November Real Estate Update - Detached Decoupling?
“We’ve seen a lot more consistency and less volatility in recent months when it comes to both number of sales and pricing, although it’s important to remember that conditions often vary between communities and neighbourhoods,” - Jake Moldowan, Real Estate Board of Greater Vancouver (REBGV) president.
Well Jake can say that again - at least the second part. The Vancouver West average detached home sale price in October was the highest ever at $2,123,222. Wow. As mentioned in last month's report, the Westside detached market was the anomaly. Its months of inventory index fell again, this time to below 4 months indicating that upward price pressure can be anticipated. Months of Inventory was down for apartments and attached homes as well but in a less significant way.
So what is going on?
One explanation for the detached market's performance might be fixed mortgage rates. Five year fixed rates in October were the lowest they have ever been and this is likely more significant for detached homes. Ironically, the high cost and thus the high mortgage values of detached homes means that low fixed term rates may encourage riskier purchases. We have had extremely low variable rates of late but as an example let's look at a $2m purchase with a $1m mortgage. The risk of a rising interest rate might make this kind of purchase unsettling, seeing as a rise of 2% could add more than $1000/month to the payments. The same $1m mortgage with a fixed interest rate of 3.29% makes the decision much easier - with the certainty that rates won't go up, the purchaser can rest easy. Another explanation could be the continuing influx of Chinese and other foreign money into the Westside market. British Columbia has one of the most attractive 'investor' immigration programs in Canada. For as little as a $200k of investment, an investor can immigrate to British Columbia. With such a low barrier, it is no wonder that the money is flowing and it is flowing to neighbourhoods with so called "top ranked" schools (i.e.: Fraser Institute - whose school rankings I put little stock in). In other words Vancouver West. Vancouver may also have developed a "safe haven" reputation in an otherwise difficult global real estate market. The high prices may actually be creating a positive feedback cycle.
So what does it all mean to me?
So what is going on?
One explanation for the detached market's performance might be fixed mortgage rates. Five year fixed rates in October were the lowest they have ever been and this is likely more significant for detached homes. Ironically, the high cost and thus the high mortgage values of detached homes means that low fixed term rates may encourage riskier purchases. We have had extremely low variable rates of late but as an example let's look at a $2m purchase with a $1m mortgage. The risk of a rising interest rate might make this kind of purchase unsettling, seeing as a rise of 2% could add more than $1000/month to the payments. The same $1m mortgage with a fixed interest rate of 3.29% makes the decision much easier - with the certainty that rates won't go up, the purchaser can rest easy. Another explanation could be the continuing influx of Chinese and other foreign money into the Westside market. British Columbia has one of the most attractive 'investor' immigration programs in Canada. For as little as a $200k of investment, an investor can immigrate to British Columbia. With such a low barrier, it is no wonder that the money is flowing and it is flowing to neighbourhoods with so called "top ranked" schools (i.e.: Fraser Institute - whose school rankings I put little stock in). In other words Vancouver West. Vancouver may also have developed a "safe haven" reputation in an otherwise difficult global real estate market. The high prices may actually be creating a positive feedback cycle.
So what does it all mean to me?
I would say that it is wise not to get carried away. I do not believe that this is a wholesale reversal of an otherwise strong trend downwards. It does mean that those of you who are selling your detached homes might get a little more of a frothy top to the market and pocket some extra capital. The prospect for attached and apartment markets are less rosy - they are likely going to continue to trend down. Ultimately, I also expect the detached market to re-couple and return to a downward trend.
Remember that: “Months of Inventory” is a measure derived from the number of active listings during a given month divided by the number of sales that month. It indicates the theoretical length of time it would take to sell all of the properties on the market if nothing changed. Historically, 0-5 months of inventory has generally implied upward price pressure for the ensuing six months, 5-8 months of inventory meant a flat market with respect to pricing and over 8 months of inventory has, for the most part, precipitated downward price pressure.
Do not hesitate to call me if you have any questions and please pass this and my contact information along to any friends or family that may benefit from my services.
Sam Wyatt - Vancouver Realtor
