That we are in the midst of a slowdown with Canadian Real Estate is indisputable at this time, and we all know that both inflation and the rise in interest rates are playing major roles in that. But what is both interesting and concerning – depending on where you own a home or where you’d like to buy or invest in one – is that homes in suburban regions may be taking much more of a hit than ones that are more within city limits. This of course has everything to do with demand for urban living continuing to insulate the market there more, but there is more to it than that.

This is even more relevant with the way that so many people have bought and moved into homes that are far from those city limits over the last 2+ years, and the reasons they did so don’t need any explaining here. What may need explaining though is a much more detailed why as to those houses losing value more quickly than their metro counterparts. Any type of downturn has serious ramifications, and it is not just the homeowners who will feel the pinch if they must sell soon for whatever reason.

There are real estate agents who work primarily in these suburban regions, and what happens when home values in an area drop significantly is that homeowners who were thinking about selling now choose to postpone that move and see what happens with the markets some ways down the road. That means fewer homes for prospective buyers too, even though there will be more of them than sellers given the opportunity to pay less for a home. Business can dip, and for realtors who are concerned about new clients in this way our online real estate lead generation system here at Real Estate Leads is a smart choice.

This is a relatively new phenomenon with suburban home values being considerably more at risk for falling values that urban homes, so it makes sense for us to look at it in more detail.

Smaller City Slowdown

What we are seeing now is that during the COVID-19 pandemic the gap between downtown real estate and houses in the suburbs has closed significantly. What this does is create a marked change from the way things have always been.

The workings of that are unique to this occurrence and perhaps this time in human history, and it is likely that this trend will be occurring in other countries too. Whether or not they occur in countries that have so much of their personal wealth and National GDP in real estate is a different question, especially as no other country has painted themselves into a corner in this way quite like Canada has.

But to the working themselves; the cost and inconvenience of commuting is typically a downside to suburban living, but as working from home became the norm for so many people during the pandemic that old standard came to change quickly. It’s been well detailed how so many people took advantage of this new working arrangement and chose to buy cheaper – and often better fitting – housing outside of the city.

House prices did take off just about everywhere during the pandemic, but the gains were definitely largest in the suburbs. What that did was make them less affordable today than at any time in the past.

Comparison

In 2016 a house in the suburbs located 50k outside of downtown would on average be worth around 33% less than a similar city home. If we look at 2019 even that gap had slimmed to 26%, while at the same time the bank was calculating that the average cost benefit had diminished all the way to just 10% for the end of 2021.

Again, this was driven in large part by buyers moving farther away from the city as needed until they would qualify for a mortgage based on the local home prices, a phenomenon that the industry began to call ‘drive till you qualify.’ Also factoring in was the same FOMO that has been going on for years, with people believing that home prices were never going to fall and some people saw the need to get in before new mortgage stress-test rules came into place nationally.

The trend has changed though, and it is not uncommon now for workplaces that previously embraced working from home to now being insistent that staff return to the office at least part of the time. This factors into the housing market quite directly, as suburban markets that saw outsized gains during the pandemic are now experiencing price declines while the metro city housing market holds fairly steady.

This may be a blip, or it may be a situational outgrowth of the trend of home prices cooling more than before due to BoC rate hikes and other known factors. The Bank is not offering much to work with to this point, but it does believe the narrowing price gap between the suburbs and downtowns could become a problem if preferences shift back toward the way they were prior to early 2020.

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Much was made of how the Corona Pandemic had more people than ever before seeing an opportunity to not be attached to city living and getting out into homes in more rural areas of Canada. That was indeed a trend, and continues to be a valid one. Although to a much greater extent if you are to read into what a new survey from the Bank of Montreal is indicating with regards about the type of prerogatives most people have for buying homes now.

