How much are Canada home prices likely to drop next year?

Ephraim Vecina
CMP

Royal LePage provides latest market forecast

The aggregate price of a Canadian residential unit is likely to decline by around 1% on an annual basis during the fourth quarter of 2023 to settle at $765,171, according to a new forecast by Royal LePage.

This is despite an anticipated “modest improvement” during the second half of the year, a trajectory that is likely to see the market on an upward trend by the end of 2023.

Annual declines will be apparent through the whole of 2023. Royal LePage is expecting aggregate home prices nationally to drop by 12% year over year during the first quarter, decrease by 7.5% in Q2, and tick down by 2% inn Q3.

Fortunately for the market, the ongoing correction does not seem to follow historical patterns, said Phil Soper, president and CEO of Royal LePage.

“After nearly two years of record price appreciation, fuelled by a steep climb in household savings, very low borrowing costs, and an overwhelming desire for more space during the COVID-19 pandemic, the frenzied housing market overshot and the inevitable downward slide or market correction began, intensified by rapidly rising borrowing rates,” Soper said.

However, “while the volume of homes trading hands has dropped steeply, home prices have held on, with relatively modest declines,” he added. “We see this as a continuing trend.”

What is supporting Canada’s current price levels?

Royal LePage said that the market environment is characterized by “an acute, long-term housing supply shortage.” Current demand mostly stems from Canada’s substantial millennial and immigrant demographics, both of which are mainly comprised of smaller families.

“Smaller household sizes mean more housing units are needed per capita than in the past,” Royal LePage said. “Pent-up demand is growing from buyers who have the ability to transact but have chosen not to in these turbulent times.”

Coupled with the market’s fundamental robustness, Soper said that housing affordability remains elusive.

“We have a tightly managed national mortgage portfolio, with historically low default rates, supported by homeowners who have been required to qualify for a loan under the strict federal stress test for the last five years,” Soper said. “And, we can’t forget that Canada has been grappling with an acute shortage of homes overall. We simply don’t see the factors at play that would result in a large drop in home values.”

 

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How much are Canada home prices likely to drop next year?

Ephraim Vecina
CMP

BoC’s latest statement a positive one for housing market, says CEO

Fergal McAlinden
CMP

Could the central bank be nearing an end to its series of rate jumps?

The Bank of Canada’s final announcement of 2022 is a welcome one that presents “stability and clarity” for the national housing market after months of uncertainty, according to the co-CEO of a leading mortgage brokerage.

James Laird (pictured), co-founder of RateHub.ca, told Canadian Mortgage Professional that the language used by the central bank – which indicated its Governing Council “will be considering whether the policy interest rate needs to rise further” – signalled that its series of rate hikes throughout the year to date could be at or nearing an end.

“It was a significant announcement, certainly,” he said. “The way I read it, they remain concerned about most things: inflation, [whether] it’s entrenched, supply chain. But then they finished the announcement by saying, ‘But what we’ve done so far might be enough to take care of all these things that we are unhappy with.’”

The Bank’s 50-basis-point hike means that its benchmark rate has now risen by a full four percentage points in 2022, and while Laird emphasized that a further jump in January is still possible, he said it had struck a much less aggressive tone than previous announcements.

“Every other announcement this year has said, ‘We will raise rates further,’” he said. “I think it’s possible there’s a hold on January 25. Obviously, there’ll be more data between now and then, but it’s a significant change from ‘More rate hikes are coming,’ to, ‘We might be done – at least, done for now.’”

What does the hike mean for the mortgage market?

Factors that are set to influence the Bank’s thinking on whether it will hit pause in January include whether a currently tight labour market will begin to ease and, of course, whether inflation will continue ticking downwards between now and its next announcement.

One or two of those variables proving more stubborn than expected could cause a further hike to become likely, according to Laird – but its program of rate hikes throughout the year has at least moved it closer to its end point than it otherwise might have been if it had decided to move in slower jumps.

“I said for months that I’d like them to get to where they want to go quickly, and not drag this out,” Laird said. “And they’ve done that with 50-, 75-, and 100-basis-point increases. They’ve moved 4% in seven months. They’re using the ‘rip the Band-Aid off’ approach here, and I think that’s a good one.”

