Why the Victoria Housing Market is a Bubble and You Should Probably Buy Anyway (Part 2 of 2)
Welcome Back! Last week we discussed the historical picture of the Victoria housing market, and whether it makes sense to consider today’s market a bubble. We also discussed low inventory and the current competitive mortgage rates. Today, we’ll get into the nuts and bolts of why I believe that despite the ballooning prices, this is a bubble that’s worth buying into. We’re going to start this article by focusing on low inventory, as this seems to be the guiding narrative driving current housing trends not only in Victoria, but also the rest of Canada and other parts of the world. Then we’ll look at how other factors like supply and demand and low interest rates factor into this story.
With the consideration of these first two puzzle pieces in hand, low inventory rates and very competitive mortgage rates, this speaks volumes about the current state of supply and demand. As anyone can tell you about supply and demand, when supply is low and demand is high prices rise. This is exactly what we are seeing in the market today. The prevailing low interest rates have created a surge in demand fostering a red hot housing market all over Canada. At the same time, housing inventory rates relative to demand have been dwindling over time. Even if it’s true that housing construction starts and completions are at record highs, overwhelming demand has led to a steady decline in current active listings. One way to measure this is by looking at a metric known as the Sales to Active Listings Ratio, or more simply put, an Absorption rate. This metric is generally evaluated based on the following:
Below 10%, there is downward pressure on prices - this is a buyer’s market
Between 15-20%, there is little pressure either way - this is a balanced market
Above 25%, there is upward pressure on prices - this is a sellers’ market
In the Victoria housing market, we have seen a continual rise in the absorption rate from about 65% in December 2020 to approximately 101% last month (December 2021). In other words, a four fold increase above the starting point for a market to be considered favourable to sellers. From a supply/demand perspective, the rapid and sustained increase in property absorption since April 2020, has meant a steady decline in months of inventory, a measure of how long it would take current levels of inventory to sell out. Between January 2020 and 2021 months of inventory declined from 5.8 months to 2.3 months and between December 2020 and 2021 it further declined from 2.6 months to 1.8 months. Taken together, it’s clear that we have been experiencing a long trend of declining supply and sustained demand. Since, practical reality tells us that it takes time for inventory to build up on the market, it’s safe to expect this trend to continue well into 2022 and this should have an impact on prices and appreciation.
Housing Price Appreciation Forecasts
2021 was a record breaking year for real estate with aggregate Canadian housing prices jumping by 21.4%. Although such a sharp rising price trend can’t go on forever, the enduring contrast between supply and demand is predicted to have continued impacts on housing appreciation in 2022. Both RE/MAX and Royal Lepage predict continuing strength in the Canadian real estate market with RE/MAX anticipating an average growth of 9.2% in real estate prices versus Royal Lepage’s prediction of 10.5%. Looking at the more conservative of these two forecast reports, RE/MAX is estimating that Victoria will see another 5% appreciation in real estate prices in 2022. If this is the case, then those who are looking to buy now instead of later still stand to benefit quite significantly.
Bringing it all together
So what does this all mean if you’re still deciding whether or not to buy in 2022? Well, with low housing inventory, and competitive mortgage rates, the anticipated continuing trend for 2022 is a competitive market and rising property prices. That will mean a few potential considerations.
If you are able to buy a property right now, and Victoria real estate value prices appreciate by the forecasted amount of 5%, you’ll stand to benefit from that appreciation as well as any additional equity you are able to accumulate for the rest of the year. If for example you were to purchase a 2 bedroom condo for $500k with a 20% down payment a 5% appreciation in 1 year would increase the total value of your property to $525k. You would also pay $11,290.08 on the principal of your mortgage in the first 12 months meaning you would be ahead by over $36k in 1 year by simply choosing to purchase rather than waiting.
If you decide to wait and see what the market does and properties do continue to appreciate as anticipated, in 12 months you’ll be paying an additional $25k for the same property that you could have bought for $500k today and you won’t stand to benefit from the additional $11k in equity you would have built up over that time. If you wait an additional year hoping for a market crash, it’s possible you may capitalise, but odds are you’ll end up buying effectively the same property but for more money and less equity. Since no one can accurately predict a market crash, for most of us trying to time the market is nothing more than a fool’s errand, and the real opportunity is buying a good quality property now and holding it for the long-term. There’s never any guarantee that property valuation will go up or down in any given year, but over the long haul of numerous decades, property owners in Victoria have continued to benefit from gradual appreciation and building equity.
This is still a competitive market. That means that in order to win a property in Victoria, odds are good that you will have to pay over asking in order to win the perfect property. Depending on the property, area, and the price bracket you’re considering, it’s possible you could end up paying anywhere from $0 to $100k over asking. Keep in mind that even with prices going up, not every deal is a good deal, and some may be worth walking away from altogether, whereas others might be worth paying substantially over asking. This is because listing agents will often utilise a low pricing strategy, where they set their asking price at or below market price in order to drive up market interest and the number of offers they receive. For example, If a listing agent sets a listing price $50k below the property’s estimated $1M market value (i.e. $950k), this can result in 10 or 15 offers, the highest of which could end up being $100k over asking. The net result being that the seller receives an additional $50k above market value for their property. It’s also possible that a seller might list the same property $50k or $100k over market value, and if it doesn’t generate a lot of interest after two or three weeks someone might win this property offering market value or slightly below market value.
The main takeaway here is that price does not always equate to value. Having a talented agent on hand can be worth their weight in gold as they will be able to equip you with sound advice and comparative market analysis to estimate the real value of a property. So if you are looking to enter this competitive market, it’s important to work with someone who is trustworthy and knowledgeable as they can help you cut through the noise and identify real value.
So, is the market a bubble and should you be buying right now? If we are going with the standard definition, an economic cycle characterized by rapid price escalation followed by a sudden contraction, then yes it would be safe to define our current real estate market as a bubble based on the rapid housing price escalation we’ve seen. However, that doesn’t tell us if or when a market correction may happen. So, the best we can do is try to make prudent rational decisions with the best evidence we have in hand. Currently, that evidence is telling me, yes this is a bubble that’s still worth buying into.