The Future of the Real Estate Market

A large price drop is coming says CMHC

Canada’s federal housing agency predicts home prices will decline by as much 18% this year. The Canada Mortgage & Housing Corp. (CMHC) is concerned for the country’s long term financial stability amidst the higher unemployment rate this year. Its CEO recently announced that one fifth of “all mortgages could be in arrears if the country’s economy hasn’t sufficiently recovered.” He also predicts the nation’s debt to disposable income ratio will climb from 176% now to well over 200% through 2021.

In fact, CMHC doesn’t think real estate prices will start climbing again until the second quarter of next year. The graph below shows the average price of homes up until now, followed by a solid-filled probability range representing the most likely scenario into the future. As we can see the short term outlook is not good for real estate investors.

My opinion

Although I can’t speak for the rest of Canada, I feel a price correction of 18% in Vancouver is probably not going to happen. According to zealty.ca, the median price of homes in Metro Vancouver has been moving up over the past 5 years. The 12 month average did turn negative in 2017 and 2019, but overall the trend is still moving higher. The nationwide lockdown during March and April also didn’t seem to hurt prices too much.

Personally I feel like the worst of the economic pain from the pandemic is over. We will probably see a flat real estate market over the next few months followed by increasing prices near the end of the year. Then in 2021 and 2022 prices will continue to climb by 4% a year as the economy expands and lenders continue to print credit. 🙂 I believe now, during the summer of 2020 is a great time to buy real estate because prices are subdued due to the pandemic. Transactions have slowed so there are fewer buyers to compete with. And interest rates are still in the basement so mortgages are cheap.

Even if there’s a large housing crash around the corner it probably won’t last long as the political will to stimulate the economy is all but certain. So I am not worried.

My plan going forward

Greater Vancouver condo prices have increased on average by 5.5% annually over the last 10 years. Immigration and high paying tech jobs have been largely driving the demand for more shelter within the city. A report forecasts the Metro Vancouver area will have 1.1 million new residents (or 38% more people) in 20 years. The region would require about 500,000 new housing units to accommodate all the new residents.

Another factor pushing up real estate prices is illegal business activity. Apparently B.C. is a magnet for drug money and other illicit businesses. Supreme Court Justice Austin Cullen announced that more than $7 billion was laundered in the province in 2018 alone.

All these trends don’t seem to be going away any time soon. So the long term prospects of real estate investing in Vancouver still makes sense despite everything that’s happened so far in 2020. 🙂 This is why I have decided to begin house hunting once again. This time I’m looking to buy a townhouse, duplex, or something larger. It won’t be just for investment purposes. I could also use it as my principal residence with my potential future family.

One of the most important parts of house hunting to me is to hire a strong and knowledgeable real estate agent.

So I decided to enlist the service of the realtor who helped me buy the rental property in January. She is very proactive and has a lot of experience. Since the real estate business is currently slow, agents have to compete more for fewer clients. So I decided to negotiate the fees in hope of lowering my costs. In the end we agreed that she would give me half of her net commissions, which is nice. 🙂

———————————————————–
Random Useless Fact:

The plural of LEGO is LEGO.