A recent Canada Mortgage and Housing Corporation (CMHC) report showed that Canadians are increasingly opting for fixed-rate options over their variable counterparts, with the latter having ticked steadily upwards in recent months alongside the Bank of Canada rate.

 

The bond market’s positive reaction to the central bank’s December announcement, then, is further good news for fixed rates, with five-year bonds having recently dropped below 3% for the first time after spending a period in the high threes.

“The fixed rates move first because the bond [market] immediately interprets this outlook, and that transfers into lower fixed rates,” Laird said. “So we’ve actually seen downward pressure on fixed rates with this announcement and in anticipation of the Bank being where they want it to get to.”

Is the Bank of Canada going to hold or hike rates in January?

In a speech to business leaders in Vancouver on December 12, Bank of Canada governor Tiff Macklem said that pushing interest rates above a certain level could risk triggering an “unnecessarily painful recession,” although he also noted the possibility that inflation expectations could become entrenched if the central bank moved too slowly.

“With inflation running well above target this is the greater risk. If high inflation sticks, much higher interest rates will be required to restore price stability, and the economy will have to slow even more sharply,” he said.

Two reports on consumer price index (CPI) inflation between now and the central bank’s next announcement are expected to play a critical role in its thinking on whether to hike or hold rates in January: the first will arrive on December 21, with the second coming on January 17, 2023 – just a week before the Bank’s first policy rate decision of next year.

 

Copyright © 1996-2022 KM Business Information Canada Ltd.

Calgary’s rental market soaring into a record year

Frank O’Brien
Western Investor

Average rents are hitting $2.57 per square foot, the highest recorded rent per square foot in the last five years, while per-door sale prices are about half that of Vancouver

Bosa’s new Arris luxury tower in Calgary, which was converted mid-stream from condos to rentals, will open this year in the East Village. | Bosa Developments

Calgary’s multi-family rental market is firing on all cylinders coming into 2023, which is shaping up to be a banner year due to an influx of new workers and students. Despite a record level of development, the rental vacancy continues to fall in the face of high demand, according to a third-quarter 2022 report from NAI Advent, Calgary.

As of the third quarter, construction has begun on nearly 2,800 new rental apartment units in Calgary in 2022. That’s the highest number on record, though 2021 was another banner year with 2,572 rental apartment starts, reports Canada Mortgage and Housing Corporation (CMHC).

“Vacancy has reached its all-time low in Calgary sitting at 1 per cent to 2 per cent in some areas. This is great for landlords but has made the rental market more competitive for renters, especially those looking for affordable rent,” NAI Advent noted.

Landlord investors, particularly from Vancouver, where per-door prices for existing apartment buildings are much higher, are looking towards both Calgary and Edmonton, agents say.

Older apartment buildings in Calgary built prior to 1970, which like Vancouver, make up the majority of the market, sell in Calgary for an average of $150,000 per door, or less than half the price as in Vancouver.

The average per-door price in Calgary for all multi-family rental sales in the third-quarter 2022 was $170,000. In Metro Vancouver it was $403,915, reports Marcus & Millichap.

The typical capitalization rate for a Vancouver apartment rental building is 2.8 per cent; in Calgary it is around 5 per cent, data shows.

And, as sales of apartment buildings in Q3 2022 fell to a seven-year low in Metro Vancouver, they were hitting fresh highs in Calgary, where rental construction is booming.

B.C.-based Bosa Developments, one of the builders active in Calgary’s East Village, is completing the 42-storey, 337-unit Arris residential tower that will open at the end of 2023.

A joint project with RioCan Real Estate Investment Trust, the entire luxury tower has been converted from condos to rentals.

The move appears to be paying off. Within days, 25 per cent of the Arris tower was rented out, Bosa claims.

“With a few banners on the building and a few social media posts, our phone started ringing and we leased 45 out of 190 homes before official marketing started,” said Robert Marchand, vice -president of marketing at Bosa Development.

