In current market conditions, it’s easy to be consumed by negative headlines on the news speaking to the shift in today’s market. However, it’s rare – and yet crucial – to take a step back and look at the larger picture: one that observes the larger flow of modern-day market cycles. The real estate cycle is a four-phase pattern through which commercial and housing markets move. While it’s important to stay informed on month-to-month changes, it’s necessary to get a clear picture of how the cycle and its four phases of recovery, expansion, hyper supply, and recession work. Whether you’re a homebuyer, home seller, real estate agent, or real estate investor, understanding this cycle will help you predict upcoming trends and make informed decisions. Here, we dive into the historical numbers and give some perspective to any buyer looking at entering the market.
Market cycles and recovering from a downturn
Market cycles have evolved in recent times. In comparing modern to past, a key difference in today’s cycles rests in the typical speed with which information is disseminated. Today’s buyers are increasingly well-informed and inundated with news via a myriad of channels daily. This creates faster changes and reactions than seen in the past. With rising inflation and slowing demand, we are beginning to see the reaction of hesitancy within the Metro Vancouver market. It’s common to be asked: in this market, when is the right time to buy? How long will it take for our market to recover from this downtown? If we look at price alone, we can find two key periods of compressing values in this market: the financial crisis in 2008 and the decline from 2018 to 2020. It took prices about three years to recover from their previous peak. While this may seem like a long time, it’s a shorter timeframe than the typical presale construction period for new homes. With this knowledge, we can assert that even in a declined market, buyers can be confident that the value they lock in at will be consistent with or better than market pricing for new homes when they complete after a buildout of two to three years.
When is the right time to buy?
This is one of the most challenging questions that homebuyers are burdened with. Ultimately, it is best answered on an individual level as each potential buyer has different advantages and setbacks. What can be applied to all those considering a home purchase is the rule that it’s not all about when you buy, but instead about how long you hold onto your investment. As Ryan Lalonde shared in a recent report on the status of the market: time in the market, rather than the timing of the market, is the single greatest natural advantage an investor has. To drive home this truth, we can look to benchmark prices across Metro Vancouver, specifically focusing on the last 10 years.
If you purchased a home at any time during this period, and held onto it for at least three years, you saw, on average, a 22% price appreciation. Despite short term peaks and valleys, the long game still pays off. As with any investment, there are always risks, but as three years turns into four, five, six or more years of ownership, your value of return is even greater. As an additional example, even those who purchased at the previous peak in 2016 have seen a 17% appreciation since their investment was made.
A conversation on the best timing to purchase, and what type of home to purchase right now, would not be complete without addressing construction costs. Construction costs have been steadily increasing and show no signs of slowing. Purchasing a presale home can help offset future increases as the purchase is locked in at today’s construction costs. By purchasing at presale now, a buyer can prevent added rising costs and can benefit from the price appreciation seen during the build out phase. In all likelihood, those beginning a mortgage in a few years when their presale home is complete will find themselves at a more favourable interest rate as rates ease over the next three to five years. Overall, a presale buyer is in a strong position in today’s market cycle, locking in the value and allowing the investment to appreciate during the construction phase.
Watch the August 2022 Pre-Sale Pulse, where Ryan Lalonde, President of MLA Canada, and Suzana Goncalves, EVP of Sales & Marketing, recap both the presale and resale marketplace over the past 30 days.