Rising Mortgage Rates Continue to Slow Market Activity

 

For the complete news release, including detailed statistics, click here.

Vancouver, BC – June 13, 2022. The British Columbia Real Estate Association (BCREA) reports that a total of 8,214 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in May 2022, a decrease of 35.1 per cent from May 2021. The average MLS® residential price in BC was $1 million, a 9.3 per cent increase from $915,392 recorded in May 2021. Total sales dollar volume was $8.2 billion, a 29.1 per cent decline from the same time last year.

“Canadian mortgage rates continue to climb,” said BCREA Chief Economist Brendon Ogmundson. “The average 5-year fixed mortgage rate reached 4.49 per cent in June. That is the highest mortgage rates have been since 2009.”

Provincial active listings were 4.4 per cent higher than this time last year, the first year-over-year increase in active listings since 2019. However, active listings still remain below what is typical for a balanced market, though current market conditions have a high degree of variation across regions and product types.

Year-to-date, BC residential sales dollar volume was down 14.5 per cent to $46.7 billion, compared with the same period in 2021. Residential unit sales were down 26.3 per cent to 43,921 units, while the average MLS® residential price was up 16 per cent to $1.06 million.

Safety and Manufactured Homes Pilot Project: Resources for Sellers and Buyers

 

Between April 11 and October 28, 2022, a pilot project is underway in the Association of Interior REALTORS® Southern Peace area regarding manufactured homes and electrical safety.

Normally, before a manufactured home can be listed for sale,

During the pilot project, sellers of manufactured homes in this area have the option of applying to Technical Safety BC for a variance that will allow them to list their homes before obtaining electrical safety approval. The approval will still need to be in place before a manufactured home can be sold, but the repairs and inspections can be done while the home is listed for sale.

This project is the collective effort of the British Columbia Real Estate Association, Association of Interior REALTORS® and Technical Safety BC.

We urge sellers and buyers to carefully review the following materials and to work closely with your REALTORS® if you decide to participate.

Here are some resources:

How the 2022 Federal Budget Impacts BC Real Estate


Budget 2022 was introduced on April 7 with a significant focus on the supply and affordability of housing in Canada. BCREA was encouraged to hear Canada’s Minister of Finance Chrystia Freeland accurately diagnose the root cause of the country’s housing affordability problem. “Canada does not have enough homes,” Freeland said. “We need more of them, fast.”

New spending towards housing totalled $10.1 billion, which – apart from climate change and Indigenous reconciliation – was the largest area of new spending in the budget and demonstrates that the government is beginning to seriously prioritize tackling Canada’s housing crisis.

Below is an overview of new commitments in the budget that may impact BC’s real estate sector.

Housing supply

Many commitments made to increase housing supply align with BCREA’s ongoing advocacy. The largest of these commitments was a new Housing Accelerator Fund, which will invest in municipal housing planning and delivery processes to speed up developments. Existing infrastructure programs will now tie infrastructure funding to actions by provincial and local governments to increase housing supply, which BCREA called for in our pre-budget submission. Additionally, more funds are being allocated to the National Co-Investment Fund, which will expand co-op housing.

There was also a commitment to launching a Multigenerational Home Renovation Tax Credit, which will allow families to claim 15 per cent (up to a $7,500 credit) in eligible renovation and construction costs incurred to construct a secondary suite for seniors or adults with disabilities.

Several proposals within the budget specifically target housing supply for Indigenous Canadians, including the initiation of an Urban, Rural and Northern Indigenous Housing Strategy.

Assistance for First-Time Homebuyers

The budget also increases much-needed incentives for first-time homebuyers, through a new Tax-Free First Home Savings Account. Beginning in 2023, it will give prospective first-time homebuyers the ability to contribute up to $40,000. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, while withdrawals to purchase a first home would be non-taxable, like a Tax-Free Savings Account (TFSA). In addition, the First Time Home Buyers’ Tax Credit will be doubled to $10,000, retroactive to homes purchased on or after January 1, 2022.

