BCREA revises housing forecast: price fall stops, house sales to surge 10% in 2010
BCREA release – As part of its Spring 2009 Housing Forecast, the British Columbia Real Estate Association (BCREA) reported today that housing market conditions have improved more rapidly than expected. As a result, BCREA has revised its home price forecast upwards, reflecting greater price stability through the balance of the year. The average Multiple Listing Service® (MLS®) residential price in British Columbia is forecast to decline 8% to $420,600 in 2009, instead of 13% originally forecasted at the beginning of the year.
“The majority of the decline in home prices has already occurred,” said Cameron Muir, BCREA Chief Economist. “Balanced markets are emerging in Victoria, Vancouver and the Fraser Valley. There’s now little downward pressure on home prices in these areas.”
Home sales in the province have climbed out of a trough, posting double-digit percentage gains for three consecutive months (seasonally adjusted).
BC MLS® residential sales are forecast to decline 12% to 60,755 units this year, as a result of a weak first quarter. However, stronger consumer demand is expected to continue for the balance of the year and through 2010. Residential sales in 2010 are forecast to climb 10% to 66,740 units.
Affordability reached a three-year high in April with lower home prices and record low interest rates reducing the carrying cost of the average priced home 24% over the last year.
“A significant increase in affordability has brought many first-time buyers into the market,” added Muir. “First-time buyers were largely absent in the late fall and winter, making it more difficult for move-up buyers to sell their current homes. The chain of ownership is now being oiled.”
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Full report follows.
BRITISH COLUMBIA REAL ESTATE ASSOCIATION HOUSING FORECAST SPRING 2009
HOUSING MARKET STABILIZING
Residential unit sales on the Multiple Listing Service® (MLS®) in BC are forecast to decline 12% to 60,755 units this year, largely the result of a weak first quarter. However, home sales have climbed out of the trough recorded during the winter months, posting double-digit gains for three consecutive months on a seasonally adjusted basis.
Despite the recessionary environment, home sales are now more in line with expectations. Home sales going forward will likely mirror the level experienced at the beginning of the decade, before the most recent bull market.
Recent elevated sales activity is expected to continue for the balance of the year and through 2010. BC MLS® residential sales are forecast to climb 10% to 66,740 units next year.
Housing affordability has improved markedly. The combination of lower home prices and record low mortgage interest rates has reduced the monthly carrying cost of the average priced home 24% over the last year. Housing affordability is now at a three year high.
First-time buyers were largely absent in the late fall and winter months, making it more difficult for move-up buyers to sell their current homes. The increase in affordability has now brought many first-time buyers back into the market, thereby oiling the chain of ownership.
Increased consumer demand combined with a downward trend in the number of homes for sale has improved market conditions. Balanced markets are now emerging in Victoria, Vancouver and the Fraser Valley, with the interior markets likely soon to follow.
The forecast for home prices has been revised upwards to reflect stronger market conditions. The average BC MLS® residential price is forecast to decline 8% to $420,600 this year. Most of the decline has already occurred and relatively stable prices are expected to filter out from Victoria and the Lower Mainland into the interior over the balance of the year.
ECONOMIC OUTLOOK
Weak demand for commodities, continuing problems in the financial markets and lower asset prices are expected to restrain the economy again this year. After contracting 0.3% last year, real GDP growth in the province is forecast to decline 2.1% in 2009, and then climb 2.2% in 2010.
Demand for BC resources is unlikely to markedly improve until 2010. However, early signs of rising consumer confi-dence are emerging. BC MLS® home sales have posted gains in three consecutive months on a seasonally adjusted basis. Low interest rates are making big-ticket items more affordable and will likely provide a boost to consumer spending during the second half of the year. Improvement in retail sales will be a strong signal that recovery in the economy is underway.
Employment growth is expected to remain tepid for the balance of the year as firms continue to curb expenses and adjust to lower demand levels. Employment in the prov-ince is forecast to decline 2.6% this year. Resource extraction, manufacturing, construction and transporta-tion will be the hardest hit, while health, social services and education will be the brightest lights on the job front. The unemployment rate is expected to average 7.5% this year, well above the 4.6% recorded in 2008. However, previous recessions have induced much higher unemployment rates. Next year the unemployment rate is forecast to decline to 6.6% on the strength of higher commodity prices, Olympic related tourism, in-creased construction activity and stronger retail sales.
Despite weakness in the economy, BC households are far-ing much better than those in the US. The average weekly wage is expected grow at a much slower rate both this year and next. However, with low price inflation, workers will unlikely experience a decline in their purchasing power. In addition, more than 45% of recent home purchases in the US involved a distressed sale, and 7.88% of mortgages were in arrears. In contrast, Canada is also experiencing an increase in mortgages in arrears, but were a relatively tame 0.39% at the end of the first quarter. Mortgages in arrears in BC were lower than the national average, reaching 0.29% in March.
HOUSING STARTS
BC home builders have dramatically pulled back construction. Housing starts in the province’s urban areas were down 70% Jan.-Apr. compared to the previous year. Weak consumer demand, rising inventories of complete and unsold homes and tighter credit conditions have many builders concentrating on inventory reduction rather than increasing production.
Housing starts in the province are forecast to decline 52% to 16,600 units this year, the lowest annual total since 2000 when just 14,418 residential units were started. The largest declines will occur in multiple unit construction, where complete and unsold units have increased most rapidly. Multiple housing starts are forecast to decline 56% to 10,200 units this year. Singledetached housing starts are forecast to decline 42% to 6,400 units in 2009.
