ogmunds said. “Monetary policy tends to affect the wider economy with a long lag, but it hits the housing market pretty fast, especially given the pace of interest rate increases.”
He said prices are also being affected by a spike in the number of listings last spring after a long shortage.
Over the last six months, combined property values have fallen 9.2 percent across the Tri-Cities, but the drops are affecting areas and housing types to different degrees.
Port Coquitlam has been hit hardest, with single-family homes down 15.9 percent. Port Moody properties dipped 4.1 percent decline while Coquitlam’s dropped 8.4 percent.
While the figures are less dramatic, the cities’ declines in townhomes and apartment prices followed suit.
Pitt Meadows’ single-family homes and Maple Ridge’s townhome values have seen the steepest decline in the Lower Mainland, at 19.4 and 17.2 per cent, respectively.
When looking at a one-year timeline, however, pandemic gains made for the vast majority of properties are still significantly up.
The cities which saw the biggest pandemic gains are also seeing the fastest declines, according to Ogmunds.
He said buyers, often working remotely, looked for more space in more affordable markets, which drove prices up in the Fraser Valley and the outer edges of Metro Vancouver.
“Some of those trends are unwinding, I think,” Ogmunds said. “In 2021, you would have seen that the farther away a market was to Vancouver, the more prices were increasing. What we’ve seen in 2022, is that the relationship has completely flipped.”
Looking at the price movements in Metro Vancouver, Davidoff said he doesn’t see an obvious pattern yet.
If it’s an end-of-COVID effect, he said he would expect single-family homes to see the biggest declines; if it’s a case of buyers being over-leveraged, he’d expect the declines to hit apartments and townhomes.
The effect of interest rates on the housing market can take years before being fully realized, Davidoff said, noting the U.S. housing crisis started in 2006 and didn’t end until 2011.
It all depends on how long interest rates take to lower inflation, he said.
“Maybe rates don’t stay high for so long. But if they do, I think the reaction could be quite delayed,” Davidoff said. “Prices are sticky on the way down.”
“Transactions tend to dry up before prices. . . . We’ve seen a dramatic slowdown in transactions, and significant, but less dramatic, decreases in price.”
Canadian inflation has fallen slightly from its 8.1 percent peak in June.
The U.S. Federal Reserve has signaled that interest rates above the 4 percent mark will likely stay until the end of 2023, and Canada may well follow suit.
Parliamentary Budget Officer Yves Giroux has said he thinks rates will reach four percent by the end of the year. His report in late September stated that Canadian home prices could fall as much as 23 percent by Jan. 1.
The Canadian Mortgage Corporation had been more conservative. In July, the agency forecast a five percent drop by the middle of 2023, before revising that estimate to 10 to 15 percent at the end of September.