Now meaning in an era where although the pandemic isn’t over, we’re moving well out of the restrictive phases of it and more and more people are returning to work in the office like they did before early 2020. Let’s also not lose track of the fact that there are always plenty of people looking to move to the cities for the first time too, and as is always the case that is true of many educated young professionals who may have come from smaller town Canada but have studied and earned degrees in these cities and now starting their careers there is the logical next step.

It’s the same as it is in any country where the majority of real estate agents will be working in the major metro areas of the country, and if this trend of more people returning their focus to city home ownership then the logic would be that is going to be beneficial for these realtors working there. There may be some truth to that, but it also enhances the competitiveness factor. Here at Real Estate Leads our online real estate lead generation system for realtors is an excellent resource for realtors newer to the business who aren’t as well established when the business becomes more competitive again.

That’s always true, but let’s stay on topic and look at what more the survey revealed about changing homebuyer preferences in Canada as they are happening here in the middle of 2022.

Metro For Me Please

Those of us who have no choice but to be in urban areas may be a little astonished that anyone would choose to live here if they didn’t have to, but it seems that mentality is definitely not the norm. Plus, it is important to remember that not everyone who can work remotely is completely free of other factors that necessitate them living in the city. Property ownership, family, and access to care are just 3 of a long list of factors that may be part of a person’s reality too.

The BMO survey came back showing that interest in buying a home in a major city centre has risen 5% since last year. As mentioned above, this is something of a marked change as Canadians began looking beyond the boundaries of large cities for their housing choices. Work-from-home arrangements may have allowed them to do this, and rising home prices in the last two years may have been the impetus to actually go ahead and do it.

Now the situation for many seems to be quite different. It is the city centres that are attracting more interest from buyers, and at the same time the preference for moving further from the city has seen a similar decline. There are other changes to Canadian’s home buying habits lately too, and the results seem to indicate that Canadians have developed a willingness to change their plans in response to rapidly changing housing and housing market conditions.

Finances in Order?

Another consideration here is the way that BoC Interest Rate hikes are slowly but surely bringing down the median prices for homes in these desirable locations. Financial hurdles are always going to have a major impact on the purchase plans for homebuying consumers with regards to what they will buy and when they are looking to buy it. Respondents to the BMO survey said they will likely need to spend more if they choose to buy in the city, but now there may be more value and bang-for-buck in doing so.

It also showed that 68% of respondents were willing to change how much they spend on a home purchase, and around 73% of potential homebuyers even said they are now willing to spend more. The reasons listed for spending more on a home include increased home prices, income growth (individual or couple), and the pandemic realities having increased their personal savings to result in more money available for a down payment on a home.

Around 1/3 of respondents indicated that they expect to pay 10% or less for a down payment and two-fifths foresee relying on help from family to have enough funds, although less of that help being required than might have been the case at this time last year. Perhaps most interesting here is the amount Canadians expect to spend on their homes has gone up 26% in just the last year. This in unision with the average spend coming in at $588,000. Ontario buyers were the highest here with an average expected spend of about $790,000 and they also saw the highest increase (around $200k per home.)

Last but not least, we’re seeing a lot of demand for mortgage pre-approval these days, and that’s not surprising given the promise of even more rate hikes from the BoC. 30% of survey respondents (8% more than last year) said they are already pre-approved to buy. Another 43%3 were aiming to be pre-approved in the near future.

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There have been warnings from economists all across the country that interest rate hikes are going to occur again here in Canada, and they’re going to occur because they need to occur to combat inflation along with more simply getting into line with what rates should be. Long story short they’ve been kept artificially low for a very long time, and while there were reasons for that type of regulation the fact is that the economy can’t be geared for pandemic recovery forever.

Now to be fair, the majority of homeowners in Canada have been smart about buying the home they did, and most of those same people have managed their personal finances in a way that has let them move towards ownership of the home by being able to afford their mortgage and still have the lifestyle they’ve envisioned for yourself. Some may say that in many cases good fortune helped them do that, but to be fair there are a lot of older homeowners who bought their homes in the early 80s when 18% mortgages were the norm.

