This quarter’s Q Report is a study in looking deeper. After nearly five years of co-authoring this publication, our first look at this quarter’s numbers didn’t feel like much to get worked up about. However, as we scratched below the surface, asked more questions, and pushed into the data, we uncovered some interesting points that we are looking forward to sharing with you, our informed and valued readers. Read on.
If you are a returning reader (and you have a good memory), you may recall our discussion of the “base year effect” in previous reports. If you aren’t or don’t, not to worry — we have you covered. The base year effect refers to the idea that when economic statistics benchmark the current year against the previous year (known as the base year), the interpretation of the data can be skewed by a base year which is particularly high (or low), leading to inaccurate perceptions of market trends, growth rates, or values over time.
We have made several advance disclaimers that as we proceed through 2023, comparisons to 2022’s market will likely require some additional interpretation, since this was the MLS® Home Price Index® trend for our market:
Or, to put it another way:
Case in point: first quarter sales for detached homes are showing as being down by more than 25% year over year (Y/Y). Strata sales are even more pronounced, with a drop of more than 35% from last year. We said it was going to look like the market is in free fall. However, the reality is, sales volume is up more than 12% from last quarter for detached homes, and more than 19% from last quarter for strata.
If we take the total of Q1 home sales over the past decade and chart them, we can make some interesting observations:
First, only four years were above the ten-year average, two of which were 2021 and 2022. 2023 is not far off from several other years, most notably 2019, which is often a year we compare to as a ‘pre-pandemic’ reference, and also a year we saw higher interest rates and a relatively slower and flatter market, but not a year that observers were talking about the bottom falling out.
So, as we aim to cut through the noise and tell you what actually happened, we may use tools like alternate base years or long-run averages to show the ways in which the current market is not as bad as the ‘default’ Y/Y comparison model may lead you to believe.
We think it would be a shame to miss the opportunities in a year like this, once you see the reality is not doom and gloom. In fact, it’s a good time to make a move, as long as you’re alive to how the market should be guiding your decision-making. And, our objective in bringing you this report is to create opportunities to personally provide our data-driven service to more of our readers and followers like you.
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Some predictions we made in the past few reports came true this quarter. Mainly, that a far-above-average market in the first quarter of 2022 made this year’s first quarter look dismal in Y/Y comparisons, despite the fact that we may be seeing some early signs of recovery on the way.
Consumer sentiment suffered through Q4, which we believe proved to be the trough of the current market cycle. Uncertainty around pricing and interest rates made it difficult for buyers to commit, which led to the quietest year-end in over a decade.
As we embarked on a new year, the number of new listings coming to market has improved from 2022 but remained below historical norms. For one, investors are not likely to sell around the bottom of a market cycle, and many homeowners who have lower mortgage rates locked in than those currently available are generally preferring to stay put in their current homes rather than upgrade at a relatively higher cost. The result has been low listing inventory, which continues to provide buyers a dearth of opportunities. Buyers have continued to remain sensitive to costs given higher interest rates, and the buyer/seller price stalemate that began last year continued, resulting in the continuation of slower sales, as well as flat prices.
However, those flat prices, combined with signals from the Bank of Canada (BoC) that interest rates are stabilizing, have led to an apparent return of consumer confidence as the spring market begins in earnest.
More buyers ready to buy and a shortage of quality listings have resulted in bidding wars occurring once again for those homes which are well priced and presented. Though buyers have not bid up homes with the same exuberance they did when borrowing costs were less than half of today’s, this dynamic could lead to an increasing price trend if inventory remains low… But how much?
We have mentioned before that tracking months of inventory (MOI) is a great metric which speaks to both supply and demand in one statistic.
The double-digit annual price gains we were experiencing when MOI was pinned around 1 for over a year of ultra-low rates finally broke to provide some welcome relief in the second half of 2022, but extrapolating the current trend, as increasing demand squares off against low inventory, suggests price pressures may be on their way back before too long. If the current drop back to around 2 MOI is sustained, we would be back in a seller-favoured market in which upward pressure could see prices creeping back up by 1% per month by later this year. If interest rates begin to soften, it could accelerate this trend further.
Detached Homes, <$1.5M
The detached home market showed the strongest signs that it may be headed toward recovery leading out of the first quarter of 2023, with both sales and prices up slightly from last quarter, despite being down by double digits compared to last year.
Our take on the largest factor driving even modest increases is the undersupply of homes on the market, as we outlined above. All the talk of lack of inventory has been verified by the numbers and in the shortage of opportunities buyers find available, and in our view this has been a larger obstacle to higher sales numbers than the increase in lending rates that characterized much of the slowdown in the second half of 2022.
In yet another example of the base year effect, we see inventory counts up in every segment of the markets we monitor, year over year, by a large amount — more than double for all property types below $1.5M — however a little more historical context shows that there were around over half of the 10-year average for available detached homes in Q1, and well below the level required for a balanced market.
As a result, we have seen an increase in multiple offers, particularly toward the end of Q1, and shrinking listing discounts. The proportion of sales above asking increased, though only slightly, with around 1 in 5 homes sold in the first quarter fetching above asking.
