Our team of development land specialists take a lot of pride in being a source of accurate market information, insight and guidance for our clients, both residential developers and development land owners alike. Candidly, this has made the past couple months challenging as the reality is that there is an overwhelming shortage of meaningful data upon which to base strategic advice and far too many variables in the equation to be able to define a root cause.
Was it Just Summer?
Historically, August is a slow month for sales. Sales, as reported by the Fraser Valley Real Estate Board were down in August from July but by only 1% when compared with August of 2015. The difference this year is that June – the typical peak of the annual sales cycle – was 20% higher than June of 2015 so the drop was far more dramatic.
A Self-Fulfilling Prophecy
One thing we are sure of is that the 15% foreign buyer tax was a catalyst of a self-fulfilling prophecy; a prediction that the tax would drastically slow the market and lower prices. Conversations with many of our top clients over the month of August revealed just how many took their foot off the gas to “see what the market would do.” Regardless of whether the market was going to slow beyond what we typically see in August or not, the lack of activity caused the prediction to come true.
How much impact will the 15% tax have?
It is far too early to genuinely know the impact of the tax but it would appear that the province has achieved its goal of slowing the market velocity and lowering prices even if only for the short term.
In an expert panel luncheon hosted by the Urban Development Institute on Sept 16th, we heard insight from a number of highly regarded economists on the taxes’ implications on the market. For Helmut Pastrick, Chief Economist for Central 1 Credit Union, it’s a temporary market disruption that will last for 3-6 months before market fundamentals grab the reigns again in the Spring and prices continue their climb. In the meantime, we can expect to see average prices decline but HPI prices will continue to rise, albeit at a much milder rate. Click here to read a comprehensive summary of UDI’s luncheon on the implications of the 15% foreign buyer tax.
From a slightly different angle there is also concern that this tax has created some additional unintended consequences. “Real estate-related taxes are now the government’s single largest revenue generator,” according to Mike De Jong’s report last week. While this may seem like a great thing, the dependency on a single industry is incredibly dangerous. Helmut Pastrick, also pointed out at the UDI luncheon, that the “tax sends quite a negative signal that the government may enact negative things in the future and it may make some rethink their investment strategy.”
Economic Fundamentals Remain Unchanged
According to the Fraser Valley Real Estate Board, active listings have been increasing slightly, month over month since December 2015 but August 2016 was still down 18% from the same month last year. The chart below shows an annual peak of active listings between May and July with a trough every December but what makes this year different is how far the entire curve has shifted down. Supply is still very low.
Compounding the challenge is a severely constrained ability to respond on the supply side as municipalities continue to be the bottleneck for new development.
Furthermore, it’s difficult to believe that the demand side will change in a very significant way over the medium term when major market conditions have remained constant. Interest rates remain extremely low, our provincial population continues to grow and interprovincial migration is still on the rise. Tsur Somerville, during the UDI luncheon noted earlier, also pointed out how large the generation is that is just starting to enter the housing market.
We Still Need More Data
One thing is true, it is going to take a number of months before we truly understand how much the market has changed and we caution everyone from reading too much into the sensationalized statistics published by many media outlets.