Home Buyers’ Bill of Rights

The budget also re-affirmed the government’s commitment to introduce a Home Buyer’s Bill of Rights. This would include a national plan to end “blind bidding” as well as possibly include a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches. While we support the intent to protect homebuyers, independent research shows that banning “blind bidding” would likely lead to higher prices in a hot real estate market.

Reducing Foreign Demand

The budget committed to introducing legislation designed to reduce foreign demand in real estate. The legislation would prohibit non-Canadian citizens or permanent residents as well as non-Canadian commercial enterprises from acquiring non-recreational, residential property in Canada for two years. We are concerned this measure needlessly targets non-Canadians, creating barriers for attracting foreign investment, and will potentially result in reciprocal policies from other countries targeting Canadian “foreign” owners.

Other demand-side measures

In addition to targeting demand from non-Canadians, the government will also conduct a review of housing as an asset class to better understand the role of large corporate players in the market and the impact on renters and homeowners. They will also introduce legislation to introduce an “anti-flipping tax” beginning January 1, 2023.

Energy Retrofits

Another core aspect of the budget was new commitments to improve the energy efficiency of homes. These include strengthening affordability and energy efficiency requirements within the Rental Construction Financing Initiative, developing a Canada Green Buildings Strategy, creating the Deep Retrofit Accelerator Initiative and expanding tax deductions for business investments in clean energy equipment to include air-source heat pumps. These initiatives are designed to reduce Canada’s greenhouse gas emissions reductions targets of 40 per cent below 2005 levels by 2030.

While there are several proposals that raise concern in Budget 2022 and require further consultation, detail and scrutiny before implementation, overall, BCREA is encouraged that the federal government is taking initial steps to tackle the country’s affordability crisis.

Mortgage Rate Forecast

To view the Mortgage Rate Forecast PDF, click here.

Highlights

  • Long-term interest rates head back down on Russian invasion
  • Elevated inflation set to stick around a little longer?
  • It begins – the Bank of Canada is raising rates, but where will they stop?

Mortgage Rate Outlook
The last several months have seen a high degree of volatility in global bond markets as interest rates were whipsawed by the combatting forces of the Omicron variant, escalating inflation and, most recently, the Russian invasion of Ukraine. While the pandemic and global events are adding uncertainty to global financial markets, the driving force behind the longer-term rise in interest rates remains the elevated level of inflation across major world economies and global central banks’ reaction to that inflation. Consumer price inflation reached a 30-year high in January at 5.1 per cent (year-over-year) and Canadians’ expectations for the rate of inflation has more than doubled. The latter is particularly concerning for the Bank of Canada as expectations becoming unanchored from the 2 per cent inflation target risks a feedback loop from rising expectations to wage demands to current inflation that will be challenging to break. As a result, the Bank of Canada has adopted a more aggressive schedule of rate increases than was expected just six months ago.

Canadian fixed mortgage rates began increasing toward the end of 2021 and have now risen back to their pre-pandemic level of 3 per cent while variables rates, which move in lock-step with the Bank of Canada, are now also on the rise. Our view is that the Bank will continue to increase its overnight rate until it reaches the pre-pandemic level of 1.75 per cent, which implies a variable rate of 3.25 per cent by 2023.

We expect five-year fixed rates will rise to about 4 per cent over the next year and a half. However, uncertainty in global financial markets due to the Russian invasion of Ukraine could significantly delay Bank of Canada rate increases and may cause a reversal in the upward trend in long-term rates, a scenario we saw play out in the first week of the invasion with five-year bond yields falling 30 basis points.

Growth Outlook
The Canadian economy finished 2021 with significant momentum, growing close to 7 per cent on an annualized basis in the fourth quarter and growth appears to be stronger than expected in the first quarter of 2022, tracking at close to 4 per cent. On its current trajectory, that growth would lead to slack in the Canadian economy being completely absorbed within the first six months of 2022 and a positive output gap (more demand than supply) developing over the year. Generally, a positive output gap is somewhat inflationary, though a healing supply chain may help attenuate shortages that have placed upward pressure on prices over the past year. Tightening monetary policy by the Bank of Canada should slow demand and help to bring inflation down, though that will take time. Rising oil and commodity prices caused by the Russian invasion of Ukraine also present a risk of high inflation persisting longer than expected.

