I’ve been a realtor since 2005 and work with a network of realtors across BC. We basically help buyers and sellers in terms of assignments, but we help investors and owner-occupiers buy
pre-sale and pre-construction properties. We also do resale buying and selling, but we do a lot of pre-sales – in 2021 I think we did close to about 500 transactions, so quite a bit of business.
Today, what I’m going to talk to you about is where we were – so a brief overview of the Vancouver pre-sale market. And when I talk about the Vancouver presale market, I’m talking about greater Vancouver, effectively, just because of the way the pre-sale market is developed. The inner and outer suburbs of Vancouver are now part of that same market, and that’s where a lot of the activity is now.
I’m going to discuss where we’re at now – so, what’s happening now in the Vancouver presale market, and then I’m going to discuss where we’re headed and the way forward in the presale market. And the last thing I’m going to discuss is the opportunities in the Vancouver pre-sale market for investors and owner-occupiers.
Where we were
Basically where we were for the last, probably, four to five decades in the Greater Vancouver or Metro Vancouver area is in a dramatically and chronically undersupplied new housing market compared to the level of population growth. That can be seen by the prices in the Vancouver area and the City of Vancouver itself increasing far beyond things like the area’s increase in salaries and GDP.
Also, because of covid 19, we saw a huge surge of stimulus in the economy, and huge demand caused by stimulus from the federal government, stimulus from the provincial government, super-low interest rates, and also quantitative easing which was designed to push down long-term rates. So, we saw a huge surge in demand coming out of covid 19. Also, many affluent people who were able to work from home or continue to work during covid 19 lockdowns were able to save significant sums of money, needed to put that money somewhere, and wanted to deploy it. And a lot of it got deployed into real estate.
So, with that huge surge of demand we saw a huge transaction surge for pre-sales. We started to see the one-day project sell out: a project would be anticipated, people would talk about it, they’d launch the project to insiders and people the developer knew, and all the units would be sold the next day. The general public would find out about it, and realtors who didn’t have the kind of connections that we had would find out about it, and there would be nothing left. So, a pretty crazy market, lots of sales, and a very exciting time but a very frustrating time for a lot of people.
That surge in demand caused a surge in supply – those one-day sellouts and that sort of froth and frenzy in the market – caused a supply surge. And with that supply surge, what you
saw are developers who took projects that may not have been viable before covid or during covid or even right after covid and brought them to market, or projects that they’d been sort of waiting with and they decided to bring them to market. We saw a lot of projects launching based on decisions made by developers three to six months ago when the market was favoring sellers, not buyers.
So, that takes us to where we’re at now.
Where we’re at
I’m quite sure everybody knows inflation is back. The last read from the inflation numbers here in Canada was 6.9%, which is quite a high rate. As you can see from the chart, we’re also starting to see rising rates and the beginning of quantitative tightening – basically quantitative tightening is the opposite of quantitative easing. So, instead of printing money, the Bank of Canada and the federal reserve are pulling money or liquid out of the economy in an attempt to slow inflation and to slow price rises.
Now, you can see in the chart what’s happening with interest rates for the five-year fixed-rate mortgage and five-year bond yield. My understanding right now is five-year fixed-rate mortgages run you about 4.5 to 4.6, and my contacts in the mortgage brokering world are telling me that next week we’ll probably see mortgages at about 5%.
So, this sort of increase in interest rates has affected the pre-sale and resale markets, but today we’re focused more on the pre-sale market. You can see here from this chart, right now market conditions are calming. Now when they talk about provincial sales to active listings ratio, basically what they’re talking about is the percentage of sales based on the number of listings. So if you have a 100% sales ratio, 100% of all the listings have sold. If you’ve got a 50% sales ratio, 50% of the listings have sold in that given period of time (typically a month). What we’re seeing is a calming of the market and that is basically because of the rising interest rates.
The good news is the market is not collapsing. What we’re seeing is a softening in the market due to inflation which reduces people’s spending power because they’re spending so much money on gas and groceries and rent and those sorts of things, and then also with increased interest costs on loans that people have. But the market is not collapsing.
Immigration remains high – Canada’s expecting over 425,000 people in 2022 and my understanding is that will continue for the next few years to make up for lost time because of immigration that was disrupted during covid 19. Now, the good news for investors is there are lots and lots of pre-sale projects coming to market right now because of decisions from three to six months ago made by developers when the market conditions were much better, and some of the expectations about inflation were that it wasn’t going to be as high and as persistent as it is.
