Government Interventions In The Real Estate Market Will Continue To Have Undesired Consequences.
During the spring market of 2022, the government has announced radical changes will be introduced into our real estate market. The most impactful is a seven-day rescission period. The pending change creates the ability for a buyer with an accepted offer to change their mind within 7 days of the offer being accepted. Not because a subject condition on the contract was not met, any rhyme or reason will suffice. The pending statute law will remove the previous common law of best efforts from every buyer in every real estate transaction moving forward. Not only will there be a whim and fancy clause, but the new rules will have an undesired effect of enabling buyers to enter into a contract to purchase on multiple properties, thus exacerbating the already abysmal supply issue.
Delving into the issue of whether the real estate markets need to be cooled. The REBGV (Real Estate Board of Greater Vancouver) detached average sales price has increased 29% since July 2020, however the market has only increased 13.6% since the January 2016 price point of $1.817M. During October the detached market was able to surpass the $2M price point for the first time, after spending 7 months inside of a $70,000 price channel. The average price flirted with breaking the upper echelon of the prolonged uptrend, however with the historically low inventory created a scenario where values had no choice but to surpass the $2M barrier, finishing October with an average sale price of $2.064M
As Eitel Insights has stated many times over the years, not all areas are created equal. This is showcased by the varying degrees of market increases and decreases compared to their previous market highs. Historically lagging markets became market leaders, and historical market leaders turned into laggers. Exemplified by areas such as Maple Ridge, Port Coquitlam, Squamish, and Sunshine Coast all increasing over 30% higher compared to the previous peaks. In contrast areas such as Vancouver West and West Vancouver are still down double digits compared to their individual previous peaks. In total 12 out of the 20 areas which comprise REBGV average sale price points have not exceeded a 10% increase compared to their individual highs from 2016 - 2018.
An area where the market has increased dramatically is the FVREB (Fraser Valley Real Estate Board) in which the average sales price has increased by 38% since the previous high in April 2018 of $1.138M to $1.577M in October 2021. All of the 38% increase has occurred since July 2020, due to the work from home movement which is not a reoccurring market factor but rather a pandemic born influence.
The areas that had the lowest price of entry have increased the most during the Covid market. The knee-jerk reaction of the government to step in and unilaterally create imposing measures on every seller will ultimately have an undesired affect. The already low level of 3,525 active listing in REBGV and 1,795 in FVREB during October 2021, is the lowest October data point on the charts. The ability of nefarious buyers to tie up properties will inevitably lead to more government interference of an otherwise free market due to the fact they will need more rules to counteract the rules they are about to put in place. With the potential for buyers to tie up multiple properties on any given weekend, and the ability to request price reductions at the 11th hour of day number 6 of rescission, it will not take long before the sellers begin to voice their displeasure of the unbalanced rules.
The Greater Vancouver Condo Market still sits -1% below the January 2018 high of $751,632. While values have increased just 10% from July 2020. The current values in 13 out of the 19 markets are still below their individual previous peak values.
Rescission period measures have been in the presale condo market for years now, but to compare a presale building with months of advertising before their multiple units are for sale in addition to the numerous interested investors and homebuyers is not comparable to a resale condo or detached property single properties.
In the presale market, it is commonplace for the purchaser to place multiple non-refundable deposits in order to hold the property until possession is ready. Another undesired affect of the upcoming rule changes will be as the seller does not have the ability to receive a subject free, firm and binding contract. Sellers will begin to only accept offers that come in with a non-refundable deposit, which does not form part of the purchase price. Governments are supposed to look at the best interest of all groups, not just one side of the market, in this instance, the buyers. This will force the sellers to begin to look after their own interests which will create an even more combative market environment.
Past government roadblocks to increasing prices, such as the Foreign buyer's tax, did have an immediate albeit short-lived impact. Case in point, from July to August 2016 values decreased by $245,000 month over month. After the initial impact, values returned to hit their previous all-time high during May 2017. The government saw foreign buyers as being the detrimental force for housing affordability. That ultimately sent foreign buyers to purchase Canadian companies which had real estate holdings, or created bare trusts with their Canadian family members. According to BCREA, the foreign buyers were only 0.56% of the overall purchasers during 2020, yet prices rose with gusto.
Fast forward to the throws of the Covid 19 pandemic and the mortgage market had many prospective buyers looking to take advantage of the lowering interest rates. That led to the Bank of Canada stepping in and creating a Mortgage bond purchasing program to alleviate the secondary mortgage market to the tune of $8.3 Billion, thus enabling the secondary market to purchase the primary mortgages from the national banks. The government continually flip flops from imposing measures to enable affordability but then flip to protecting current homeowners.
A free market will go through natural highs and natural lows derived from true market factors. The environment we find ourselves in now is, the continuation of contrived markets. Rather than meddling with market factors, one notion is to help create the missing middle asset class. If local cities and municipalities were to allow for more townhouses, duplex or Vancouver special property development, the market would cool on its own volition due to the increase of choices. With Greater Vancouver predominantly spread between detached and condo properties the desire for housing to accommodate a growing family forces buyers, into the detached market that much quicker without the ability to go from condo to townhome or duplex and ultimately into the highly desired detached market.