Bank of Canada Outlook
With the Bank of Canada embarking on its first rate-tightening cycle since 2018, it is important to ask: where is the Bank’s policy rate headed?

When thinking about where interest rates will land in the long term, economists often use models of the so-called “neutral rate of interest,” usually defined as the interest rates that would prevail when the economy is in its long-run equilibrium.

Based on estimates from the standard model for the neutral rate of interest, the neutral rate is currently about 0.25 to 0.5 per cent in real terms, or 2.25 to 2.5 per cent in nominal terms given the Bank’s 2 per cent inflation target. This aligns with the Bank of Canada’s official estimate of 1.75 per cent to 2.75 per cent as a range for the neutral rate. That increase would ripple through other Canadian interest rates, which means a higher cost of borrowing for Canadian banks and lenders, and therefore higher mortgage rates. Under a scenario where the Bank of Canada returns its overnight rate to a neutral rate of 2.5 per cent, we can estimate a “neutral” five-year fixed mortgage rate by building up from the overnight rate using historical averages of interest rate spreads. Doing so implies a neutral five-year fixed mortgage rate of between 4 and 4.6 per cent, which would mean a qualifying rate of 6 to 6.6 per cent. Our baseline forecast is for the Bank to pause and re-assess its monetary stance after six rate increases, bringing its overnight.

 

Sales Activity Remains Strong Heading into Spring

For the complete news release, including detailed statistics, click here.

The British Columbia Real Estate Association (BCREA) reports that a total of 8,902 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in February 2022, a decrease of 18.8 per cent from February 2021. The average MLS® residential price in BC was $1.109 million, a 24.9 per cent increase from $887,866 recorded in February 2021. Total sales dollar volume was $9.9 billion, a 1.5 per cent increase from the same time last year.

chart

“While sales are not keeping pace with the unprecedented level of activity we saw this time last year, demand continues to be quite strong,” said BCREA Chief Economist Brendon Ogmundson. “There are some encouraging signs that listings are recovering from historical lows, but there is a very long way to go before markets achieve balance.”

Provincial active listings were 19 per cent lower than this time last year with the total inventory of homes for sale in the province at just 16,000 units. That level of inventory is well below the roughly 40,000 listings needed for a balanced market.

 

 

CLI Dips in Fourth Quarter 2021

To view the full Commercial Leading Indicator PDF, click here.

The BCREA Commercial Leading Indicator (CLI) fell to 149.7 from 150.6 in the fourth quarter of 2021, representing the second consecutive decline since the economy began recovering from the recession induced by COVID-19. Compared to the same time in 2020, the index was up by 3.8 per cent.

The CLI dropped in the fourth quarter due to declines in the financial and employment components of the index. The decline in the employment component of the index was driven by a 4.1 per cent decline in finance, insurance, and real estate (FIRE) employment and a 6.2 per cent decline in professional services employment. Workers in sales and services occupations drove much of those declines, with workers in this subsector down 6 per cent from two years prior as the economy adjusts to the post-pandemic reality. The drop in the financial component of the index was driven by the rising spread between government and corporate borrowing rates. This spread on 3-month bonds jumped from 5 to 15 basis points in the fourth quarter as investors demanded higher risk-premia over government treasuries for lending to firms.

The economic component of the index was flat from the prior quarter. Although wholesale trade rose 0.7 per cent and manufacturing sales rose 1 per cent from quarter three, these were offset by a 0.8 per cent decline in retail trade. Ongoing supply chain disruptions, Omicron lockdowns and a shifting composition of consumer spending continues to hold down growth in these economic variables driving the CLI.

It is important to note that while the BC economy generally continues recovering strongly, the environment for commercial real estate remains highly abnormal and uncertain. Although the CLI was designed to interpret specific sectoral activity and employment growth as positive indicators for commercial real estate demand, the recent strong growth of these indicators may not translate as readily into improved conditions in the commercial real estate market relative to the pre-pandemic period.

Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets

Vancouver, BC – January 18, 2022. The number of home sales in British Columbia is expected to fall and home price growth will moderate because of rising interest rates according to a new report from the British Real Estate Association (BCREA) examining the potential impacts of the Bank of Canada’s rate tightening widely expected this year.

BCREA’s Market Intelligence report, Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets, was written by the association’s Chief Economist Brendon Ogmundson and explores both the historical impacts of the Bank raising its policy rate and a number of scenarios likely to play out in BC’s housing market as a result.

“In the past, Bank of Canada tightening has usually led to falling home sales and flattening home prices, so it wouldn’t be a surprise to see the same happening in the upcoming round of tightening” says Ogmundson. “Based on previous trends and our model simulations for what might be to come with respect to rates, we have outlined a number of likely scenarios in this report.”

The Bank of Canada has signaled that in response to elevated Canadian inflation, it will begin raising its policy rate or “tightening” monetary policy this year. The impact of this type of action on housing markets is generally predictable, however, with BC’s housing markets currently undersupplied with record-low numbers of active listings, the impact on prices may not be as significant.

“With markets so out of balance, we expect home price growth to slow but to what extent depends on the final rate destination for the Bank of Canada and for Canadian mortgage rates,” adds Ogmundson. “Our model simulations show only a minor impact on home prices in the first two years following the Bank raising its overnight rate.”

British Columbia set a new record for home sales last year with 124,854 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in 2021, a 32.8 per cent increase from the 94,001 units sold in 2020. For more economic analysis from the British Columbia Real Estate Association visit bcrea.bc.ca/economics.

Commercial Leading Indicator Dips in Third Quarter 2021

 

 

The BCREA Commercial Leading Indicator (CLI) fell from 155.4 to 150.9 in the third quarter of 2021, representing the first decline since the economy began recovering from the COVID-19-induced recession. Compared to the same time last year, the index was up by 9 per cent.

It is important to note that while the economy generally continues recovering strongly, we are still in a very abnormal and uncertain environment for commercial real estate. Therefore, the strong economic and employment growth we have seen in previous quarters may not translate directly to improved conditions in the commercial real estate market.

The CLI declined in the third quarter due to a drop in the economic activity component of the index, which was the result of lower manufacturing sales. That decline in manufacturing was primarily due to a reversal in lumber prices following their historic run-up in the first half of the year. The economic activity component of the CLI was also negatively impacted by an 8.3 per cent decrease in wholesale trade, while retail sales declined 1.5 per cent primarily due to a 5.5 per cent quarterly decline in motor vehicle sales as a result of the ongoing semiconductor chip supply shortage. These negative economic factors combined to drive the quarterly decline in the CLI.

Employment in key commercial real estate sectors such as finance, insurance, and real estate (FIRE) increased in the third quarter, rising by 2,000 across the province to a record high for the sector. As a result, for a fourth consecutive month the office employment component of the index hit an all-time high. However, the effect of this strong employment growth on the demand for office space remains unclear as many nominal “office workers” continue to work remotely. Manufacturing employment also remained essentially flat in the third quarter.

The CLI’s financial component made a positive contribution to the index for a fourth consecutive quarter, while REIT prices hit fresh records. Risk spreads between corporate and government debt remained very tight.

To subscribe to BCREA news releases by email please click here.

Send questions and comments about Commercial Leading Indicator to:

Ryan McLaughlin
Chief Economist
rmclaughlin@bcrea.bc.ca
604.366.6511

The Increasing Cost of Misconduct (#544)

Prior to September 30, 2016 the Real Estate Service Act (Act) limited monetary penalties for brokerages and licensees to $20,000 and $10,000 respectively. However, as of September 30, 2016, the Legislature amended section 43(2)(ii) of the Act to allow for monetary penalties of up to $500,000 in the case of brokerages and $250,000 in any other case. In previous articles, I wondered when we would start to see the impact of these increased penalty limits. A review of the most recent discipline decisions of the BC Financial Services Authority (BCFSA) (formerly the Real Estate Council of BC) suggests that time is now.

