Notes From Adil

Shifting Winds: Entering a Changing Market

How do you know we are in a changing market? It has officially hit the news.

Entering the late Spring of 2022, we have two significant factors at play which are contributing to a calmer market — something residents of Metro Vancouver haven't seen in three years.

  1. Rising Interest Rates

It’s no secret that interest rates have been historically low. For real estate, this translates to the cost of borrowing being for buyers at a low point of the past two years, in alignment with the onset of the COVID-19 pandemic. For the sake of simplicity, when interest rates are low, the monthly cost to borrow $100,000 in mortgage debt is low (increase in mortgage rates by .25% equates to $13/month per $100,000 of debt). In an effort to tamper inflation rates in Canada, the government has increased their ‘overnight rate’ twice in the past three months, and there is speculation of further increases over the next three months. For a more in-depth understanding on the Bank of Canada and interest rates, refer to their website.

As borrowing becomes more expensive, buyers in the market are hindered. The size of a mortgage that a buyer may qualify for decreases, therefore making them less capable of participating in price bands of the market that they were once able to. As this effects the majority of the buyer pool, the inevitable result is that sellers have to meet buyers at a point that they can afford, resulting in a decrease from the plateau of prices.

2.Increasing Inventory

When home values are rising, most homeowners are intent on holding on to their property to maximize their investment. As soon as we see a downturn, owners who have been thinking about selling are suddenly urgent to get their property on the market and sell while the market is still at or near its peak. This rush to list by anyone who has been holding off creates a surge in inventory. From March to April, 2022, the Metro Vancouver market gained 15% more housing supply, indicating exactly this effect taking place. As more sellers try to to capitalize on high prices before any sort of dip, we can expect listing volume to increase and potentially return the region to a historically more normal number of homes on the market.

Should inventory rise, the natural rules of economics will take place: higher supply should result in price decline. Added benefits for buyers will be more selection to choose from and more time to work through the buying process.

Where do things go from here?

That is the crystal ball question. The last time Metro Vancouver experienced rising interest rates was just over three years ago. In late 2018, interest rates began creeping up on the heels of other governmental imposed policies targeted at curbing demand in the housing market. The region experienced a 15 month cooling which saw prices decrease between 6% and 10% depending on the market segment. As buyers became accustomed to elevated rates, demand began ramping up in late 2019 right up until the onset of the COVID-19 pandemic in North America.

If history repeats itself, the West Coast real estate market could be in for a different look over the next 12 to 18 months. It would be reasonable to foresee much of the rapid gain in value that occurred from the over-heated January to April market be wiped out gradually. From there, we should see a balanced market take hold, which many would consider to be a healthier marketplace for both buyers and sellers.

Over the long run, Metro Vancouver tends to project an upwards trajectory. This projection is largely based on historical evidence, which indicates that property values consistently rise throughout the region, especially over longer time horizons.

Have thoughts on the housing market in 2022? Feel free to reach out to me anytime at adil@adilkhimani.com

Thank you for reading,

Adil