Well, it has been an interesting quarter in Victoria real estate, to say the least. The current numbers demonstrate clearly that we are now past the peak of the market, which continues to cool as interest rates ascend.
At press time, we are still seeing multiple media outlets reporting that prices have continued to rise even as sales volumes have conspicuously slowed, but these headlines are based on HPI® Benchmark prices, not on the totality of reported sales. Read on for our Market Breakdown and HPI® Trends features to see what actually happened (hint: it wasn’t prices going up), and make sure you’re subscribed for future editions to stay better informed.
OPPORTUNITIES: Q2 2022
As the market shift continues into summer, here are the areas of opportunity we see for players in the near-term market:
Luxury & Single Family: Slower sales and marked price declines in certain areas have opened up opportunities for buyers who found themselves shut out earlier this year. For instance, we tracked median sale prices in Fairfield tumbling from a high of $1.9M in Q1 down to below $1.5M heading into Q3.
Cash is King: In tandem with the point above, if you aren’t beholden to banks at 5%+ interest, now is a great time to take advantage of increased selection and pick up what you want on discount, without worrying about carrying costs.
Condos: The condo market still has a healthy ratio of sales to active listings, and everything near entry-level price points remains in sellers’ market territory. If you’re contemplating a move up, this could be a time of opportunity.
Local Moves & Move Ups: With values softening, sellers willing to price to the current market (and still enjoy large equity gains of the past two years) can still put together a sale, and if done quickly, negotiate a closing window that could give them the potential benefits of increased inventory and softer prices later in the year to make their subsequent home purchase.
Smaller Multi-Unit Residential: We picked up a particular price trend among Quadriplexes that have recently sold, with average prices less than $1.5M, the per-unit cost of acquisition is down to around $365K/unit, $457/sqft — which is a fraction of the cost of adding condo units to your portfolio in the current market.
Land Assemblies: With recent market dynamics, we have seen an explosion of land assemblies, most notably in the Westshore. As buyer demand softens and prices follow, we see a prescient opportunity for forward-thinking developers to secure land assemblies at comparatively favourable prices over the coming quarters. With around a three-to-four year window from purchase to completion, the timing could be nothing short of ideal.
Do you want to explore your best opportunities in today’s changing market? Contact us today for your no-obligation, confidential consultation.
As we continually make it our mission with The Q Report to tell our readers clearly and concisely what actually happened in each quarter we analyze, it’s clear that the top story at this point in time is the market shift we are seeing at home and around the developed world. We have entered a phase where buyers are collectively asking themselves, ‘should I really be competing to pay that price? What’s it going to actually cost me on a monthly basis if interest rates continue to rise?’ Many sellers are reacting to reduced interest for their offerings with a similar hesitancy, and being forced to re-adjust their expectations.
Slowdown? Price drops? What’s going on?
What makes current trends noteworthy is the sheer speed of this shift, as well as the widespread repetition of the same story playing out in real time in thousands of local real estate markets, which generally operate somewhat independently, subject to local forces. Today, we are seeing how deeply local real estate markets are in fact interconnected to global economic impacts.
The last edition of The Q Report did a deep dive on inflation, which continued to rip past decades-old records over the course of Q2 on the heels of international markets struggling to meet pent-up consumer demand for goods and services that has exceeded pre-pandemic levels, not to mention the ongoing Russian invasion of Ukraine and its spillover effects. As the primary lever available to central banks to tame demand by making money more expensive to borrow, interest rates have been pushed up at every BoC meeting since January, with the prime rate now six times higher than it was to start the year.
How has the market responded?
The increased cost of borrowing has taken a heavy toll on buyers’ enthusiasm. In real, nuts-and-bolts terms, the cost of the Canadian dream jumped by more than $18,000 per year between January and June.* According to the latest VREB REALTOR® Market Survey results, fewer than a third of recent homebuyers paid cash, meaning that a large majority are still relying on mortgage financing to purchase.
