This is my first blog of 2017. As in past years I’ll summarize what I think the new year holds for us. I’ll cover:
Global Economic Climate
BC Economic Climate
How Economic Factors Affect our Real Estate Market
Trends We Expect This Year
As we enter 2017 the global economy is on an improving trend. The US economy is continuing to build momentum and separate itself from other developed nations by reducing stimulus and increasing its overnight rates. Despite Brexit, and continued sovereign debt concerns, the European Union is chugging along with a GDP growth forecast of 1.5% for 2017. China continues to tweak its monetary policy to reduce capital outflows and is forecasting a 6.5% GDP growth. The risks to an accelerating global economy remain mostly political. With the wave of protectionism time will tell whether trade agreements continue to broaden the greater economy or if isolationist policies will reduce growth potential. Free trade is especially important for emerging markets as rates of growth in developed nations remains around 2%.
As a small player on the global stage, the larger global economy drives our local economy. With a favourable US exchange rate, continued strong migration, low unemployment, and one of the most desirable places in the world to live, it’s no surprise BC continues to lead Canada’s economic growth. The good news is this isn’t expected to change in 2017. Total BC migration as forecast by Central 1 is 1.4% for 2017. Forecast oil prices of around $50+/- USD are expected to keep the CAD/US exchange rate around $0.75US, which will continue to drive BC exports and support our growing Tech and Tourism sectors. The spinoff of a strong BC economy is that retail sales are expected to grow from 6% to 7% this year as consumer confidence remains positive.
How Economic Factors Affect our Real Estate Market
It doesn’t take a genius to figure out that a healthy economy translates to a healthy real estate market. This continues to be the case especially after a record setting year in total number of housings units sold, and value appreciation. There were approximately 112,500 home sales in 2016 with an average 8.6% increase in sales price province wide. The Lower Mainland Home Price Index (HPI) increased a remarkable 26.6% in 2016. While the drivers of real estate remain solid for 2017, the forecast is a for a reduction in the number of overall home sales by 12%. The reason? Monetary policy.
The Department of Finance and the Office of the Superintendent of Financial Institutions (OSFI) continue to limit access to mortgage financing in an attempt to cool Canada’s red hot housing market. The recent policies to toughen access do nothing to address the issue of affordability or supply in Vancouver. A prime example from last Tuesday; CMHC announced due to increased capital reserve requirements imposed by OSFI and the Department of Finance, CMHC and other private mortgage insurers (Genworth and Canada Guaranty) are increasing insurance premiums on March 17th. Premiums will increase modestly from 3.6% to 4.0% for those putting 5% down. The largest hike in insurance premium will be for borrowers who are putting 15% to 20% down. Insurance premiums will increase a whopping 55% from 1.8% to 2.8% for those financing between 80% and 85% of value. We suggest anyone planning a low down payment secure their insured approval prior to March 17th. Regardless of the changes, Central 1 forecasts around 100,000 unit sales in BC this year, which reflects the impact of recent mortgage rule changes on an otherwise robust economy. Overall, it’s still a great forecast!
While the Feds focus on tougher guidelines to slow the market, we express kudos to the BC Government for stimulating much needed supply. Last year the BC Govt. changed Property Transfer Tax thresholds to encourage builders to build new homes for less than $750,000. In doing so these new homes qualify for a PTT exemption – a competitive advantage over the re-sale market. We also support the launch of BC Housing’s BC Home Owner Equity Participation Program (BC Home Program) which provides a 5 year interest free 2nd mortgage to help first time homebuyers by matching down payment to a maximum of $37,500. After the 5 year interest free period, the 2nd mortgage must be amortized over the remaining 20 years at the first mortgage interest rate plus 0.50%. Down payment remains a challenging obstacle for first time buyers.
As we enter 2017 we still see an undersupplied market. Listing inventory remains extremely low with developers playing catch up. Housing starts are expected to be 28,000 in 2017 after recording 32,000 starts in 2016. We have been in an undersupplied state as a result of conservative monetary policy requiring a high number of pre-sales, lengthy delays for re-zoning and issuance of permits which has exacerbated population based demand over the last 6 years. The good news is that the continuation of the high number of housing starts should help balance pricing in the most active segment of the market, $3.0M and below. As we started to see in the fall, we expect luxury markets in the $3.0M+ range to continue to see fewer sales as the foreign buyer surtax puts pressure on this segment. We have seen fewer Westside and West Van sales which has helped drop the average Greater Vancouver Benchmark price to $897,600.
As for interest rates; we expect the Bank of Canada to keep its overnight rate unchanged in 2017. We expect posted mortgage rates to remain within 0.25% of current rates. Of course, interest rates can change in a heartbeat based on a number of factors, this forecast is based on available information. One trend that emerged last quarter is as cost of funds increased we only saw a reduction in the discount being offered by our lenders, there was no change in their posted interest rates. I believe this is due to mortgage qualifying being tied to the Bank of Canada Benchmark rate which is an average of the Big 5 posted rates. By reducing discounts and keeping the posted rates the same, qualification isn’t affected by minor fluctuations in the bond market.
Trends We Expect This Year:
Government and monetary policy continue to be the biggest factor controlling our market.
Capital market volatility to remain as we navigate the unchartered waters of the new Trump administration. This is particularly true if trade with the US or NAFTA is unwound.
Families will continue to help each other buy in the GVRD . We are seeing more and more family members co-sign or provide gifted equity.
Mortgage lending to continue to be tight and confusing to the public. With new terms “insured/insurable” versus “un-insurable” best available interest rates can vary by as much as 0.50%.
The GVRD to remain under-supplied in 2017 with prices increasing slightly. We don’t see any collapse on the horizon despite what the media says!
Thanks again for your amazing support in 2016. We look forward to another healthy and happy year helping clients to find their best mortgage and to build net worth through Real Estate. We hope to hear from you soon!