Five Forces Driving B.C. Home Prices
Last Updated May 2, 2024.
At the highest level, supply and demand set house prices and all other factors drive supply or demand. At Mortgage Sandbox, we have created a five-factor framework for gathering information and performing our market analysis. The five key factors are core demand, non-core demand, government policy, supply, and popular sentiment.
In the long run, the market is fundamentally driven by economic forces, but sentiment can drive prices beyond economically sustainable levels in the short run.
Summary
Core and non-core demand are much weaker than in the past.
Currently, the prime drivers of the market are high rates and weak consumer sentiment, both of which put downward pressure on buyer budgets and home prices. Smaller budgets also lead to a shift from detached homes to townhomes and apartments.
1. Core Demand
Core Demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in a household.
Home Price Growth: Changes in the market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: Your maximum mortgage is calculated using income (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments). Local employment (unemployment) levels factor into this because you need a job to qualify for a mortgage.
Population Growth
B.C.’s population is almost always growing, but the growth rate is essential for our analysis.
If population growth is the same or lower than in the past, then there is less upward pressure on prices.
After a pause in 2020, B.C.’s population growth is back on track, making up for lost ground during the pandemic. While the 2023 growth figure looks high, when taken in the context of low population growth during COVID, the average growth rate is solid but in line with the long-term trend.
Canada has set record-breaking immigration targets, and it would appear they have met 2022 immigration objectives. Curiously, full-time employment has not been growing at the same pace as population growth.
As recession fears grow, we might expect Canadians to be less open to such high immigration targets in a weak jobs market.
Home Price Changes
Price growth reduces affordability and reduces the pool of qualified potential buyers. In an ironic twist, this means rising prices create downward pressure on prices. This is a factor for first-time homebuyers trying to buy an entry-level apartment.
As a rule of thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.
According to RBC Royal Bank, homeownership costs in Vancouver were 90% of the median household income, whereas, in Victoria, ownership costs were 67%. In other words, B.C. home prices are above sustainable levels according to long-term economic fundamentals.
Savings-Equity
Equity
Existing homeowners benefited from price appreciation, so they have more home equity to use when buying another home.
A recent softening in the market has eroded some of this equity, but not enough to have a significant impact.
Condo-to-House Price Gap
A large gap means more savings and mortgage financing are needed for condo owners to upsize to a house.
B.C. house values rose more quickly during the pandemic than condo values. In the past few months, the gap between house and condo prices has narrowed.
A narrowing price gap helps to make upsizing more accessible for condo owners.
Okanagan Valley gap between condo apartment and detached house price
Savings
The savings cushion that Canadians accumulated during the pandemic has been spent, according to Statistics Canada. "On average, regardless of a household's demographic or economic characteristic, gains in household wealth acquired over the previous year have been erased," Statistics Canada reported on Monday, October 3rd.
With inflation rising faster than incomes, everyday items are becoming more expensive while paychecks are unchanged. If this trend continues, Canadians will run out of savings (including nest eggs for buying a home) and begin taking on debt to cover everyday expenses.
Financing
Mortgage Rates
Since 2020, mortgage rates have been rising. They are in the mid-range compared to the past 30 years but are the highest since before the 2007 financial crisis.
So long as mortgage rates remain elevated at current levels, home buying budgets will remain depressed.
Employment and Incomes
While the employment picture has improved significantly, you must hold a job for 3 to 6 months before applying for a mortgage. Also, full-time employment in British Columbia appears to have softened since the summer of 2022.
Job growth is critical because population growth will not put upward pressure on home values if those new arrivals don't have meaningful work.
Recently, full-time employment has trended upward. If full-time employment continues to trend upward, we can expect more demand in 2024, regardless of population growth.
Homeownership Costs
The cost of utilities (heating oil, natural gas, and power) has been rising. In many cases, heating costs alone have risen $100 per month. Add the rising cost of groceries and gasoline to the equation, and it is clear that homebuyers have less disposable income to put toward mortgage payments.
Overall Core Demand
While British Columbia’s population has been growing at higher rates, full-time employment has not kept pace.
The core component on the demand side is rising interest rates. A household that would have qualified for a $600,000 mortgage in 2021 will now only qualify for $450,000. This, combined with record home prices, shows why home purchases have dwindled.