Will this mean more homes are going to go onto the market? Nearly certainly, but not so certain is whether or not that will be a huge plus for anyone working as a real estate agent. It is always a competitive business and more homes going onto the market won’t necessarily mean an uptick business for any one realtor. What likely will though is use of our online real estate lead generator here at Real Estate Leads. It is proven for helping you be directly in touch with people who are ready to make a move in the real estate market.

Let’s stay on topic though and look at the what the potential fallout of more interest rate hikes as it relates to homeowners making decisions about whether they can afford their homes anymore.

Shades of Early ‘80s

Regarding those 18% mortgages in the 80s, here we are roughly 40 years later with another incompetent Trudeau printing money to the long-term detriment of the economy. But we won’t digress into that, and will only say there are always very real consequences to bad monetary policy when it occurs at the Federal level. While interest rate increases aren’t attributable to that, the severity of their affects on the average Canadian’s budget very much are and some homeowners are about to find they’re that much more over-leveraged with the home they recently bought.

An online survey conducted by Manulife Canada between April 14 and April 20 of this year found that just under 20% of homeowners polled are already at a stage where they’re realizing their home is unaffordable for them, even if they’re currently living in it and managing to make the mortgage payments – for now. That’s because Nearly 1 in 4 homeowners are foreseeing no choice but to sell their home if interest rates go up further.

And that is in the process of happening, with the BoC overnight rate rising by half a percentage point to 1.5% on June 2, and in the response to that more than 1 in 5 Canadians expect rising interest rates to be detrimental with the impact on their overall mortgage as well as debt and financial situation.

Many are in that reality right now, with the three hikes seen so far this year having a significant impact on their household’s monthly cash flow. To give you an idea here, one that had been budgeting $2,600 a month on variable rate mortgage at the start of 2022 would be paying about $400 a month more now as result of the rates rising 125 basis points so far.

Financially Unmanageable

That is a serious amount of money, and it is not the type of quantity that can be made up for by cutting corners elsewhere. This is all an outgrowth of how over the last two or three years, very low interest rates have encouraged many Canadians to take higher mortgages. Unfortunately the same truth as always applies – you need to have a very firm idea of what you can afford, and especially considering that most people will have been advised of the potential repercussions of rising rates.

In fairness, this is something that a good realtor will take the initiative in making their clients understand long before they start making offers on properties. Yes, there is a mortgage stress test and it’s become much more stringent recently. But obviously there are buyers who passed it when in reality they should have had the common sense to pass on homes they can’t afford.

Wave of New Listings?

This creates an age-old situation where some stand to benefit at the detriment of others, and of course with more housing supply available there will be real benefits for people who haven’t been able to get into the housing market so far. But some homeowners will stand to lose their home, and even though that may be in large part their own doing it’s not something anyone should be happy about.

There is a belief that most homeowners should be insulated from a rapid rise in interest rates thanks to that federal mortgage stress test but many of them working with some credit unions or private lenders could be exempt. In these scenarios they may be qualifying for a mortgage rate of either 5.25% or two percentage points higher than their actual rate, whichever is higher.

The reality now is that Canadians who rushed into the housing market during the pandemic on the promise of low mortgage rates at or below 2% should be very clear on the fact that the time to renew is fast approaching with rates around 4% now the norm. This has the potential to double their monthly payments, and of course many simply won’t be able to afford that unless they find some way to drastically increase their income and do it quickly.

1st-time homebuyers who jumped into real estate during the pandemic will likely see these rates rising for the first time and it definitely could be a wake-up call or even a cause for buyer’s remorse. Experts suggest those who are thinking to buy a home and haven’t done so already should ask mortgage advisors about what they should expect for the next three to five years.

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No need to necessarily be an economist to have forecasted that median home prices in Canada were going to go down as a result of the BoC’s inevitable interest rate hikes. Everyone knew this was coming, and of course that includes those who’d stand to be the least thrilled about it – home owners considering selling their home anytime in the near future. That said, the values of said homes in comparison to what most of these owners would have paid for them should be taking a good bit of the sting off anyways.