What we’re seeing overall across the Greater Vancouver real estate market is that the investors are very active in the suburbs, where you saw the greatest surge in supply and the greatest surge in transactions, and also the largest surge in prices. Now what we’re seeing is that the suburbs – like Surrey, Coquitlam, the Fraser Valley, those kinds of places – that’s where you’re starting to see the biggest falls in transaction numbers and the biggest reductions in demand. So that’s where the investors were and that’s where the investors still are active.
You do have owner-occupiers out there, but in contrast to the core (and when I refer to the core, I talk about the city of Vancouver, Burnaby and the North shore), the purchasers in those markets tend to be owner-occupiers who are buying properties to live in based on the extremely high price of pre-sale and pre-construction properties in the core, where it just really doesn’t make much sense from an investment perspective. You’re looking at a gross cap rate on an annualized basis of probably 3% if you were to buy a pre-sale in the core, so it’s typically and primarily occupiers, whereas you get into the suburbs and potentially get between 4-6% gross returns. But, as I’ll get to soon, those numbers are going to improve.
Right now, rents are rising with inflation and a return to post-covid. What you see with rents are they tend not to fall except in very exceptional circumstances, like covid 19. But right now rents are rising with inflation, and any of you here who own properties and are paying attention know you’re able to get significantly higher rents than you were able to get six months ago or a year ago – even taking out covid 19.
Another thing which is interesting is I was recently at a presentation with Ryan Lalonde, one of the principals of MLA Canada (and I’m a big fan of both). He mentioned that construction costs are up 25% since January 1, 2022. So, the increases in costs are affecting everybody – consumers, investors, and developers. And right now, we’re starting to see an increase in incentives offered by developers. You’re seeing more of it in the suburbs than in the core, but the incentives could become quite significant going forward.
Where we’re going
Now, in terms of where we’re going – I call this crystal ball time because my crystal ball is as good as yours. I can’t predict the future and I would be very cautious or wary of anybody who said to you with 100% accuracy that they could predict the future. But based on what I’ve been
reading and what I’ve been seeing from the Bank of Canada, rates are expected to continue to rise. The consensus I’ve heard is that based on the last inflation reading of 6.9%, we’ll probably see a 0.75% rise from the Bank of Canada and we may well see that coming from the federal reserve in the United States.
The Bank of Canada has an inflation target of about 2% and we’re running at about 6.9%. With interest rates where they are, there’s pretty much only one way interest rates are going to go, and they’re going to go up.
Now my understanding is that in terms of the Bank of Canada’s rate, a neutral rate so it doesn’t put any upward or downward pressure on costs between 2-3%, is that we may have a period of time during which those rates need to actually be higher than that to bring inflation down and under control.
So, like I say here in this slide, higher rates have a downward effect on real estate prices and sales volume. Now, we’re seeing that sales volumes across the Greater Vancouver area, including the Fraser Valley, are down about 30 percent compared to last year. We’re also starting to see price softness. It’s not necessarily showing up in the Real Estate Board’s Greater Vancouver statistics at this time, but you will start to see it because the statistics for real estate tend to be backward-looking – because nobody, again, has a crystal ball that works. So, they can report on what’s happening in the past but reporting on the here and now on a day-to-day basis can be difficult.
A further thing is higher rates may result in a recession. Some of the recent comments from the
federal reserve chairman, Jerome Powell, are saying he’s not necessarily afraid of creating a recession. That might be what they call in the economics profession “job owning”, which is where they try to talk down the market as opposed to taking action – or it may not be, who knows. But the good news is, if there is a recession, central banks tend to cut rates during recessions.
So we may see rates rise for the next six months to a year. They may stay high for a period after that, if inflation gets under control and goes down and GDP growth goes down, you’re probably going to see rates going down – which, for a real estate investor, is quite a good thing.
Here’s where I see the opportunities. Based on what we’re seeing now, rates are on their way up, transactions are on their way down, and we’re seeing price softness. Now, one of the things I’ve been thinking about is that pre-sales could be the perfect investment for taking advantage of the current interest rate situation. Now, I’m operating on a few assumptions here.
