4. Supply

Supply comes from two sources.

1. Existing sales: Existing home sales are sales of ‘used homes.’ They are homes owned by individuals who sell them to upgrade, move for work, or other reasons. The B.C. Real Estate association only reports existing home sales and listings.
2. Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.

Rising supply releases the upward pressure on prices caused by demand.

Months of Supply of Existing Homes

While the total number of homes for sale is a key metric of supply, shown below, the ratio of listings to purchases expressed in months of supply is a better indicator of where prices are headed. This is because months of supply show the relationship between supply and demand. If supply and demand drop together, then the market balance is maintained, and price pressures are unchanged.

Supply has been surprisingly tight throughout the pandemic and is now trending upward.

Mortgage Delinquencies and Foreclosures

According to MNP, roughly 25 per cent of British Columbians are within $200 of financial insolvency.

Antrim, one of the larger private lenders in B.C. has lent $668 million in British Columbia. 1,350 of their mortgages are in Metro Vancouver with an average weighted interest rate of 7%. Most of their mortgages need to be re-approved every 12 months.

“Total consumer debt has climbed to $2.32 Trillion, an increase of 8.2 per cent in Q2 2022 compared to last year according to Equifax Canada’s most recent Market Pulse consumer credit trends and insights report.” - Equifax Canada

Financial distress leads to rushed or forced sales - more supply.

Pre-sales and Completions

New Construction:

Home construction in Metro Vancouver is in line with previous years. Victoria and Kelowna have many more homes under construction than in previous years.

As these projects are completed in the next 18 months, they might come onto a soft market. While many of the homes under construction are pre-sold, their new occupants will be vacating or selling their current residences.

Pre-sales:

Pre-sales are purchases of unbuilt and completed brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before they can start construction, so housing starts are a good indicator of successful pre-sales.

Pre-sales are purchases of brand-new homes from developers.

The below chart provides good data for Vancouver, where the market has cooled significantly.

Victoria is trending above average, and Kelowna is well above average.

Popular Sentiment

Popular sentiment can be volatile and easily influenced by the latest headlines. Sentiment can shift quickly, as witnessed in the past two years.

Canadian Consumer Confidence

The Ipsos-Reid and Nanos Canadian Confidence Index shows that Canadian consumer confidence has improved significantly, and confidence in real estate values has improved. Roughly 45 per cent of Canadians believe home prices in their neighbourhood will rise over the next six months.

Although consumer sentiment is a key factor contributing to real estate price trends, sentiment on its own is not an accurate predictor of future prices.

Conclusion

Here is a quick summary:

• Core demand is weaker because higher interest rates and inflation have eroded home-buying budgets. Also, full-time employment is trending downward simultaneously with record population growth.
• Non-core demand is weaker due to the high cost of rental financing, and the government's imposition of a foreign buyer ban removes some potential buyers.
• Existing supply is rising, and there are record numbers of homes under construction, many of which will complete in the next 18 months.
• Consumer confidence in real estate is mildly negative.

While it is not guaranteed, the current conditions dramatically increase the risk of a major market correction. Abbotsford has already experienced a house price drop greater than 20 per cent since the market peak, which we would consider a major correction.