This week the BC Real Estate Association published the 2nd Quarter housing Forecast for the Thompson-Okanagan region, which serves the Penticton, Kelowna and Kamloops areas.
As I know many of you are anxiously watching the Market I thought I would share their latest thoughts on our Market and I have highlighted what I believe are the important points.
Real Estate Sales were lower in 2017 after a record-setting year prior. Despite that decline, sales were still the second highest on record for the region as a result of a strong provincial economy, robust regional employment growth, significant inflows of interprovincial migration and low mortgage rates.
This year, we anticipate those home sales will slow as moderating economic growth, rising mortgage rates and the impacts of both federal and provincial policy measures impact consumer demand.
The BC economy has benefited from four years of above-trend economic growth, which the Okanagan region has both contributed to and shared in. Employment growth across the region surged as the area’s ageing population increased labour demand in the healthcare sector and vigorous new construction activity created thousands of jobs. A rebound in the forestry sector and strong export activity also provided a further boost to regional employment growth. However, there are early signs that employment growth is slowing alongside the overall economy.
In addition to slower economic growth, the housing market has been negatively impacted by the implementation of a “stress test” for conventional homebuyers (i.e., those with more than a 20%down payment). Over the first three months of 2018, home sales declined 23%in OMREB and SOREB and 39% in Kamloops compared to December 2017 on a seasonally adjusted basis. The impact of the B20 stress test was likely most severe over the first three months of 2018, with home sales expected to recover over the second half of the year.
Compounding the impact of the stress test, Canadian mortgage rates have been trending higher over the past year. A household that could qualify at a contract rate of 2.5% one year ago, must now qualify at a rate as much as 300 basis points higher due to the combination of higher mortgage rates and tougher mortgage qualifications. As a result, conventional borrowers have seen their purchasing power reduced by as much as 25% compared to a year ago. However, it is expected that home sales will increase in the second half of the year and, consequently, will end the year down 4 to 6% in the region in 2018 and a further 3 to 4% in 2019.
Demand may be further impacted by the implementation of the Province’s so-called speculation tax. The tax will be levied on homes in Kelowna and West Kelowna that are left unoccupied for more than six months of the year. The tax presents a risk specific to Kelowna due to the region’s buyer profile and the near record level of new home construction currently underway. The Okanagan region has long attracted homebuyers from outside of BC, both for retirement and for those looking for recreational property. More than 15% of buyers in the OMREB region are from outside of the province, and those owners will be facing an annual 1% tax if their property is unoccupied for longer than six months.
Out-of-province buyers are an important source of demand in the region and the impact of the tax has the potential to disrupt current development plans. With demand already slowing as a result of the tougher mortgage qualifications, further disruptions may impact the new construction industry by causing an overhang of supply and slowing of housing starts.
While there are headwinds to housing demand across the region, total active residential listings in the OMREB, SOREB, and Kamloops areas remain extremely low by historical comparison. In response to very low levels of inventory in the resale and new home market, residential construction in the Kelowna CMA, Kamloops CA and Penticton CA has ramped up considerably, resulting in a surge of units currently under construction. While we do not expect that pace of homebuilding to continue in 2018, as many of these units complete over the next several quarters, the imbalance between supply and demand is expected to diminish. However, that process may take up to 18 months to play out, and in the meantime, upward pressure on home prices will likely continue.