Many British Columbians want to own their first home or upsize. However, fewer households have the financial capacity to make their desired purchase compared to six months ago.
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2. Non-core Demand
Non-core demand represents short-term investment, long-term investment, and recreational demand (i.e., homes not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Since non-core demand is ‘optional’ (i.e., not used to shelter your own family), it is more volatile than core demand.
Foreign Capital
Beginning in January 2023, Canada banned some foreigners from buying Canadian homes until 2025. The foreign-buyer ban won’t apply to students, foreign workers, or foreign citizens who are permanent residents of Canada; however, the additional hurdles will reduce the flow of capital to Canadian real estate compared to previous years.
Long-term Rental Investors
Rental investments are a significant driver of home prices. Nearly 50 per cent of City of Vancouver condos are not owner-occupied, and almost 20 per cent of detached single-family houses in the city are not occupied by the owner. The percentage of investors drops to 31 per cent of condos once you consider the entirety of the Greater Vancouver region. Similar trends are reflected in the Okanagan and Victoria.
New risks exist in the rental market due to potential unlocked supply, planned reductions in study permits, rising mortgage costs, and rising property taxes.
The Minister of Immigration, Refugees and Citizenship announced that the Government of Canada will set a two-year study permit intake cap. For 2024, the cap is expected to result in approximately 360,000 approved study permits, a decrease of 35% from 2023. It is unclear what impact this will have on rent rates.
Borrowing costs have more than doubled. For many owners, insurance and energy costs have also driven up condo maintenance fees.
Finally, property taxes are rising across Canada. It is now more difficult for tenant incomes/rents to cover mortgage costs, maintenance fees, taxes, and wear and tear.
Finally, the B.C. government has passed a new law that stops Strata Corporations from preventing rentals in their buildings. This could lead to increased rental supply, further clouding the stability of future rental rates.
Short-term Rentals
According to the British Columbia Housing Minister, there are 19,000 entire homes available year-round on short-term rental platforms that are never owner-occupied.
In October 2022, according to Airdna.co, short-term rentals were:
Vancouver: 4,000 rentals with 87% occupancy.
Victoria: 1,100 rentals with 88% occupancy.
Kelowna: 1,600 rentals with 71% occupancy.
An occupancy rate between 70% and 95% is typically considered a supportive investment environment.
Tourism is finally on track to match or exceed pre-pandemic levels! This bodes well for short-term rentals.
However, new B.C. short-term rental rules come into effect on May 1st. The new rules limit short-term rentals to a property owner’s principal residence — plus one additional unit or suite on that property — for municipalities with more than 10,000 people. The change is expected to add 19,000 homes that are currently short-term rentals to the long-term rental market.
House Flippers
When house prices rose consistently, it was easier for hours flippers to make money. The market has softened, and house flipping is beginning to look risky.
This might be partly because the B.C. government is introducing a new tax on the sale of real estate held for less than two years. A tax rate of 20 per cent will apply to income from properties sold within 365 days of purchase. It will gradually decline to zero between 366 and 730 days.
Note: The flaw with the chart below is that most flippers will "live in the property" for at least 1 year before selling so they can claim it as their principal residence and avoid capital gains tax on the sale. The regulators don’t count flips that occur within 18 months.
Share of homes purchased and then flipped within 12 months (%)
Dark Money
Dark money is the proceeds of crime or money that are transferred to Canada illegally. Dark money includes funds earned legitimately that are transferred illegally from countries with capital controls (e.g., China) and legitimate earnings moved from nations subject to international sanctions (e.g., Iran, Russia, and North Korea).
It is laundered in the real estate market to hide the illegal nature of the funds. Sometimes, the property's true owner is hidden by using a Straw Buyer, and other times the property is owned by a shell company.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide their true origins. In 2015, a British Columbia realtor was caught with hundreds of thousands of dollars in her closet at home.
The new British Columbia land registry is hoped to stop money laundering, but some economists challenge this assumption. Kevin Comeau from Transparency International says the new system does not require the “proactive” verification of the identity of the true beneficial owner of a property. In other words, the ultimate owner, whose name is not listed on the land title, does not need to be verified - it’s an honour system. As a result, the system offers little value to law enforcement agencies and others who search the registry.
