BC Housing Market Forecast

Forecast Highlights

• Housing market activity to remain high
• Affordability for low-equity buyers worsens
• Sales slip lower, price increases slowing
• Tighter rental market
• Soft-landing market adjustment ahead
• Lower-cost markets outperform higher-cost urban markets

Gradual market adjustment ahead

Market conditions are shifting away from a tight seller's market. Considerable market price pressures remain, which has resulted in a balanced market at this time. Sales are off last year's highs and the rate of price increase is slowing. Overall, the sales decline is more widespread geographically than six months ago. Initially, it was centred in the Lower Mainland and Victoria markets, but it has since spread to most other regional markets. Annual sales are expected to fall in most Real Estate Boards, led by Vancouver, Fraser Valley and Victoria. 

Sellers' market conditions are subsiding with the combination of fewer sales and more listings. This means less price pressure going forward. The slowing trend in price increases in evident in most markets.

Housing starts have been trending downward from their high in February 2006. Both single-detached and multi-unit starts in urban B.C. centres are lower.

Demand fundamentals are expected to remain quite favourable for the next couple of years. Stronger income growth is the primary catalyst, along with still reasonable interest rates and modestly higher migration to B.C. Poor affordability among potential low-equity buyers is the main negative going forward.

With no significant slowdown or acceleration in Canada's economic growth likely, little change in the prime lending rate is expected. The Bank of Canada is currently in a holding pattern and would adjust rates downward if growth slows more than expected. Some economists see possible rate cuts in the 2^nd half of 2007 however they may not be as drastic as previously forecast. Should this materialize, it would boost housing sales.

While little or no change in the prime rate is foreseen in the next two years, some movement in longer-term rates is inevitable. Long-term bond yields need to be higher than current levels to normalize the risk-reward relationship. Unless the economy slows substantially, long-term bond yields will not fall any farther beyond temporary fluctuations. This means no decreases in mortgage rates are expected at this time.

The five-year posted bank mortgage rate, currently at 6.65%, is forecast to rise to 7.00% in 2008. This would also mean a 35 basis point increase in the five-year discounted mortgage rate to 5.60%-5.65%.

Purchasing affordability is the poorest since this housing recovery began in 2000. First-time buyers are most negatively impacted by these affordability trends and the outlook sees further worsening in 2007 and 2008, though at a decelerating pace. Higher-equity buyers, mainly existing homeowners and investors, are much less affected by deteriorating affordability because they benefit from rising home prices. Financing options to address affordability have expanded to include zero-down payment mortgages, interest only mortgages, and longer amortization mortgages. While interest rates are higher that before (up approximately 1.00% from 2005), some of these new mortgage features keep monthly payments lower than otherwise.

Rising construction and land costs will prevail well into the forecast period. This will put a floor under new housing prices and push them higher. More listings coming onto the market will help contain price increases. The forecast sees listings at a moderately higher level in 2007 and somewhat slower in 2008.

Total residential sales in B.C. are forecast to dip by 4% in 2007 to 128,000 units and another 3% in 2008 to 124,000 units. This is a gradual decline, in line with the still favourable demand fundamentals. A small increase in mortgage rates and higher prices will further erode affordability for low-equity buyers, but a stronger uplift from income growth and migration provides a solid underpinning to the market.

These forecasts are lower than envisioned six months ago because the current sales decline has been longer and steeper than expected.