A slower expansion of the housing stock will enable the overhang of new home inventory to draw down. Reduced new construction also helps underpin home prices as the total number of homes for sale, both new and resale, trends lower. By 2010, builders are expected to begin increasing production as rising demand, lower inventories and a signals of recovery in the economy focus their attention on market opportunities.
MORTGAGE RATE FORECAST
Canadian home buyers have benefited from sharp declines in mortgage rates this year. The posted one-year borrowing cost on a fixed term mortgage fell to 3.9% at the end of April, marking a 170 basis points (bps) decline since the end of 2008. The five-year fixed term mortgage rate fell to 5.25%, down from 6.5% during the same period. Rates are now at the lowest level on record, precluding any discounts often offered by lenders (Fig. 1).
BCREA forecasts posted mortgage rates to remain nearrecord low levels before rising in 2010.
A weak economy and moderate risk of inflation in the near future has set the stage for a continuation of low mortgage rates in the next year. The global economy remains mired in the deepest recession in the post-World War II period.
Households and businesses have cut back on spending and investment, impacting global trade flows and confidence around the world. Lower US demand for Canadian produced goods like vehicles, auto supplies and lumber coupled with drops in commodity prices have weakened export volumes, while declines in domestic demand have created excess capacity in Canada’s economy and job losses.
These factors have lowered price levels, particularly for products such as gasoline and vehicle leasing and purchasing. Consumer price inflation fell to 1.2% in March, down from a high of 3.5% in August 2008 and below the Bank of Canada’s (BOC) target of 2% (Fig.2). As a result, the BOC lowered its target for the overnight interest rate on April 21 to 0.25% in a further effort to stimulate the economy. The BOC also stated in its Monetary Policy Report that this rate would hold until the second quarter of 2010, contingent on its inflation outlook.
Variable mortgage rates, which generally move in lock-step with the prime and hence the overnight rate, have essentially dropped to the lowest level possible with the latest rate decline. Fixed term mortgage rates which are closely related to bond yields and deposit rates of similar maturity, are expected to remain stable near current levels before rising in the first quarter of 2010 when expectations for an economic recovery and higher price inflation yield higher expected future interest rates. In the meantime, gradual improvements in credit market conditions should lower the cost of mortgage market funds raised in capital markets, providing modest downward pressure on mortgage rates during the next two quarters.
REAL ESTATE BOARD OF GREATER VANCOUVER
The Vancouver housing market is exhibiting strong signs of improvement compared to the beginning of the year. While the global recessionary environment continues to loom, housing demand increased for three consecutive months through April. The market is now expected to show stability for the balance of the year.
A marked improvement in affordability is inducing many first-time buyers to get off the fence and enter the market.
At the beginning of April, the carrying cost of the average priced home was 26% less than a year ago, and the lowest in more than three years. The combination of lower home prices and record low mortgage interest rates is pushing up demand. The re-emergence of first-time buyers is helping to grease the chain of ownership. As a result, moveup buyers are now better able to sell their own homes and complete on their new purchase.
MLS® residential sales through the Real Estate Board of Greater Vancouver are forecast to edge down another 5% this year to 23,500 units. This reflects the extremely low sales level at the beginning of the year. A much higher number of sales are expected through the balance of this year and through 2010. MLS® residential sales are forecast to increase 9% to 26,000 units in 2010.
The imbalance between supply and demand that was experience in the fall and winter months has waned. Market conditions have improved from a buyers to a balanced market over the first four months of the year. This means that going forward there will likely be little downward pressure on home prices. The average MLS® residential sales price is forecast to be down 9% to $540,000 this year. However, most of the decline has already occurred and greater price stability is expected for the balance of the year. A sharp pullback in housing starts this year will also moderate expansion of the housing stock and keep the overall inventory of homes for sale more closely in line with demand.
FRASER VALLEY REAL ESTATE BOARD
The Fraser Valley housing market is expected to reach balanced conditions by the end of spring this year. MLS® residential sales have improved markedly from the winter months on a seasonally adjusted basis. The imbalance between supply and demand that led to falling home prices has narrowed considerably.
Despite higher sales activity this spring, the low level of sales recorded at the beginning of the year will pull total sales in 2009 lower. MLS® residential sales are forecast to decline a further 8% this year to 11,600 units. However, stronger sales activity is expected for the balance of the year and through 2010. Total MLS® residential sales are expected to climb 10% in 2010 to 12,700 units. Historically low mortgage interest rates have magnified the impact of lower home prices on affordability.
Heading into the spring market, the carrying cost of the average priced home was 24% less than a year ago. This is equivalent to a 24% decline in home prices at last year’s interest rate. Housing affordability in the Fraser Valley is at a three-year high and many first-time buyers are taking advantage of this boost.
The average MLS® residential price is forecast to decline 9% to $395,000 this year. However, most of the reduction in home prices has already occurred. The Fraser Valley is expected experience relatively stable home prices through the balance of the year.
Housing starts are forecast to pull back dramatically this year. Rising inventories and tighter credit conditions will curb residential construction in 2009. As a result, housing starts in the Abbotsford CMA are forecast to decline 52% 615 units. A slower expansion of the housing stock will have a positive impact on home prices as the combined inventory of new and resale homes trends lower.
