We certainly have enough variables at play in today's real estate market. The US election result is yet another variable to add to the mix. It's too early speculate about the effects of the Trump win. Much talk has occurred over the past few months; now comes the New Year and we'll see what's real. Some of what becomes real is bound to affect Canada, and our local real estate market. No doubt some effects will be positive, some negative.
A Fine Balance
The full effects of another recent variable at play -- the much stricter mortgage qualifying rules -- are also too early to gauge. I'm willing to bet, however, that the effects will be significant.
Introduced as a “stress test,” the new rules essentially require a relatively large portion of home buyers to qualify at a mortgage rate of some 4.7% today, vs. the rate they'd actually be charged should they obtain the mortgage. Given Metro Vancouver home prices, many home buyers were likely maxing out their purchasing ability at, say, 2.5%. You can see how a sudden bump to 4.7% could result in some number of potential purchasers unable to qualify for the amount they could have just a month earlier.
On a $500k mortgage, for example, 4.7% vs. 2.5% is a payment increase of almost $600/mth or so, with the required income being some $1800/mth higher. And we'll no doubt see a trickle-up effect: Fewer buyers able to qualify will lead to less demand at any price point. You can argue either side of this policy. Many buyers will lose the dream of home ownership, or at the least settle for less than they'd like. However, interest rates may not remain at these historically low rates. It's a tricky balance between actions that help Canadians realize the dream of home ownership vs. the risk of thousands of homeowners unable to cover their costs if rates rise. Just in the past week US bond rates, on which US fixed mortgages rates are based, have begun to rise. The same could happen here.
If you were to do nothing but follow the local media, you’d be forgiven for assuming that the market has stopped in its tracks. And there's no doubt this is true for some types of homes, neighbourhoods, and price ranges. However, many sub-markets have remained strong.
In general, lower to mid-priced priced properties in any given area are selling, and at or near pre-summer price points. Activity for higher-end properties in most areas has slowed considerably.
Until recently, most market activity reporting looked at average home prices across a sector or area. And it's certainly true that, based on averages, prices in most areas are down. However, don't assume that your lower-price-point or even mid-price-point home is suddenly worth 20% less! The average is skewing downwards because high-end homes sales, in all markets, are making up less of the total sales price volume. Thus, a lower average price.
Enter the Housing Price Index (HPI). According to the Real Estate Board of Greater Vancouver, the HPI is a more stable price indicator than average prices, because it tracks changes to "middle-of-the-range" or "typical" homes and excludes the extreme high-end and low-end properties. Below is the Board's explanation of the HPI.
"Typical" homes are defined by the various quantitative property attributes (e.g. above ground living area in sq ft) and qualitative housing features (e.g. proximity to shopping, schools, transportation, hospitals etc.) toward the home price of properties sold in Greater Vancouver communities.
These features together become the "benchmark" house, townhouse or apartment in a given area. A benchmark property is designed to represent a typical residential property in a particular MLS® HPI housing market, such as Richmond or North Vancouver. For example, perhaps the basket of features for a typical home in a given community includes a 10-year-old, 3-bedroom house without a panoramic or ocean view on a 7,200 sq. ft. lot, with 8 rooms, 2 bathrooms, a fireplace, a 1-car garage and is close to schools. A benchmark price for this home can be created from the individual dollar values given to each of the above features.
The breakdown of each month’s real estate sales in a given area are estimates of current prices paid for bedrooms, bathrooms, fireplaces, etc. Prices for these qualitative and quantitative features are then applied to the typical house model and an index price is estimated for that month. This type of pricing model involves estimating the price of a property’s features rather than the property itself.
While the HPI has fallen somewhat since last spring (the peak of the market), it has not fallen as much as average measurements (due to fewer high-end home sales, as mentioned above). Indeed, the spread between average sale prices and prices based on the HPI has widened since the spring. The Board is now reporting market trends with the HPI, as they feel it is a better indicator of price trends than averages.Comparison dates are another important factor when looking at price movements. Whether measuring HPI or averages, prices have declined somewhat since the peak last spring. However, today's prices are, in general, significantly higher than one year ago.
Readers who've followed my e-news for some time know the importance of drilling down through the data to understand the true value at the exact moment in time for the exact home you intend to sell or buy. Despite the variables in play these days, it can be done.
Indications are that this winter will see the traditional slow-down in home selling activity. If you're thinking of selling, I'd recommend waiting until early in the New Year. However, it’s not too early to begin the planning process. If you're thinking of making a move next year, it would be most beneficial to meet and chat about possibilities, options and alternatives now. And if you're on the buying side, and are mortgage-qualified, you'll have less competition and perhaps lower price points than just a few months ago now and into early next year. Time to chat as well!
Contact me any time if you're considering a move. I'll be glad to discuss and advise on options, implications and strategies.