At the highest level, supply and demand set house prices and all other factors drive supply or demand. The five key factors are core demand, non-core demand, government policy, supply, and popular sentiment.

In the long run, the market is fundamentally driven by economic forces, but sentiment can drive prices beyond economically sustainable levels in the short run.

Summary

Core and non-core demand are much lower than in the past.

Currently, the prime drivers of the market are high rates and negative consumer sentiment, both of which put downward pressure on home values.

1. Core Demand

Core Demand is a function of:

• Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in a household.
• Home Price Growth: Changes in the market value of the desired home.
• Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
• Financing: Your maximum mortgage is calculated using income (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments). Local employment (unemployment) levels factor into this because you need a job to qualify for a mortgage.

Population Growth

B.C.’s population is almost always growing, but the growth rate is essential for our analysis.

If population growth is the same or lower than in the past, then there is less upward pressure on prices.

After a pause in 2020, B.C.'s population growth is back on track and making up for lost ground during the pandemic.

Canada has set record-breaking immigration targets, and it would appear they have met 2022 immigration objectives. Curiously, full-time employment has not been growing at the same pace as population growth.

As recession fears grow, we might expect Canadians to be less open to such high immigration targets in a weak jobs market.

Home Price Changes

Price growth reduces affordability and reduces the pool of qualified potential buyers. In an ironic twist, this means rising prices create downward pressure on prices. This is a factor for first-time homebuyers trying to buy an entry-level apartment.

As a rule of thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.

According to RBC Royal Bank, homeownership costs in Vancouver were 90% of the median household income, whereas, in Victoria, ownership costs were 67%. In other words, B.C. home prices are above sustainable levels according to long-term economic fundamentals.

Savings-Equity

Equity

Existing homeowners benefited from price appreciation, so they have more home equity to use when buying another home.

A recent softening in the market has eroded some of this equity, but not enough to have a significant impact.

Condo-to-House Price Gap

A large gap means more savings and mortgage financing are needed for condo owners to upsize to a house.

B.C. house values rose more quickly during the pandemic than condo values. In the past few months, the gap between house and condo prices has narrowed. A narrowing price gap helps to

Spencer Kumo

Spencer Kumo Personal Real Estate Corporation 🇯🇵 | Award-Winning REMAX Crest Realtor | Vancouver & Burnaby Real Estate Expert As a dedicated and award-winning Realtor with REMAX Crest, I specia....