That success persuaded Bosa to launch a second East Village rental tower, which started construction this summer.

Kendall Brown, market and rental analyst at Urban Analytics, said the Arris’ larger-than-normal units and upscale amenities likely attracted Calgary renters.

“A lot of younger professionals are choosing buildings based on the amenity offering,” Brown said. “Arris differs from the competition by offering larger floorplans than what are typically found in downtown Calgary, plus it offers comprehensive, upscale amenities that are becoming a trend among rental building.”

Rents at the Arris start at $1,674 for a one-bedroom, compared to an average Calgary rent of $1,491 per month.

On the demand side, seven interest rate hikes in 2022 have driven more people to rent rather than own.

Alberta is also seeing a significant uptick in people moving to the province, with more than 50,000 coming to the province to live in the first half of 2022 alone, according to Statistics Canada data compiled by NAI Advent.

According to the latest numbers from Rentals.ca, the average Canadian rental apartment was $1,810 a month in Q3 2022, up about 12 per cent from the previous year.

In Calgary, the average one-bedroom rental as of the Q3 2022 increased from 20 per cent to 25 per cent from a year earlier, NAI Advent reports.

“Average rents are hitting $2.57 per square foot, the highest recorded rent per square foot in the last five years,” according to NAI Advents Calgary Q3 2022 multi-family report.

A City of Calgary program also provides grants for converting empty office space into residential buildings, but it is proving expensive.

Three buildings were recently named as receiving incentives for conversion to residential, including 909 Fifth Avenue SW, recently purchased by Peoplefirst Developments with an eye to redevelopment. The others include Palliser One at 125 Ninth Avenue SE and 205 Ninth Avenue SE. Each will require $10 million in city incentives.

In announcing the first office conversion, Calgary Mayor Jyoti Gondek, referenced the extent of the city’s office glut, in estimating about six million square feet of office space should be converted to other uses or removed.

 

© 2022 Western Investor

False Creek Flats leads Vancouver CRE development into 2023

Frank O’Brien
Western Investor

New $2.1 billion hospital, office and industrial buildings anchor 450-acre site in East Vancouver

When Keltic Canada Developments Ltd. laid out plans last year for a new 10-storey medical office next to the under-construction new St. Paul’s Hospital in Vancouver’s False Creek Flats, it was assumed that its entire 102,000 square feet would be sold to individual owner-occupiers and investors.

Instead, California medical supply company Masimo Corp. bought the whole building at 229 Prior Street for $123 million on February 14, 2022.

The deal works out to about $1,200 a square foot, which was less than other office strata is being sold for in the Flats.

“Any time you’re looking at a larger-scale transaction there’s definitely going to be a different value than there would be, comparably, than doing smaller units and selling them individually,” explained Michael Buchan, a principal with Avison Young, which represented the vendor, Keltic.

Strata office space in the False Creek Flats, a 450-acre site in East Vancouver that is seen as shaping the future of Vancouver commercial real estate, is currently selling for $1,400 to $1,600 a square foot.

A confidentiality agreement limited what Buchan could say regarding Masimo’s purchase, but he noted that the strata property had experienced strong interest even before marketing began.

Rachel Li Liu, CEO of Keltic, said the company is now scouring the Flats for a site to build another strata office building for medical professionals. Keltic had bought the Masimo site in 2019 for $25 million. It may not find that price today in the Flats, which has seen a rush of land buys and development permits over the past two years.

These include:

• Lab 29 by LowTide Properties. The first purpose-built life-science lab in Vancouver in more than a decade, the eight-storey project will rise at 1629 Scotia Street next to St. Paul’s Hospital.

• Archetype, a mixed-use development consisting of a strata industrial and office building (10 storeys) and a residential rental building (13 storeys) containing 216 secured market rental dwelling units; all over three levels of underground parking, by QuadReal and Hungerford Properties, at 1717 Lorne Street.

• A new 10-storey office tower at 306 Terminal Avenue in the Flats by Rize Alliance. It will total 146,890 square feet including 109,600 square feet of Class A open-floor office space within the upper levels, and 30,100 square feet of industrial manufacturing space in the lower levels. A floor space ratio density of five times (FSR5) the size of the lot is expected on the site, which is adjacent to the Main Street SkyTrain station.

