In January of this year, our Advisory team made predictions around what 2024 might hold in the yearly MLA Intel Report. As we pass the halfway point of the year, we will soon release this year’s Black Book, our comprehensive mid-year market update. In the evolving dynamics of real estate in the Lower Mainland, we’re taking a moment to look back. Where did our predictions land in the current reality of 2024? What did we foresee, and what surprised us? Here, we look at how today’s market compares to our forecasts at the start of the year.
Presale: A Tough Year Forecasted
In our January Intel Report, we anticipated a challenging year for the presale market. The forecast highlighted critical issues: plummeting housing affordability due to sharp price increases and rising mortgage rates, sticky construction costs, and difficulties in acquiring and developing land due to the changing policy environment. These challenges were further compounded by municipalities imposing higher fees on new developments. We expected that well-capitalized developers with strong financial and realtor relationships would outperform less established builders. Particularly, developers with older land bases and multi-phased, master-planned communities were expected to navigate the market's difficulties more effectively.
Presale: Resilient Launch Activity Amid Sluggish Market
As 2024 progresses, the presale market continues to experience sluggish activity. Potential homebuyers remain hesitant, and developers face difficulties in achieving financial viability for their projects. However, the overall launch activity has shown resilience, with the number of new projects expected to match or exceed those in 2023. The second quarter witnessed the largest release of inventory since mid-2022, with 19 presale projects launched in May alone, introducing 2,228 units to the market—nearly four times the number compared to the same period last year.
This influx of new projects brought diverse absorption trends across the region. Despite the surge in project launches, the absorption rate remains lower than expected at 18%, attributed to current market conditions and the timing of these launches. Developers are balancing several factors, including holding costs, keeping construction crews and in-house teams active, hedging against future construction cost increases, managing financial partner expectations, and staying ahead of competitors.
A significant development affecting the market was the Bank of Canada's reduction of its key policy rate by 25 basis points to 4.75% on June 5th. This adjustment, while not transformative, represents a key step forward and a boost in short-term morale. The rate cut offers some immediate relief to variable rate mortgage holders, increases new buyers' purchasing power, and sparks optimism among those waiting for a positive shift in market sentiment.
Purpose-Built Rental: Past Projections Positive
The 2024 Intel Report predicted significant impacts on the rental market from the federal GST relief on new rental housing construction, introduced in September 2023. This move, potentially coupled with reductions in provincial sales taxes, was expected to catalyze development in the purpose-built rental housing market. Shifting policies by both federal and provincial governments underscored the growing recognition of the need for significant increases in housing supply.
While we attributed pressure for rentals to factors including immigration and a growing subset of foreign students attending Canadian post-secondary institutions, we didn’t expect these elements to go away. Additionally, those unable to afford homeownership at higher interest rates were expected to opt for renting until they could purchase a home. Despite these motivators for purpose-built rental projects, high interest rates and rising costs were anticipated to pose challenges for developers. We postured that developers with rental projects under construction would likely continue building but might adopt a ‘wait and see’ approach before proceeding with approved developments.
Purpose-Built Rental: High Demand And Modest Rent Growth
The current rental market in the Vancouver area is marked by sustained and high demand, though the explosive rent growth observed in 2022 and 2023 has leveled off. Vacancy rates remain low. New rental projects are stabilizing quickly, typically within three to six months. Despite robust demand, rent growth has moderated over the past six months. In 2023, average rents saw a nearly 10% annual increase, but this year, rental rates at newly completed projects have remained relatively flat. The median monthly rent has appreciated by a modest 2.1%, rising from $2,320 to $2,370 by June.
As noted, the significant rent appreciation last year was driven by strong immigration and high barriers to home ownership, including elevated prices and interest rates. This "front-loaded" growth has led to the current stabilization in rent rates as they align more closely with wage growth. The rental market, more closely tied to real income than the presale market which is driven by wealth and accumulated equity, has potentially reached a soft ceiling where rental appreciation cannot far outpace wage growth.
So far this year, the market has shown us both anticipated challenges and unexpected trends. While the presale market grapples with sluggish activity and lower absorption rates, the rental market experiences a stabilization in rent growth, aligning more closely with wage increases. As we move forward, monitoring key metrics such as interest rates, employment rates, and legislative changes is crucial. We remain optimistic about the long-term prospects of the market, anticipating that demographic and population trends will continue to support those willing to bring housing supply into the market.
For a more thorough and data-driven analysis of 2024’s market at its halfway point, stay tuned for 2024’s Black Book, coming soon.
