The bull and bear case for the Lower Mainland's real estate market

This column is by Mark Ting, a partner with Foundation Wealth who helps clients reach their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast's guide to personal finance.

According to a recent Angus Reid Survey, 28 per cent of B.C. respondents stated they would like to see housing prices drop by 30 per cent or more.

The results were divided along homeownership lines — 70 per cent of Canadians are homeowners so it's not surprising that roughly 70 per cent of those surveyed wanted price appreciation whereas the remaining, almost 30 per cent, were hoping for a real estate crash.

Unfortunately, the real estate market doesn't care about these surveys or what people think, it ebbs and flows based on supply and demand and is often manipulated by various government policies.

• March home sales through the roof in Vancouver area amid rapidly rising prices

Current policies, such as low interest rates and income replacement programs, not only prevented a real estate crash in 2020-2021 but pushed prices much higher. As for demand, it is mostly coming from local people buying a home to live in rather than foreign buyers or real estate investors.

According to the Scotia Bank 2021 housing poll, 39 per cent of Canadians aged 18 to 34 accelerated their home-buying plans to take advantage of the low interest rates and, compared to the previous year, home purchases within this age group were up by 23 per cent.  

According to this survey, lots of young people can and were buying real estate.

The bull and bear cases 

The bull case for real estate is founded on the historically low interest rates and unusually high rate of savings among Canadians — this combination is positive for real estate.  On the supply side, there isn't enough to keep up with the demand and that's before 400,000 immigrants settle into our cities as soon as the travel restrictions are lifted.

According to the bulls, the additional demand should soak up supply thereby pushing prices higher.

The bear case for real estate is that a lot of the demand has been pushed forward due to the low interest rates. This demand should subside as more buyers find their homes. We are also seeing more supply coming online.

Many analysts believe the market is currently overheated, but expect it to cool over the next couple of months as demand decreases and supply increases.

After considering both the bear and bull arguments, over the long term, I expect prices will keep going up mainly due to excessive money printing by the central bank, higher construction costs and Canada's immigration targets.

Changes to the stress test

In response to the hot market, as of June 1, the Office of the Superintendent of Financial Institutions is proposing to increase the floor of the stress test for uninsured mortgages to 5.25 per cent. The result of this change is that borrowers would qualify for approximately 4.5 per cent less of a mortgage.

The hope is that the higher stress test will push some potential buyers out of the market, thus reducing demand and cooling the market.

Buyers who need to qualify under the current, more favourable, stress test rules must now find a property and complete their purchase before June 1st. This should push forward some sales but expect a drop-off once the deadline has passed.

Overall, as the stress test change only affects buyers who have at least a 20 per cent down payment, I don't think it will have a meaningfully impact on housing affordability.  In fact, we are seeing the opposite happening in the pre-sale condo market where prices are increasing due to the higher cost of labour, materials and government regulations.

Ultimately, it will be higher interest rates that will cool real estate prices. Currently the bond market is hinting at a potential rate hike over the near term, but I don't expect to see a spike in rates anytime soon.

If or when rates increase, real estate prices should moderate and then trend down — which is healthy for a market. It's important that our real estate markets cycles experiences some negative years but remember, similar to the stock markets, for every negative year there are usually several positive years.

Overall, with both markets, the long-term trend continues to be higher.