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Central 1: Caution as pandemic shifts towards greater normalization

Bryan Yu, The Business Examiner, Aug 30, 2021

BRITISH COLUMBIA – It is no secret that housing prices have surged across BC and throughout Canada. Since the onset of the pandemic, average MLS® home prices in Canada have increased 25 per cent with BC 23 per cent higher.

What is often missed, however, is a detailed perspective of urban area performance. MLS® data published by the Canadian Real Estate Association and local real estate boards is current and valuable to assess the current state of the market and resale inventories.

However, data is generally aggregated at the real estate board level (of which there are 11 in BC) and combines data from multiple urban and rural markets. One would be hard pressed to find data on Cranbrook which is covered by the broad Kootenay real estate board, or Parksville, or Prince Rupert. In the case of Metro Vancouver, the region is split between two distinct real estate board areas (the Fraser Valley Real Estate Board and Real Estate Board of Greater Vancouver) which further complicates analysis.

This note drills below the surface and compares price performance during the pandemic among BC’s Census Metropolitan Areas (CMAs) and Census Agglomeration (CAs). Rather than MLS® data, we employ statistics compiled by Landcor Data Corporation from BC land title transfer information to assess strength based on median price growth.

Specifically, we compare the three- month moving average of seasonally- adjusted median resale market prices for June 2021 and February 2020 for both all sales and detached home sales. This smooths out some monthly volatility. However, as land title transfer data tends to lag market activity (and MLS® trends) by up to three months, actual price growth during the pandemic is understated but captures peak market activity observed in early 2021 and pre-pandemic activity.

Leaders And Laggards

Not surprisingly, strong price growth was evident across nearly all urban markets in BC given the smoothed median resale value rose 20 per cent from early 2020 to $688,250. Low mortgage rates, pandemic era demand for space, drove demand and prices. That said, some markets stand out more than others

Based on our calculations, the top five markets for price growth were:

Chilliwack: up 41 per cent to $694,400
Prince Rupert: up 36 per cent to $374,350
Nanaimo: up 33 per cent to $620,350
Courtenay: up 32 per cent to 606,900
Salmon Arm: up 31 per cent to $494,000

In contrast, low (and negative) growth performance was observed in:

Dawson Creek: down 18 per cent to $268,000
Terrace: down 3 per cent to $321,300
Fort St. John: down 1 per cent to $326,000
Victoria: up 5 per cent to $705,800
Cranbrook: up 11 per cent to $335,000

Broadly, markets outside the major markets outperformed. While caution is warranted given thin market activity in some small urban areas, the data is consistent with a number of pandemic themes.

More working professionals have exited the largest urban markets due to work from home, fanning into suburban areas and across the province in search of slower lifestyles and larger homes while earning metro area incomes. Meanwhile, households unable to travel invested domestically in vacation homes.

We do not know how many people relocated to these markets given a dearth of timely regional population data, but strong interprovincial migration and robust housing markets point to a wave of demand for both owner- occupied dwellings and for investment purposes. Small urban markets, which typically experience little population growth in most years and minimal housing supply overhang were ill-equipped to adapt to the surge. In some markets, major project activity and commodity shifts have impacted overall demand and price trends.

With gains in the 25 – 40 per cent range, it has not been abnormal to see price growth exceeding $100,000 over the past 16 months in markets like Salmon Arm, Courtenay and Squamish among others. Regions with less of a recreational angle grew at a more moderate pace.

In comparison, the median value in the Vancouver CMA was relatively more modest at 15 per cent over the period and four per cent in Victoria, although the latter drag from the influential condo markets weighed. That said, detached home sales activity points to a similar pattern, although gains in larger metro markets were considerably more robust.

The pandemic surge in home values has tipped price levels above $500,000 for the majority of urban areas based on our calculations. Prior to the pandemic, the median price exceeded $500,000 in seven of BC’s 24 CMAs and CAs. The latest data shows this has increased to 14 regions.

Final Thoughts and Implications

The rapid acceleration in home values has been spectacular and far reaching in BC with demand in nearly all markets lifted by the shift in pandemic era demand but driven largely by the province’s smaller recreational communities. Once affordable communities have become out of reach for many buyers due to inflows of both new residents and the emergence of more recreational buyers, amplifying already existing housing stress in these markets.

While prospective buyers are enjoying exceptionally low interest rates, the rapid increase means significantly less buying power already constrained by the existing mortgage stress test which sits at a qualification rate of 5.25 per cent. For buyers at the margin, higher prices require a larger down payment to bridge the gap.

The outsized gains in smaller markets are eyebrow-raising and there are increased risks of a more severe rollback relative to large metro markets, although lack of housing supply remains a support for valuations. Metro markets can count on stronger long-term growth due to international immigration.

For smaller regions, the question is whether the new demand sticks and if population growth and recreational demand is permanent and self- reinforcing and a driver of local economic activity. Permanent work from home is unlikely as firms increasingly mandate hybrid work, which could require employees remain in commutable distance. As work pivots back to the office, the draw of smaller urban areas is likely to decline. Individuals could change jobs, either joining full remote opportunities or work in the local area, but the supply of employment is likely to be a constraint. Recreational property buyers may also shift gear as broader borders re-open, leading to divestiture of domestic property.

While smaller regions have experienced unprecedented housing demand during the pandemic, caution is warranted as the pandemic evolves and shifts towards greater normalization. While this may be a new normal and require rapid supply side measures, demand could also shift quickly.

Full Report here.