'Severe' disruption needed for big price drop on Metro Vancouver homes, says economist
Sales are down, but Central 1 Credit Union's chief economist says prices won't see a big drop
The latest real estate numbers show a decline in sales last month, but so far, that has barely budged the benchmark price of local homes.
In fact, the cost of a home in Metro Vancouver is up by nearly 30 per cent over last year.
So when will buyers looking to get into the market see movement on prices?
On The Coast host Stephen Quinn spoke to Central 1 Credit Union chief economist Helmut Pastrick for his thoughts on that question.
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With a slowdown in the market, why haven't we seen a decline in prices?
We've seen the rate of increase slow considerably. Earlier in the year we saw the rate of increase in the benchmark price on the order of 30, even 40 per cent.
That has now slowed into the 20 per cent range and it looks like it's going to head towards zero in the next few months. There's always some lag between changes in sales, market conditions and changes in prices.
And what's it going to take to see broader declines in prices in the next little while?
I think it would take something more severe. The market disruptions we're seeing due to these policy changes I think will result in a mild market adjustment.
Obviously we've seen unit sales decline and some pricing pressures ease and turn slightly into negative territory. Conditions for a major price correction, which we have seen in the past, typically are associated with economic recession.
Yesterday, the federal government announced it would increased scrutiny for homebuyers applying for a mortgage, including implementing a "stress test." What do you see will be the impact of that?
The stress test will have the greatest market impact. In fact, on this end here [at the credit union], we're scrambling to reduce our housing forecast for 2017 as a result of that stress test.
Earlier this week, the federal government announced all insured mortgages will have to undergo a "stress test" that ensures a borrower's ability to make their mortgage payments at a higher rate of interest.
It means borrowers will be tested against their ability to pay their mortgage if actual rates were as high as the big bank's five-year posted mortgage rates, which the Bank of Canada says currently average 4.64 per cent.
Won't it shut out middle-income earners trying to buy a house, meanwhile, a foreign investor who doesn't mind playing a 15 per cent premium can go ahead and buy anyway?
Yes, that would be the case, and I would also add to that, this policy by the federal government is applied on a national basis, and I think there's a good argument to make to only have those policy measures apply only to overheated markets such as Vancouver and Toronto and not to other markets that haven't experienced the same type of excesses.
What do you expect from homebuyers and sellers in B.C., in light of this news, and in light of the steps both levels of government are taking to cool down sales?
There'll be some uncertainty. We'll see some potential buyers hold off, and people who want to list properties will probably hold off. Once we get a sense of the full impacts, I think we'll see market participants begin to come back to some degree.
I think this market disruption phase will last three to six months or so and then we'll be into this new environment with stress tests and new regulations on foreign buyers and the like, so I don't expect to see a major, major correction.
With files from CBC Radio One's On The Coast
This interview has been condensed and edited for length and clarity. To hear the full interview, click the audio labelled: 'Severe' disruption needed for big price drop on Metro Vancouver homes, says economist