April 24, 2023 Macroeconomics at Force in the Market Today

While the real estate market in British Columbia can sometimes appear frustratingly complex, there are always a few significant macroeconomic factors that pull the largest strings and shape the industry’s trajectory most boldly. Whether seeking to build, buy or sell this year, these factors hold the key to making informed decisions. MLA Canada’s Director of Advisory, Saket Ayala, dives into the top macroeconomic influences on BC’s housing market right now.

Interest Rates: On hold for now, but how much longer?

“You would typically expect some level of resurgence in a spring market... it’s a huge bump up from what we were experiencing last year, so it’s definitely a sign pointing in the right direction.”

No market participant is going to be surprised that the current interest rate rises to the top of the list of influential market factors. Interest rates play a crucial role in determining the health of the economy and can significantly impact consumer confidence in a myriad of ways. Over the past few months, stability in interest rates has contributed to a noticeable uptick in the market. While there are valid arguments that this increase could be attributed to the regular seasonal spring boost, the market is certainly experiencing some positive momentum. “You would typically expect some level of resurgence in a spring market,” shared Ayala, “but it’s a huge bump up from what we were experiencing last year, so it’s definitely a sign pointing in the right direction.” There is always an underlying level of baseline household transactions driven by factors such as family changes and immigration, but for the past two quarters the transaction levels have been below this baseline, creating pent-up demand. Two months ago, Ayala says, we would have been more optimistic and asserted that the end of the rate hikes was near. Now, we’re taking a more conservative outlook. “There’s a lack of correlation between the monetary and fiscal policies in the country right now. With increasing expenses and a lack of increased taxation, the fiscal policy of the federal government seems to be at odds with the efforts of the Bank of Canada. On the one hand, we’re spending more money, and on the other, we’re trying to reign in inflation. We’re not being as aggressive as we can be to really curtail inflation, and that will ripple throughout the market.”

Employment Rates:  BoC Warns Canada’s Low Unemployment Rate Needs to Rise Before Interest Rates Can Decrease

“Canada as a whole and particularly the Toronto and Vancouver markets have been moving away from being an income-based real estate market for a while now”

“Canada as a whole and particularly the Toronto and Vancouver markets have been moving away from being an income-based real estate market for a while now,” says Ayala. “Instead, investor sentiment has emerged as a more powerful force in driving the industry.” What we’re really looking at here, he asserts, is the relationship between employment rates and interest rates. The Bank of Canada has warned that Canada’s low unemployment rate will need to rise before interest rates can decrease. Unfortunately, we're currently at odds with that milestone; Canadians are increasingly returning to work due to the rising cost of living, forcing people to work more to make ends meet. So, while employment rates affect interest rates, the effect on the housing market is more indirect when compared to investor motivation.

Population and Immigration Growth: Fuelling Demand in Metropolitan Rental Markets

“As the market evolves and the numbers start to make more sense for investors, it is likely that we will see additional investors entering the market, particularly on the pre-sale side, where a combination of those factors is driving increased investor confidence”

When speaking of metropolitan centres such as Vancouver, we’d be remiss not to reference the impact population growth and immigration have. In 2022, Canada added more than one million people to its population. Approximately half a million of those were new permanent residents gained through immigration. So, while the influx has expanded the workforce and boosted economic growth, it also threatens to worsen shortages of housing. Most immigrants do not purchase a house within their first 12 months in the country, but they still need a place to stay, which drives demand in the rental market. Although the growth in rental rates has slowed now compared to the meteoric rise of the past, it remains steady and is not expected to decrease anytime soon. For investors, increased rental rates help offset the rising holding costs of real estate assets such as mortgage costs and significant property tax increases. While many purchasers in British Columbia may not be seeking a cash-flowing property as their first priority, they do look for opportunities for capital appreciation and rental income offset. “As the market evolves and the numbers start to make more sense for investors, it is likely that we will see additional investors entering the market, particularly on the pre-sale side, where a combination of those factors is driving increased investor confidence,” noted Ayala.

Consumer Confidence: Sentiment Balances on Cautious Optimism

“We need more supply, and we need government policies at every level to support that.”

“Consumer confidence, particularly in the presale market, can be described using two words that have been floated around a lot recently: cautious optimism,” said Ayala. Many consumers realize that purchase prices are unlikely to drop significantly, and the market has stabilized after the fluctuations seen during the pandemic. Since February 2022, there has been a 25% contraction in prices, but they remain 20 to 25% above pre-pandemic rates. The current balanced market is slowly leaning back towards a seller's market slowly, especially in places like Vancouver, where there is a lack of supply. “We need more supply, and we need government policies at every level to support that.”

Government Policies: Too little, too late, too recent to determine Meaningful Impact

“Steps to increase density really should have been taken five to seven years ago to have a significant impact on the current market. The movements we see now will take years to change the supply-demand imbalance.”

Attempts have been made to address supply issues and constraints in the real estate market through government policy. Vancouver’s Broadway Plan, for example, aimed to streamline the development process and increase density. However, the plan faced backlash from the public and was amended, limiting the number of rental development proposals accepted per year. “Steps to increase density really should have been taken five to seven years ago to have a significant impact on the current market,” lamented Ayala. “The movements we see now will take years to change the supply-demand imbalance.” The First Home Savings Account, introduced in the latest federal budget, is seen as a step in the right direction as it offers potential homeowners an opportunity to save significantly for their initial down payment. The Provincial Government’s recent introduction of the Real Estate Development Marketing Act allows developers to market their projects earlier, providing more leeway in a rapidly changing space. However, it's still too early to determine the full impact of these varied pieces. Overall, the effects of government policies on the housing market might not be felt for a few years, and the presale market will be the first to feel the shifts from any changes.

As the interconnected macroeconomic pieces continue to evolve, it is essential to stay informed and be prepared for the ever-changing market dynamics. By examining their impact, potential investors, buyers, and sellers can better understand British Columbia’s nuances and make informed, profitable decisions. For a deeper look into the market, keep an eye out for the soon to be released MLA Black Book, which will provide detailed data from the first quarter of 2023.