The Metro Vancouver housing market is grappling with a number of important factors. Two policy changes at the provincial level and one significant change from the federal government are squeezing demand from both the high and low end of the market. These changes are expected to temporarily depress demand and add some uncertainty to the housing market.
The introduction of a third tier to the Property Transfer Tax earlier this year has crimped the budgets of wealthier households. While it’s easy to argue that a progressive tax is for the public good, the impact on our children and grandchildren will be more severe, as the absence of some form of indexing to inflation will mean more and more transactions with be subject to the tax in the years to come.
|Cameron Muir, Chief Economist, BCREA|
The second policy change was the sudden implementation of a 15 per cent tax on foreign national home buyers. According to government figures, the tax could impact as many as many as 10 per cent of home sales in Metro Vancouver and even more in certain communities. While this tax is unlikely to curb all foreign buying activity, it'll have a discernible impact on housing demand, not to mention new construction activity and related employment growth.
Many first time buyers have just experienced the sharpest decline in housing affordability in years as a result of a third policy change. New rules introduced by the federal government on October 17 mean that home buyers securing a high ratio mortgage must now qualify at the five-year benchmark rate, even if they have negotiated a much lower five-year fixed term rate with their lender. This change will cut millennials’ and other first time and low-equity home buyers’ purchasing power by as much as 20 per cent.
Housing demand isn’t linear. It oscillates, sometimes dramatically. This creates a significant structural problem to housing affordability as the ability of builders and developers to supply the market can either come up too short or else over shoot consumer demand. Over the long term, the housing stock expands in tandem with household growth. However, short-term oscillations in demand can lead to significant under and over supply conditions that have real consequences to home prices, as was experienced earlier this year.
Home sales in the region reached a cyclical high in the first quarter and have been trending lower ever since. While this trajectory is typical in Metro Vancouver, the reversion back to more average consumer demand is being accelerated by the three policy changes noted above. In addition, public perception of market risk resulting from these policy changes is likely magnifying their impact and may contribute to a larger contraction in demand.
Against this backdrop are the powerful underlying forces of population growth and nation leading economic performance, along with the attendant employment growth and a large contingent of millennials who’re now entering their home buying years. This means that slowing housing demand will be a temporary event. Households will retrench their finances, pent-up demand will once again intensify and another cycle of strong demand will undoubtedly unfold.
With these different factors in place, it’s important to talk to your REALTOR® to help you navigate the housing market.