The first assumption is that the Bank of Canada and the federal reserve will act decisively to the point of potentially pushing Canada and the United States into a recession. If you want a precedent for how that works, one should look at the 1980 to 1982 time period during which Paul Volcker, the former head of the federal reserve went by a similar script whereby he pushed interest rates up to 20% when inflation was running above 10 or 15% for a period of time. What that did was cause the recession in 1981/1982, which was painful but short. But then, as of late 1982/early 1983, the North American economy started to do very, very well and had a significant period of very low inflation and relatively high growth following that time. I don’t think that we are in the same situation as we were in the late 1970s/early 1980s just because it’s a different world now, but I think there is a chance that interest rates could be increased to a point whereby we may see a recession.
Here’s where I see an opportunity. Continuing rate rises should expect market softness. When there is market softness for an extended period of time, the way developers get buyers to move forward on a purchase is by offering incentives. Now, these purchase incentives typically are called a decorating allowance, which is a credit upon completion.
Say for example, person A was to buy a pre-sale today and pay the full price of $1. Then, person B decides to wait three months for the market to get worse and for more incentives to be offered. So person B in three months from now goes to the display center and asks if there are any incentives for a pre-sale, and the developer’s representative or the developer marketer says yes there are – we are offering a decorating allowance, which is a credit upon completion.
Basically what the developer will say is, “I agree to sell you, person B, this pre-sale for
$1, but I will give you a 10-cent discount upon completion, when you transfer ownership at the land titles office.” So, when person A looks at what other people paid in a few months or few years after the project’s completed, and they look at the tax form for person B’s purchase, they see a $1 purchase price – they don’t see the decorating allowance because it actually doesn’t show up. Developers do this to not cannibalize their own sales and to not make previous buyers unhappy, feeling that they overpaid.
My idea is to continue to watch the presale market. Now, if you’re interested in following the pre-sale market, I’ve got a very, very good pre-sale email list on my websites, VancouverNewCondos.com and MikeStewart.ca. You can just go on one of those sites and sign up on the VIP page for email lists of all the major cities and municipalities across Greater Vancouver, the Okanagan, Sunshine Coast, Vancouver Island, the Fraser Valley, etc. Then, we have an email list of about 70,000 people and send out probably two emails a week. Recently, we’ve been sending out emails on new pre-sales that are coming out, and we’re starting to see more and more incentives. When we hear about these incentives we share them with our email list, and some of these incentives are significant – you could see anywhere from $10 to 30, 50, sometimes even 200,000 incentives depending on the property that the developer needs to get sold.
So, I think over the next 3-12 months you’re going to see a lot more of these incentives. And within the next 3-12 months during the period when the Bank of Canada is raising rates and when quantitative tightening occurs, the market will soften, market conditions are going to get worse, and the developers are going to offer incentives on their pre-sales.
Now, if you’re buying a pre-sale, the nice thing about it is when you buy, you don’t have to complete, you don’t have to get a mortgage, and typically the pre-sale will complete anywhere from six months to a year. But I would wait – I would get something completed probably in a year up to five years in the future.
For example, Concord Pacific‘s Piano project in Surrey is completing 2027 so my suggestion would be to buy a pre-sale in the next 3-12 months when pre-sale incentives become large and widespread, because they will. I’ve seen this before – I went through the market during the financial crisis and people who bought before then, as things got worse and as things came out of it, did extremely well.
I’m not saying we’re going to have a financial crisis – I think we may see a recession, we may not, but I think we’re going to see a period of tough times in the real estate market when rates rise. And I think buying a pre-sale when the market is down, when things are tough, is a good idea because if you complete in a year to 3 years after you purchase it, in the next 3 to 12 months with those incentives, there’s a very good chance that interest rates will be down because inflation has been brought down by the period of higher interest rates that we’re going into.
So that’s where I think there is an opportunity – you basically complete on your pre-sale in a period of low or falling interest rates, and lower and falling rates tend to put upward pressure on real estate prices and sales volume. That would be a good opportunity for people this summer.
There’s one last thing I wanted to mention. Rents tend to have a somewhat ratcheting effect – they go up in times of inflation but they tend not to fall in times of economic uncertainty and slowness, the reason being immigration and population growth in the Greater Vancouver area, coupled with chronic undersupply of properties that we’ve seen over the last few decades.
That pretty much covers everything I wanted to discuss. If you want to find out more about us and join our pre-sale email list for incentives on pre-sales across British Columbia, you can go to MikeStewart.ca, which is my personal website, or VancouverNewCondos.com.