The resulting loss of appetite among local consumers to jump in and compete for properties has made pricing trickier for sellers, and we are seeing the uncertainty in the numbers. We tracked price reductions through Q1 and Q2 and saw the number go from 0-1% in Q1, up to around one out of five active listings seeing prices reduced by the end of Q2.
In fact, it has not been uncommon lately to see higher daily counts of price reductions than pending sales on our MLS® hot sheets.
As eroding affordability has taken away competition for properties, this has left many remaining buyers with the upper hand in their real estate transactions, able to negotiate lower prices with sellers, and consequently pushing median sale prices down:
More leverage for buyers has also brought the welcome return of subject conditions (such as property inspection, financing approval, title review, etc.) to the vast majority of real estate transaction, also nearly overnight.
Keep reading through the Market Overview ahead for a more detailed breakdown of how different parts of the market fared, as well as our look at how local sale price trends have detached from the latest MLS® Home Price Index® benchmarks.
*This calculation represents a single-family detached home at the 2022 average price of $1.4M, financed at 80% loan-to-value, on a 30 year amortization, financed at 2.7% APR (January) versus 5.1% APR (June)
Ask anyone who was in the market this spring, and they will tell you how palpable the shift was between April and June. The great whoosh of air out of the market was buyer demand deflating, as prices reached peak madness at the same time that the Bank of Canada cranked interest rates up by 125bps from their historic pandemic lows an attempt to bat down decades-high levels of inflation. If you need a recap on how we got there, our Q1 report took a deep dive on CPI inflation.
While median prices have already softened slightly from their peak across all categories, the market’s response is most visible in the movement of sale to list price ratios, shown in The Q Report as Listing Discount. The average of all single family detached homes sales came in at 9% above asking in Q1, but Q2 saw all categories return to listing discounts of zero.
Zero-discount sales does have the initial appearance of prices being propped up, at least temporarily, as this suggests a majority of successful sellers still managed to attract their full price. However, the number of list price reductions grew exponentially, which ultimately manifested in the drop of median sale prices across all property types.
Buyers are feeling either less pressure to act, or downright skittish about engaging in a shifting market. And as we noted earlier in this report, those with homes to sell are suddenly faced with the prospects of unknown timing and price for a sale.
Detached Homes, <$1.5M
The number of detached homes sales was back up from Q1 thanks to an increase in new listings, but still down nearly 40% Y/Y from Q2 2021. More new listings and fewer sales resulted in a rapid threefold increase in standing inventory from Q1 to Q2. More selection for buyers, but increased competition for sellers.
Detached home prices also showed a descent from their first-quarter peak, averaging around -6% from Q1 on a median and per-sqft basis, though still showing sizeable Y/Y gains.
Strata Homes, <$1.5M
Compared to other property types, the attached home market saw the highest ratio of sales to active listings over the course of Q2, demonstrating that strata properties saw less drop in demand. This is also evidenced by sales volume having remained right on pace with Q1, however, higher listing activity resulted in a substantial increase in the number of active listings.
The accessibility of pricing in this segment appears to be supporting more robust performance than other home types. With just two months of inventory on market at press time, the strata segment remains a seller’s market for now.
Luxury Homes, >$1.5M
The >$1.5M market has been a particularly interesting category to watch. With the average single-family home price hitting $1.4M this spring, it became a very short leap for many homes into the >$1.5M ‘luxury’ price point, but as we explained in The Q Report when we moved the threshold up from $1M a year and a half ago, many homes with ‘luxury’ prices simply weren’t ‘luxury’ homes in early 2022.
Sales were up by year and by quarter, largely given to this pricing shift, but this was of little consequence to the number of new listings above $1.5M coming on market each month steadily tripling between the beginning of Q1 and end of Q2, leaving active listings up more than double from Q1, with only 16% of those homes listed in this price point sold during the month of June.
We expect to see those sellers unwilling to accept lower prices for their property withdraw from the market this summer. Those who must sell, will likely do so at less than they initially listed, and consequently we expect to see this higher-priced inventory shrink appreciably by Q3.
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.