Here is a list of some of these recent decisions revealing significant monetary penalties, suspensions and license cancellations:

  1. A licensee, by way of consent order, was given a six month suspension with a discipline penalty of $16,268 and enforcement expenses of $1,500.1

  2. A licensee’s license was cancelled with a prohibition against reapplying for a minimum of two years.2 In addition, the licensee was ordered to pay their clients $17,015 in commissions received and a further $1,500 in enforcement expense.

  3. A licensee whose licence had already been under suspension for four years was prohibited from re-applying for a new license for an additional year, was required to pay a discipline penalty of $45,000 and $50,000 in enforcement expenses.3

  4. A licensee had their license cancelled with no ability to reapply for five years, a discipline penalty of $23250 and enforcement expenses of $51,563.4

What can be learned from these decisions?

The enforcement expenses of the last two examples were significantly higher because they went to a full hearing rather than resolution by consent order. In the latter two cases, the Discipline Committee posted written reasons for the sanctions and penalties imposed which provide some insight into how appropriate sanctions and penalties are arrived at.

Although the facts and circumstances of each individual discipline case differ, the BCFSA has published Sanction Guidelines which assist individual Discipline Committees in their deliberations and decisions.

The Sanction Guidelines make it clear that the overriding principle behind licensee discipline is the protection of the public by:

  1. Discouraging misconduct
  2. Preventing future misconduct by specific licensees through
    1. corrective measures
    2. punitive measure
  3. Preventing future misconduct by other licensees through example

The Sanction Guidelines also suggest that a Discipline Committee may consider a variety of aggravating and mitigating factors including:

  1. Licensees age and experience
  2. Discipline history
  3. Nature and gravity of misconduct
    1. did misconduct involve fraud, dishonesty or deception
    2. vulnerability of affected persons
    3. was conduct knowingly, recklessly or wilfully blind to rules or standards
    4. duration or pattern of misconduct (ie. isolated or repeated, pervasive or systemic)
    5. if and to what extent licensee has obtained or attempted to obtain a financial benefit
  4. Extent of harm to client or public
  5. If licensee relied on legal or professional advice
  6. If the licensee has
    1. acknowledged and accepted responsibility
    2. voluntarily taken measures to compensate or mitigate impact on others

Consequences are not just monetary

In addition to the discipline cases cited above, there were several qualification hearings where an applicant must convince the BCFSA that they were “of good reputation and suitable to be licensed.” It is apparent from these decisions that becoming licensed again after a period of cancellation is by no means a certainty. One was refused5, and one was accepted on their second attempt with a series of significant restrictions6 (ie. direct supervision, weekly reporting to their managing broker, prior approval of managing broker before providing some real estate services and quarterly reports from managing broker to BCFSA).

It is apparent from these recent decisions that the cost of misconduct is increasing. Of course, the simplest way of avoiding disciplinary problems and the possibility of significant fines, suspensions or even license cancellation is to know the law, the Act and the Real Estate Rules, to keep abreast of changes to BCFSA guidelines and policies and to always conduct yourself in a manner that is beyond reproach, particularly with vulnerable clients and consumers. In addition, it might be instructive to review the BCFSA discipline decisions as they are released to give you an idea of what conduct is unacceptable and what sanctions and penalties you might expect if you engaged in such conduct. Remember that one of the underlying principles of licensee discipline is so that licensees might learn from the mistakes of others.

Finally, if you are found to have conducted yourself inappropriately, acknowledge and accept responsibility for your actions and hope that BCFSA will choose to address your misconduct through corrective rather than punitive measures.

  1. BCFSA Consent Order June 9, 2021 Lau
  2. BCFSA Consent Order October, 22 2021 Ayala
  3. BCFSA Discipline Decision September 13, 2021 Bratch
  4. BCFSA Discipline Decision September 22, 2021 Chonn
  5. BCFSA Qualification Hearing September 16, 2021 Applicant 2
  6. BCFSA Qualification Hearing September 16, 2021 Applicant 1