Vancouver Real Estate: Where to From Here?
Bubble or not, you need the right plan when your home equity’s in the mix.
Is our real estate market in a bubble, just waiting to pop? Even with the recent pullback, a typical home in Greater Vancouver remains twice as expensive as a decade ago. What’s more, the market is showing signs of heating up yet again.
While there may be uncertainty ahead one thing’s for sure. If you’ve owned property in the Lower Mainland for any stretch it’s a good bet you’ve built up significant equity. No matter your goals, that’s wealth you can take advantage of by carefully weighing your options and making smart choices.
Not much of a correction
Want to sum up Vancouver’s real estate market in a word? How about resilient.
Headline numbers for sales and prices have been down, but by some measures the slump in the back half of 2016 was less dramatic. Year-over-year comparisons are far from rosy if viewing average prices, pulled down in part by weakness in the luxury detached segment which was impacted most by the introduction of the foreign home buyers’ tax. On the other hand, the benchmark price – representing a typical property in Greater Vancouver – has risen 11%. The soft patch did little more than bring sales back in line with their ten-year averages.
Lost in the shuffle has been the relative strength of multi-family housing, driven by buyers seeking out affordability. With a typical single-family home sitting above $1.5 million, townhouses and condominiums have increased their share of Metro Vancouver residential property sales to 69%. The sales-to-active listing ratio for condos exceeds 82%, indicating strong demand and a “seller’s market”.
Getting back in gear
If activity so far in 2017 is any indication of what’s to come, anyone hoping for an extended cooling to get into the market or trade up is apt to be disappointed.
Figures from the Real Estate Board of Greater Vancouver show the composite benchmark price in Metro Vancouver, representing all types of residential properties, has jumped 5% since year-end with sales more than doubling since January. Seeing brighter prospects ahead, Central 1 Credit Union has elevated its outlook, predicting prices will rise 6.1% in the Lower Mainland next year and a further 3.3% in 2019.
There are good reasons to be positive. Housing in the Lower Mainland continues to benefit from rock-bottom interest rates, a BC economy poised to be among the leaders nationally again this year, and a growing population. There’s no shortage of people who are making home ownership a priority. The falling loonie is a lure, especially for American buyers. There’s also the feeling the shock of the foreign home buyers’ tax is fading, helped by new exemptions for those working in the region and paying taxes here.
On the supply side, homes available for resale remain sparse, with new listings falling 21% in March compared to a year earlier. Adding to the squeeze is a shortage of new home inventory, ongoing scarcity of land available for development, and resistance to higher density from multiple corners – all factors supporting prices.
Boomers Staying Put
It’s no secret Baby Boomers and older generations occupy the majority of single family dwellings in Canada, most notably here in BC. The theory was that once they entered their empty nest and retirement years, Boomers would trade their now-overly-spacious digs en masse for a low maintenance lifestyle, flooding the market with single family homes. It’s not happening – at least not yet.
Research from Resonance Consultancy finds 58% of Boomers in British Columbia are unlikely to move in the next five years compared to 40% of Gen-Xers and 26% of Millennials, choosing to stay in their homes and communities, close to friends and family. That’s bad news for younger generations competing for a constrained supply of detached homes.
What could go wrong?
Broadly speaking, last year’s break in the market’s upward momentum was hardly a hiccup, keeping worries of a bubble going.
Optimists point out Canada’s well-capitalized banking system and tightened lending standards are key reasons why we’re at low risk for a US-style housing crash. That said, there are trouble spots.
Even with the advantage of record low interest rates, affordability remains stretched. Residential property prices are severely disconnected from incomes and wage growth, forcing many buyers to take on mounting debt to own a home.
Moody’s Investor Services has identified Canada as one of the advanced economies seeing the largest increase in home prices and household debt over the last three years, adding us to a short list of AAA-rated nations – including Australia, New Zealand and Sweden – at risk of a market correction. The situation is arguably worse here than it was in the US at the peak of their real estate frenzy before the financial crisis.
The pin that finally bursts an arguably bubbly market might turn out to be a moderate increase in interest rates, or an economic slowdown pushing up unemployment; either could stretch overly-indebted households past their capacity to meet their obligations. And the more debt borrowers carry, the deeper a market correction could be. Then, there’s always the danger of an external jolt from the global economy, or a domestically-driven crisis that shakes confidence – the troubles engulfing alternative lender Home Capital Group just a small example.
Another trigger that could tips the scales the wrong way? A setback in the soaring Greater Toronto housing market. In an April article, Maclean’s pointed to research from BMO predicting that mortgage payments as a percentage of income will reach 1989 levels in Ontario within 24 months, the point where a previous bubble in that market popped.1 Any jitters there could spark fear here, particularly among highly-leveraged speculators who will be quick to sell. Once a downturn hits real estate, odds are the broader economy will suffer as well.
1 Maclean’s Magazine, Canada’s housing bubble looks disturbingly familiar, April 7, 2017
Making smart choices
The good news is having a healthy amount of real estate equity means you have options. You can downsize to help out your children or free up some equity for retirement. Or, you might prefer to just stay put. Regardless of your priorities, here are some key issues you shouldn’t overlook.
1. Stress-test your finances
With real estate’s fantastic performance, it’s hard not to think of home ownership as an easy path to riches. But as with any other asset, having too much of your net worth tied up in property is risky. How would a sudden hit to the market affect your retirement plans? Make sure you don’t ignore other investments and income sources you might have to count on, like your RRSP or workplace pension.
2. Don’t overestimate your windfall
One reason to downsize is to produce a financial windfall. But that’s not always the case.
While you might make a tidy profit unloading your current residence, in a rising market it also means you can expect to pay more than you hoped for your next home, whether it’s on another street or in a different community.
Competition for property in Greater Vancouver is starting to make its way into secondary markets like South Vancouver Island and the Okanagan. Last month, the price of a benchmark single-family detached home in Victoria was up nearly 18% year-over-year, outpacing price gains here.
Even buying something smaller won’t necessarily translate into big profits. Trading a family home in the suburbs for a luxury city condo with high monthly expenses can seriously dig into the extra equity you thought you’d have. And, don’t forget about selling costs, legal fees, property transfer tax and moving expenses. The bottom line? Do your research first, so your expectations don’t leap ahead of reality.
3. Think about taxation
Selling real estate can have tax consequences, particularly if it involves property other than your principal residence. For example, half of the profit from the sale of a rental home or vacation property could be exposed to capital gains taxes. That could substantially reduce the wealth you were counting on spending one day, or expecting to leave to your loved ones. If the property was originally purchased as a business venture, the entire profit could be taxable. Assess the potential tax impact carefully before you decide to sell.
4. Investigate alternatives for tapping home equity
According to Resonance Consultancy’s research, 7 in 10 homeowners in Metro Vancouver expect to rely on their home equity to fund retirement. Selling your home to generate income, either by investing the proceeds or purchasing an annuity, is one solution, but it isn’t your only choice. Say you want to utilize your home equity without having to sell and move. A home equity line of credit is a viable alternative for generating reliable cash flow. Ask your advisor to explain the details and help you weigh the pros and cons.
Whatever your goals, when it comes to managing your real estate wealth make sitting down with your BlueShore Financial advisor your first step. We’ll discuss the possibilities and help you make the best choices for you and your family. Contact us today for an appointment.