With many would-be sellers choosing to hold back at this time, it has created an opportunity for those willing to wade in and list their home.
Strata Homes, <$1.5M
The number of condo and townhouse sales increased by one fifth from Q4 2022, though were down by a third from a year ago. Prices, market times, and inventory in this sector have all remained consistent for the last nine months, but like detached home sales, the median sale prices have been falling for almost a year. Strata homes have seen a 10% price dip from peak to trough, compared to detached homes where we measured over 15% Y/Y.
However, the above describes a fall from the peak of 2022 when interest rates were at historic lows. In brief, all signs led to that being (as predicted) unsustainable, thus the ensuing drop off from those highs.
As we see some sustained consistency in the attached homes segment relieving the sense of uncertainty that pervaded the latter half of last year, we expect this will lead to consumers feeling more confident to act in this year’s spring strata market as well.
Luxury Homes, >$1.5M
Our luxury market recorded a higher percentage increase of sales volume than detached homes below $1.5M compared to last quarter, which at face value would come as a surprise to many. Once again, some context gives a fuller picture: the Y/Y drop was precipitous with sales volume dropping by half, a six-figure price slide, and homes spending more than twice as long on market.
Even though we find mortgage rates tend to have less influence on perceived value at higher price points, we expect the luxury segment to remain softer than it was when rates were lower, simply because those ultra-low interest rates temporarily provided access to this segment for a larger population of buyers, whose purchasing power now has them back in non-luxury price categories.
The MLS® Home Price Index® (MLS® HPI®) is purpose-built to gauge neighbourhoods’ home price levels and trends, using more than a decade of sales data and sophisticated statistical models to define a “typical” home based on the value home buyers assign to various attributes on homes that have been bought and sold. These benchmark homes are tracked across localized neighbourhoods and different types of houses. The Q Report’s HPI® trends compares relative regional price movements around Greater Victoria by tracking the HPI® Composite Benchmark Price across 15 districts, comparing Y/Y price changes.
We are looking at a very different HPI map this quarter, with Y/Y HPI Benchmark Price declines almost across the board, and yet another example of base year effects in action.
Movement compared with the previous quarter was much more muted, with a number of districts turning in price changes of less than 1% from winter to spring.
However, even as we see the HPI® benchmark prices in real time stabilizing, the full arc of 2022’s rise and fall tells us that next quarter’s HPI® numbers are almost certain to look even worse, since the HPI® benchmark prices reached their peak in mid-2022.
Even though our own data showed prices peaking earlier, we discovered late in 2022 that the HPI® has been being calculated based on sale prices at completion of sale, not at contract. Because completions tend to lag contracts by several months, we continue to regard the HPI® as somewhat of a lagging indicator until the index is recalculated using more timely data.
At the close of 2022, in our last Q Report, we wondered whether we would see more buyers or sellers entering the market in the new year. As many sellers opt to hang on to their properties rather than take on today’s interest rates, and we see new listings remaining below normal, our answer is in, at least for the moment. This will drag on sales, and unfortunately as long as there are more buyers than sellers, the forces of supply and demand will dictate that there may be little relief on affordability, and a tighter market for buyers and sellers to work in than they may have anticipated after watching listings sit unsold just a few short months ago.
We are heartened to see that the need to build more housing is at least one issue which is garnering not only media attention but agreement amongst politicians at all levels of government, and across the political spectrum as well. By and large, decades-old zoning regulations and the local governments that have continued to uphold them, often at the behest of NIMBY community land use boards, have failed Canadians when it comes to addressing housing diversity, supply, and affordability. The city of Victoria’s leadership position on up-zoning is certain to soon spur followers into action — we only hope to find out it was a step in the right direction through the passage of time. With a shortage of over 400,000 housing starts compared to population on a national scale, it is an avenue worth pursuing.
In the meantime, it is a dynamic and sometimes tricky market out there, and we have seen both rapid and significant changes occur as the world steps out of the COVID-19 pandemic. If you are thinking of making a move in 2023, you owe it to yourself to ensure your representation is fully informed on market conditions and ready to go to work for you using that knowledge toward ensuring a successful outcome for you. We take special care of our Q Report readers — why not give us a call?
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Dirk VanderWal & Fergus Kyne
Newport Realty | Christie’s International Real Estate
(250) 385-2033 | firstname.lastname@example.org
All views and opinions expressed in The Q Report are solely those of its authors, Dirk VanderWal and Fergus Kyne, and do not necessarily represent the views or opinions of Newport Realty Ltd. or the Victoria Real Estate Board. Not intended to solicit parties already under contract. E&OE.
For a list of terms and definitions used in The Q Report, click here.
The Q Report’s analysis includes listing and sales data exclusively from the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) ‘Core’, ‘Westshore’, and ‘Peninsula’ regions. Data is analyzed for unconditional pending and completed sales that occurred between 2023/01/01 and 2023/03/31 except where speciﬁcally noted otherwise.
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