But going up and going down is what markets do, albeit not with any frequency when it comes to real estate in British Columbia and Canada as a whole. Which is a good thing when you consider how much the real estate industry contributes to Canada’s GDP, and whether or not that’s a good thing in the big picture (it’s not, but we won’t digress). Having homes retain their value increases to a significant extent has been what the informed homeowner will have been hoping for when understanding that the market couldn’t – and shouldn’t – stay that heated forever.

Real estate agents worth their salt will have their thumb on the pulse of all of this, and it is true that even in the ‘best’ of times real estate is a competitive business given how lucrative it can be for people who have the smarts and are willing to put in the work required to be successful. Those who are new to the business may be surprised to find just how competitive it really is, and for these individuals our online real estate lead generation system here at Real Estate Leads is highly recommended.

The typical home price came in at $1,261,100, which worked out to a 0.3% decrease compared to April 2022. This goes along with an annual basis price that represents a 14.7% increase over May of last year. This applies to Burnaby, Coquitlam, Maple Ridge, New Westminster, North Vancouver, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, South Delta, Squamish, Sunshine Coast, Vancouver, West Vancouver, and Whistler.

But back to topic as always, let’s look at the numbers and other noteworthy considerations about median home values have dipped in the Greater Vancouver area and Fraser Valley these days.

Marginal Drop for both Regional Districts

New monthly reports from both the Greater Vancouver and Fraser Valley REBs came a day after the Bank of Canada hiked its interest-setting rate by 0.5% percent on Wednesday June 1st. This was the third increase in 2022, and it brought the central bank’s key rate to 1.5%. At nearly the same time the Greater Vancouver REB reported the next day (June 2nd) that the composite benchmark price for all residential properties went down month-over-month in May.

What this means most pertinently is that the rising interest rates are making many home buyers put a lot more though into making decisions in today’s housing market. We are also seeing upward pressure on home prices beginning to ease in the housing market over the last two months, and even the most ambitious realtor is going to tell you this is absolutely something that had to happen in the big picture, despite what it might mean for folks who have only recently entered the market.

Focus on Coming Supply

Greater Vancouver home sales totalled 2,918 in May 2022, which represents a 31.6% decrease from the 4,268 sales that occurred in May 2021, and a 9.7% drop from the 3,232 homes purchased by homebuyers in April of this year. Add to that the benchmark price of a detached home in the region in May 2022 was $2,093,600, a decline of 0.4% from April while rising 15% from May 2021.

Apartment homes saw a smaller increase, with a benchmark price for this region being $779,700, up 0.4% from April 2022 and 15% compared to May of last year. Attached homes had a typical price in May 2022 of $1,141,200, working out to a 0.6% drop from April 2022 but rising 21.5% up from May 2021.

Statistics for the Fraser Valley REB – which covers Abbotsford, Langley, Mission, North Delta, Surrey, and White Rock – were quite similar although not quite as pronounced. It was quick to note falling sales, despite realtors in the region selling 1,360 properties for May 2022. That number works out to a 16.9% decline from April sales of 1,637, and being down 53.9% compared to May of last year.

Beginning in March, what has been seen is sales coming down with an accompanying increase in inventory. What this has done is provide a much-needed balance and cooling of the heated market and some people believe that the role of big pandemic-era drivers like working from home and record low interest rates may have come to an end now. Let’s hope so.

The price of a typical detached home in the Fraser Valley was an average of $1,712,500 for May, a decline of 2.4% compared to April 2022 while up 26.2% from May of last year. Townhouses in the region came in at $918,900 for townhouses, and that was a decrease of 1.4% compared to April 2022 and a 31.3% increase from May 2021. Apartments came in at $581,400, for the Fraser Valley, which is down 1.1% compared to April 2022 and up 30% in comparison to May of last year.

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