Benchmark prices cooled down slightly around the CRD this quarter, coming down from recent values in the 30% Y/Y range to the teens in some cases. Of particular note, Y/Y value changes in the core kept up with outlying areas for the first time in several quarters — perhaps hinting at the post-pandemic shift back to central geography we have been musing about.
Overall, though, the MLS® Home Price Index® is still showing massive Y/Y gains in every district. Benchmark price decreases are just beginning to show up in a few districts compared to the previous month, but the overall index has continued to trend upward, even as median sale prices have been sliding throughout Q2:
Why? As we have pointed out in previous Q Reports, one of the greatest advantages of the HPI® is its superior ability to maintain long-term smoothing of price movements. It is specifically designed to tame the month-to-month swings that often show up in median/average price calculations, given to the particular mix of properties that may sell in a given month. Unfortunately, that long-term averaging becomes a weakness in times of rapid market shifts, as we are currently experiencing. From our perspective, it is most likely that the HPI® algorithm is treating the change in median prices as a data ‘blip’ rather than a trend. We will keep you updated on this one as the numbers are updated.
Curious how HPI® Benchmark pricing relates to your largest financial asset? We can show you the numbers as they apply to your situation. Get in touch today.
Unless you are in some state of willful denial, it’s clear that Q2 marked a major turning point for our real estate market. Where does this leave us headed into Q3 and beyond?
In the near term, buyers and sellers continue to adapt to changing conditions. It was a surprisingly short trip back to nearly ‘balanced’ market conditions — where we are currently seeing around 3 months of inventory and a 36% sales-to-active-listings ratio — from just a hundred days before this writing, when we had around one month of inventory, and a 120% sales-to-active-listings ratio. Spring market buyers could sign a purchase agreement with full confidence of their current property selling quickly and for top dollar. Now, they are unsure what their own sale time or price might be and as a result can’t land on the number that will make them confident for either a purchase or a sale.
Dominant themes in Q3 will be increasing market times, and negotiated sale prices that are less than asking. There is a good likelihood of sales volumes declining another 20% from Q2 to Q3, and we will see further softening of average/median sale prices — just not to the extent of the Toronto/Vancouver suburbs that are grabbing headlines currently. Bear in mind that there are still many ‘need to sell’ and ‘need to buy’ consumers active in the current market. The potential for ‘want to sell’ or ‘want to buy’ transactions will continue to fall off until the lynch pin of moving interest rates comes in the form of some consistency and stability from the Bank of Canada.
A correction, yes; a downturn, yes; but without the missing ingredient of subprime lending, we don’t see a 2008-style housing ‘crisis’ evolving out of current conditions. However, on the back of housing making up such a large share of Canada’s GDP, a recession in 2023 is all but guaranteed based on current trends and outlooks. And, as recessions are identified in data that lags behind, our bet is the 2023 recession will already be underway in 2022, well before it makes the 6 o’clock news.
Quality properties, priced appropriately to the current conditions, will keep the market moving while a new normal develops. The top floor condo or the home backing onto a park will continue to be something special to buyers. So while some will take longer to decide to offer, those most prepared to buy or sell will find success. And as the frenzy of speculation subsides, we will welcome the return of real estate being looked at as a long term hold rather than a commodity to be flipped for capital gain.
Needing to make a move in the foreseeable future? Get in touch with the seasoned industry pros whose in-depth understanding of market dynamics will fuel your success.
How we can help
We appreciate you taking the time to read The Q Report. Being informed on the value of your largest financial asset — and especially being informed before stepping into any transaction — with solid, verifiable data, have taken on greater importance than ever.
As not only market experts and ‘numbers guys,’ but also award-winning, experienced, skilled and trained veteran real estate agents at one of Victoria’s top boutique firms, we are your best bet for maximizing the opportunity in your next move. Contact us now to chat about your needs, and find out how we can apply our data-driven approach to your unique situation.
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 2022/04/01 and 2022/06/30 except where speciﬁcally noted otherwise.
Bank of Canada
BC Real Estate Association
Canada Mortgage and Housing Corporation
Canadian Real Estate Association
The Globe and Mail
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