Let’s talk Real Estate WeLoveEastVan.com! It’s now been over two months since the additional 15% property transfer tax for foreign Buyers was introduced, and now the Federal Government has joined the conversation, announcing yesterday a few changes to Mortgage Rules, which will surely affect some Buyers. Onto the news..
How the Additional 15% Property Transfer Tax for Foreigners Has Affected the Market
The 15% tax definitely made an impact in the high end detached house market on the Westside of Vancouver (including West Vancouver) but the impact wasn’t as strong on the Eastside, though there was a marked difference in certain neighbourhoods and aspects of the market. Average Sales Price dropped from $4.245-million to $3.7-million on the Westside (about 13%), while average price dropped from $1.703-million to $1.606-million on the Eastside (about 6%).
This graph details average sales price for detached houses on the Westside vs the Eastside:
I see a lot of news outlets talk about how there have been fewer sales since the 15% drop, well, they often fail to mention that there are also fewer listings. The better stat to consider is the Sales to Active Ratio, since it considers the ratio between the number of sales compared to the number of listings. Remember, a ratio under 14% is a Buyer’s market, between 14-20% is a Balanced Market and over 20% is a Seller’s Market. Both detached markets are currently sitting at a 10% sales to active ratio after the Westside was at 15% and the Eastside was at 17% in July. Note that the sales to active ratio had been dropping since April.
How the New Mortgage Rules Can Affect the Market?
The Federal Government announced a few new changes to Mortgages and Property Ownership this week, you can check out our full blog about it here. The biggest change (effective October 17th) that came is one that requires Buyers with less than 20% down to qualify for a mortgage (i.e. determine their max purchase price) using the Benchmark Rate rather than the lowest rate available to them (the Benchmark rate is much higher that the lower rates). Buyers can still agree to a mortgage with the lower rate, but they have to qualify with the higher rate.
What do I mean? Here’s an example:
- Prior to Oct 17, 2016, a $60,000 salary and 10% down would qualify a Buyer for a max purchase price of $400,000 using the lowest rate available to them (low rates right now are around 2.4%).
- After Oct 17, 2016, this same $60,000 salary and 10% down would yield a max purchase price of $325,000 using the Benchmark Rate (which is currently at 4.64%). The Buyer can still use the lower rate when agreeing to their actual mortgage terms, which will make their mortgage payments quite affordable, but the problem will be accepting that they’ll be looking at less expensive properties that may not meet their needs.
The Government did this to ensure that Buyers will be able to withstand an increase in the interest rate (which is inevitable, at some point) and/or a negative change in their income. I’m sure there will be (1) a number of Buyers who will sit on the sidelines while they continue to save to perhaps hit that 20% down payment mark, (2) a number of Buyers who will sit on the sidelines hoping the prices drop considerably, and (3) a number of Buyers who accept that this is the new reality and jump into the property market to start gaining equity!
Keep in mind that this only affects Buyers with less than 20% down (and anything over $1-million already requires at least 20% down) so this will affect first time Buyers in entry level price points the most. I’ve got to say, it’s unfortunate that the Government made yet another change to the market that negatively affects middle class Buyers who were trying to get on the property ladder.
What Does it all Mean?!
My opinion, which is an educated idea based on previous years’ data, market principles and psychology, is that the market will slow down for the next few months while people digest the changes. I think enough Buyers will be pushed out of the market (or will chose to sit on the sidelines) leading to a decrease in competition between Buyers. Meanwhile, Sellers will likely continue to list with high prices, and with less competition, Buyers who are actively looking can likely submit offers under list and with subjects clauses (yay!), encouraging negotiation until an agreement is reached. I’m sure we’ll see some Sellers who don’t “need” to sell decide not to sell, but there will be other Sellers who know that selling and buying in the same market negates any ill effects.
As for prices, I don’t think they will drop significantly, and certain markets will “even out” rather than drop, but nutty bids in multiple offer situations won’t happen nearly as often.
I can see next Spring being quite busy, as Buyers and Sellers both come back to the table – Vancouver is still seeing an increase in the population and the supply isn’t increasing quick enough. So Buyers, if you still qualify for a decent mortgage, keep looking! Now could be a good time to experience a market with less competition, more time for due diligence and dare I say, a deal? Sellers, the standard principles apply: ensure your home is properly marketed, looks great upon a viewing and that you’re working with great agents (us!) to ensure you’re properly represented.
For Recent Home Buyers
For those of you who have recently bought – stop thinking about the real estate market! None of this matters until you decide to sell, so enjoy your new home and call us in a few years
Let’s see what the numbers say: (Green is Detached Houses, Blue is Townhouses, Orange is Condos)
Sales to Active Ratio:
Average Sales Price:
For our specific updates on each market, check out our blogs below.
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