• At 1725 Clark Drive on the eastern edge of the Flats, Alliance Properties is developing a five-storey building on a 1.5-acre industrial lot that Alliance bought in June 2019 for $30.5 million. Under FSR3 density, Alliance is completing nearly198,000 square feet of office and light industrial space.

And, of course, the new $2.l7 billion St. Paul’s Hospital and health campus at 1002 Station Street. The largest medical development underway in Canada covers 18.4 acres as the anchor for the False Creek Flats. It includes a new state-of-the-industry 548-bed hospital, and 800,000 square foot Clinical Support and Research Centre, which encompasses core research facilities including wet labs, biobanks and a medical conference centre

.PCL Construction began work on the new hospital early this year and it is expected to open in 2027.

For more on the future of the False Creek Flats, read the January 2023 issue of Western Investor, on

stands and online. 

 

© 2022 Western Investor

Opinion: Housing is a struggle and governments about to make it worse

Frank O’Brien
Western Investor

Four new rules – including one now in effect in B.C. – will be costly, complicated and do nothing to alleviate the low supply or high price of housing in Canada

| Dominion Lending Centre

Despite headwinds, rental investments appear solid into 2023, due, ironically, to the high cost of homeownership that will keep more tenants renting. This, combined with a spike in immigration and low supply of rental apartments, means that rents will likely keep increasing and the value of multi-family rental property will also rise.

But a residential market that is already reeling from a series of seven interest rate hikes since the spring, is about to experience a new round of government “assistance” that will make the process of buying a home in Canada even more complicated and costly, especially in British Columbia.

The Land Owner Transparency Registry (LOTR) came into force in B.C. on November 30, 2022. The first of its kind, it was dreamed up four years ago when governments suspected real estate was being used to launder money. Now, it appears, everyone is considered guilty unless they prove they are not. Under LOTR, every residential land transfer application must declare everyone “considered to have some meaningful relationship with the land or an indirect ownership interest in it.”  Failure to provide the transparency report can result in meaningful fine of up to $50,000 for the homebuyer.

Vancouver lawyers say LORT has been a time-consuming and complicated registry to complete.

On January 1, 2023, the federal government will bring in a home sale flipping tax for two years, which was recently extended to include assignment sales of new homes.

The tax kicks in when home or assignment is bought and sold within one year, unless disqualified by divorce or death. Any profit on the flip would be taxed as business income and would not qualify for the 50 per cent capital gains exemption.

With home prices falling across Canada since the spring and the outlook for little recovery next year, short-term flipping has already vanished, but the regulations remain in place.

On New Year’s Day 2023, Ottawa will bring in a two-year ban on foreign home buyers, just as it tries to increase immigration to the highest levels the country has ever seen. The Prohibition on the Purchase of Residential Property by Non-Canadians Act will stop would-immigrants from purchasing a home before their families arrive in Canada, further complicating their efforts to become productive citizens.

B.C. and Ontario, the major destinations for immigrants, already have 20 per cent of value tax on foreign homebuyers.

Also on January 1 the B.C. government will bring a new rule that requires that consenting adults who agree to consummate a home sale must wait three days before the sale is legal.  All this rule will do is delay possession dates and mess with the mortgage financing.

Advice to provincial and federal governments: please save us from any more government help with home buying. It is adding expense and delays to the process of simply owning a home.

 

© 2022 Western Investor

Opinion: Housing is a struggle and governments about to make it worse

Frank O’Brien
Western Investor

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6.5-acre land assembly in Central Surrey sells for $170 million

Western Investor Staff
Western Investor

The development site of older rental buildings is destined for approximately 2,000 homes in five new condominium towers, some as high as 44 storeys.

Sutton Group West Coast Realty, Vancouver, for Western Investor

 

Property type: Development land assembly

Location: 13315 104th Avenue, Surrey B.C.