We see no evidence of a diminished role for dark money in British Columbia real estate.
Overall Non-core Demand
Given the foreign buyer restrictions and volatility in the rental market, we assess that capital inflows toward residential real estate for non-core uses will soften at least until mid-2024. This adds some downward pressure on B.C. home prices.
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3. Government Policy
Empty Homes Tax (Vancouver)
The City of Vancouver raised its Empty Homes tax from 1.25% to 3%, and the City has approved another increase to 5%. From the government’s perspective, ownership of a vacation property in a major Canadian city is a luxury that only the wealthy can afford. The tax is intended to be a fee on luxury real estate charged to people most capable of paying it.
Vancouver has a supply shortage of homes, so ownership of empty luxury homes is a misuse of a valuable resource.
Foreign Buyer Restrictions
The Federal Government, using its housing agency, has announced a ban on home purchases by non-Canadians effective January 1, 2023. There are some exceptions for those with temporary work permits, refugee claimants, and international students.
The two-year ban was implemented to allow the government to study whether it reduces the property market's levels of speculation and commoditization.
Increased Rent Controls
The B.C. government announced the maximum rent increase in 2024 is 3.5 per cent. Inflation over the past year was 5.6 per cent, so the increase in rent will not cover the landlord’s rising costs. This will provide relief to renters at the expense of landlords, but it also discourages investment in new rental stock.
Overall Government Influence
Overall, the government unwound many programs supporting home values through the pandemic and subsequently implemented restrictions on foreign investment. Compared to a year ago, there is significantly less support from the government to maintain home values.
4. Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes.’ They are homes owned by individuals who sell them to upgrade, move for work or for other reasons. The B.C. Real Estate Association only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Rising supply releases the upward pressure on prices caused by demand.
Months of Supply of Existing Homes
While the total number of homes for sale is a key metric of supply, shown below, the ratio of listings to purchases expressed in months of supply is a better indicator of where prices are headed. This is because months of supply show the relationship between supply and demand. If supply and demand drop together, then the market balance is maintained, and price pressures are unchanged.
Supply was surprisingly tight throughout the pandemic and is now trending upward.
Mortgage Delinquencies and Foreclosures
Antrim, one of the larger private lenders in B.C. has lent $668 million in British Columbia. 1,350 of their mortgages are in Metro Vancouver with an average weighted interest rate of 7%. Most of their mortgages need to be re-approved every 12 months.
Financial distress leads to rushed or forced sales - more supply.
Pre-sales and Completions
New Construction:
Home construction in Metro Vancouver is booming. All major centres in B.C. are experiencing record levels of construction.
As these projects are completed in the next 18 months, they might come onto a soft market. While many of the homes under construction are pre-sold, their new occupants will be vacating or selling their current residences.
Pre-sales:
Pre-sales are purchases of unbuilt and completed brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before starting construction, so housing starts are a good indicator of successful pre-sales.
Pre-sales are purchases of brand-new homes from developers.
The below chart provides good data for Vancouver, where the market has omprovoved significantly.
Victoria is trending above average, and Kelowna is well above average.
Popular Sentiment
Popular sentiment can be volatile and easily influenced by the latest headlines. Sentiment can shift quickly, as witnessed in the past two years.
Canadian Consumer Confidence
The Ipsos-Reid and Nanos Canadian Confidence Index shows that Canadian consumer confidence has improved significantly, and confidence in real estate values has improved. Roughly 45 per cent of Canadians believe home prices in their neighbourhood will rise over the next six months.
Although consumer sentiment is a key factor contributing to real estate price trends, sentiment on its own is not an accurate predictor of future prices.
Conclusion
Here is a quick summary:
Core demand is weaker because higher interest rates and inflation have eroded home-buying budgets. Also, the unemployment rate In Vancouver is higher than the Canadian average.
Non-core demand is weaker due to the high cost of rental financing, and the government's imposition of a foreign buyer ban removes some potential buyers.
Existing supply is rising, and there are record numbers of homes under construction, many of which will be completed in the next 18 months.
Consumer confidence in real estate is mildly negative.
While it is not guaranteed, the current conditions dramatically increase the risk of a significant market correction.
See our B.C. Home Price Forecasts
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