Real estate drop doesn't make it a buyers' market yet

What does the housing market slowdown mean for buyer choice and affordability? A financial expert weighs in

Real estate has been the investment of choice for generations, and Metro Vancouver has been a gold mine for residents in the last decade.

Reports say 76 per cent of national wealth is tied up in real estate, which is fine as long as housing prices are moving higher but it can be downright dangerous if the real estate market bubble is bursting.

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Canada’s housing market is in a funk. Locally, the price drop we have seen is still failing to ease Metro Vancouver’s housing crisis. In our city, the number of homes sold has also plummeted and home prices continue to fall. Some are recognizing the drop, while others refuse to believe it’s as severe as it is.

What does that mean for affordability?

If you’re interested in a house over $1 million, you will need at least a 20 per cent down payment due to CMHC insurance requirements. Given that the average home is $1.4 million in Vancouver, you’ll need $280,000 down with a $1.12 million mortgage. To qualify for this, your household needs to have annual income of at least $250,000 and you’re looking at a mortgage payment of $6,700 per month or more. In other words, you need to be in the top two per cent of income earners to buy an average home.

Are we currently in a buyers’ market?

Although there was a drastic drop in the number of sales, with prices following closely behind, we don’t think that we are in a buyers’ market quite yet. Since the market has moved significantly higher over the last several years, with the exception of 2018, we still think the market still has a long way to go (even lower!). Some analysts believe there’s potential for a lost decade in Vancouver, which could lead to alarming domino effects for the local economy.

Effect of interest rates, debt levels and recessions

While interest rates are currently on hold, we saw a sharp climb up from 2017-2018. Historically, we are still well below the average, and there is always potential for them to move higher over the years. With Canadians effectively maxed out on debt, any higher rates, or a recession that puts a squeeze on jobs, could lead to many households struggling to make their monthly payments.

Either of these scenarios could cause home prices to drop even further. Bankruptcies and delinquencies have climbed already. Even with mortgage rates on hold for now, people should be wary of taking on too much debt with a softening economy.

Buying versus renting?

For those who live in Vancouver, it might make sense for some to rent rather than buy, often on affordability alone. Buyers of an average condo in Vancouver pay $900 per month more relative to renting, which often means renting is more within one’s budget. For some Vancouverites, it may make more sense to hold off on buying anyways and rent for a while until this market finds a bottom. Housing declines can last years, and you may not want to enter the housing market too soon and watch your investment decline in price.

So what do you do with your money?

With the amount of home sales running at least 30 per cent below last year, buyers’ fears are real, and so are the concerns of industry professionals. With the majority of home prices down anywhere between 10 per cent to 20 per cent year over year and the possibility to fall further, it is best to weigh your options. The good news is that if you do have cash on the sidelines, there are other places to find growth on your assets. Other investments have been able to provide much better returns compared to real estate. GICs, bonds and stocks – all have outpaced real estate in 2019, and in my opinion will continue this trend going forward.

Outlook for real estate 

Vancouverites are accustomed to major gains on their real estate investments, and many expect growth that just isn’t sustainable. If you are currently looking to buy, you likely have time to wait for prices to bottom. If you are looking to sell, the peak has passed and may not return for a while so prove your property accordingly. If you can earn a decent rate of return on other investment solutions while you sit on the sidelines, it may be a good time to evaluate your options and talk to a financial expert today.

Lori Pinkowski is a senior portfolio manager and senior vice president at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or pinkowski@raymondjames.ca. You can also listen to her every Wednesday morning on CKNW at 8:40 a.m.

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