Size of land: 6.5 acres

Sale price: $170 million

Date of sale: July 2022

Buyer: Bosa Properties

Brokerage: Sutton West Group Realty, Vancouver.

Broker: Goran Bucan

 

 

© 2022 Western Investor

Brick-and-mortar retail holds the course as consumers cut spending

Peter Mitham
Western Investor

Space constraints ensure Metro Vancouver mall resilience

Shoppers have returned to Metro Vancouver’s malls, but inflation means they’re set to spend less.Rob Kruyt/Business in Vancouver

Consumers are back in force at malls, but many are spending less as cost-of-living pressures bite.

Close to 90 per cent of Canadians will visit shopping malls in December, according to surveys by JLL Canada, up from 85 per cent last year. Approximately 43 per cent will shop for 30 to 90 minutes, an improvement over 37 per cent a year ago.

“People are going back to the malls feeling more comfortable and safe shopping in person compared to last year,” said Madeleine Byblow, a senior associate specializing in retail with JLL Canada in Vancouver.

The arrival of the omicron variant just in time for Christmas put a damper on mall traffic last year, but the risk of respiratory viruses this season seems to emphasizing more focused trips rather than keeping people away.

But the survey, based on a sample of 982 shoppers contacted between late October and mid-November, indicates that spending will average $412 per person. This is 13 per cent lower than last year, and effectively offsets the effect of inflation on prices.

“Canadians plan to spend almost the same amount on gifts that they spent in 2020; however, prices are not the same as two years ago,” JLL reported. “Overall consumer prices have increased on average 12 per cent since the 2020 holiday season, mostly over the past year.”

While spending last year was driven by pent-up demand for in-person experiences, a spirit of restraint is in play this year even though demand remains high.

“Most consumers report that their cost of living − food, utilities, and gas − has risen since the beginning of the pandemic, reducing their discretionary budgets,” JLL reported.

Byblow said the cost of living has always been higher in Vancouver than elsewhere in Canada, and the current environment will drive a greater percentage of consumers to brand-name discounters like Homesense, Marshalls and Nordstrom Rack both during the Christmas season and in the year ahead.

“People are way more conscious of what they’re spending,” she said. “You’ll probably see those discount banners do well this season.”

The debut of Specsavers Optical Group, a UK retailer JLL is working with to secure locations in Metro Vancouver, underscores the trend.

“It’s going to be very timely for them to enter the market given that people are going to be looking for more affordable solutions for eye care,” Byblow said.

The impact for retail landlords is minimal, however.

While consumer spending might be down, tenants aren’t necessarily leaving malls because storefront exposure is an integral part of the new omnichannel marketing environment.

While more shoppers are researching purchases online, and fewer than half are completing purchases in-store, approximately 18 per cent will use brick-and-mortar stores as pick-up points for purchases.

The in-person activity co-exists alongside online shopping, with close to 60 per cent of shoppers buying online and having products home-delivered.

The shift in consumer habits has increased the importance of mall activities.

“The big one that’s come back this year is photos with Santa,” Byblow said. “That’s obviously a reason to get families into the mall and have them stay.”

But even with lower traffic, Metro Vancouver malls will likely be more resilient than those in other markets given geographic constraints that ensure retail space doesn’t track with population growth.

“Vancouver malls always fare better because we’re geographically constrained in terms of how much retail space we can even have,” Byblow said.

 

© 2022 Western Investor

Burnaby Metrotown 1.8-acre land assembly sells for $145 million

Western Investor Staff
Western Investor

The 80,000-square-foot, two-lot assembly eyed for high-density mixed-use development

Sutton Group West Coast Realty, Vancouver, for Western Investor

 

Property type: Development land assembly

Location: 4444 and 4488 Kingsway Avenue, Burnaby, B.C.

Number of sites: 2

Land size: 80,000 square feet (total)

Land size in acres: 1.8 acres

Potential: High-density, mixed-use residential development FSR (floor-space-ratio) 14.3

Date of sale: November 30, 2022

Brokerage: Sutton Group West Coast Realty, Vancouver

Broker: Goran Bucan

 

© 2022 Western Investor