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Vancouver housing market crash in 2023? Vancouver Real Estate Bubble?

For an update see Vancouver Housing Market Forecast 2024 with REBGV Economist Andrew Lis

Updated by Vancouver Real Estate Agent Matt Scalena PREC December 16, 2023

Ten months of declining sales and a Q4 that sent Adam on paternity leave. 2022 was a doozy. But we are not here to talk about last year’s news. The burning question is: if and when will Vancouver real estate crash? And is the Vancouver real estate bubble a concern in 2023?

BCREA’s Chief Economist, Brendon Ogmundson, sits down with Matt & Adam in studio to discuss interest rates, sales volume, inventory numbers, immigration and where the market will be by the end of this year. This is a market update and forecasting episode you can’t afford to miss. Listen up!

A host of the national bank experts are predicting that we will hit the bottom of the market this spring. Is the Vancouver real estate bubble a concern? Will house prices go down in 2023?

We do think the market will bottom out this spring and we’ll see some recovery in housing prices after that. We are seeing bond yields drop and the five year fixed rate will reflect that.

So we are seeing what we need to see for this scenario to play out, but it’s still early. The housing market is so interest rate sensitive, it’s hard to predict.

Will we see a return to normal for the Vancouver real estate market?

We ended 2022 in Vancouver with about 10,000 listings and a healthy number is north of 15,000. So inventory is still quite low, mostly because we started at such a low level. Sales have been slow and new listings are below average.

The risk is if we’re in a recession with high unemployment and high interest rates, we’ll see distressed sales where sellers need to sell ASAP in large part because of unemployment and high mortgage rates. We’re watching mortgage defaults and listings. So far, we’re not seeing any distress but we’re watching.

On the inventory side, I think we’ll still see slow accumulation. Past 2023, I think we’ll still be stuck with a broken supply side. The demand factors have not gone away.

Let’s play out the worst case scenario for BC in terms of housing prices. When will Vancouver real estate crash & is that in the cards for 2023?

Even if home prices rise, they will still be down compared to the peak in 2022. We won’t get back to that peak volume-wise or price-wise.

A lot of markets have come down from their peak and housing prices are flattening out. Will housing prices go down further? In a worst case scenario with a recession, high unemployment and high rates, yes. Then we’ll see that distressed selling that puts downward pressure on pricing. But that does not mean the Vancouver real estate market will crash.

Our baseline or expected scenario is things flattening out across BC. Prices have already come down a lot from the peak.

My prediction is home prices may come down a bit but we’ll mostly see a flattening until things start to pick up again in 2024.

What are the most and least resilient housing markets in BC?

The most resilient housing markets would be Kamloops and the Kootenays. If you look at the sales in the Kootenays in 2022, it looked like a normal year. They didn’t see the same huge spike in sales during covid. Northern BC is the least interest rate sensitive, making them quite resilient too.

Real estate markets with more downside are ones like the Fraser Valley that saw such a huge run-up during covid.

But a lot of those markets have already come down and still have good demand factors, like Surrey where we’re still seeing a lot of growth. Abbotsford and Chilliwack are still growing a lot too. They’re not ghost towns, but there’s just not all of this demand at once.

What does the next year and a half look like for Metro Vancouver? When will Vancouver real estate crash if it does?

I think 2023 is going to be a pretty tough year for the Vancouver real estate market. We are very interest rate dependent and it’s still unclear which way interest rates are going to go.

I think five year fixed rates will continue to get lower. I think the Bank of Canada will be cutting rates by the end of the year and we’ll start to see decent recovery.

It will be similar to the time in 2018/2019 before rates changed. We heard a lot of talk about recessions then but no one saw the pandemic coming.

In 2023, I predict growth will slow but we’ll also hopefully see rates start to come down and inflation normalize. We’ll be in a much different market by the end of 2023 and set up for strong demand in 2024 and 2025.

What macroeconomic trends are you seeing that affect housing?

I fielded a lot of calls recently about the new foreign buyer ban. However, this ban will likely affect less than 100 sales a month, with all of the loopholes and exemptions. But what we’re not talking about is record immigration targets: 500,000 new immigrants over the next three years!

The foreign buyer ban over a two year period affects maybe a couple thousand sales across the province. While the increase in immigration could see a 30,000 household increase in BC. So that demand impact is quite a bit higher, on top of a market that already has a huge local demand and supply shortfall.

Let’s talk about affordability in the Vancouver housing market.

Any large city, like Vancouver, becomes a very wealth-based market. There’s a lot of money in Vancouver. People have made a lot of money in real estate over the past 25 years. The wealth transfer from Baby Boomer to Millennial or Gen X is a big deal. And unfortunately, that wealth transfer has become necessary for younger people to get into this market.

It’s hard to save $100,000 as a 30 year old for most people. Even an apartment is a $600,000 mortgage, which is a huge hurdle to clear with today’s high interest rates.

Even the CMHC report that looks at the supply gap says that just to get to a 44% affordability (mortgage to income ratio), which is higher than the 30% norm, would require a $200,000 drop in average housing prices. That’s just not going to happen, especially since we’re not building enough of any type of housing whether that’s strata, rental or social housing.

What real estate markets are set to take off when activity comes back?

It’s as simple as supply and demand. If we’re going to have that much immigration, we’ll see upticks in Metro Vancouver and big cities, like Vancouver and Surrey. That’s the biggest driver long term. Those markets will probably still be undersupplied because we’re so behind.

Our best housing policy would be to build a time machine, go back ten years and build all the housing we didn’t build because we were too busy talking about foreign investors.

We’re not going to get to a magic level of affordability at any time in Vancouver. (This is true across the West Coast of North America, as detailed in our conversation with New York Times’ Economics Reporter Conor Dougherty about his book on the subject). I hesitate to say it’s a lost cause but it’s really hard to get there. The best we can do is lower the growth rate of prices to make them more in line with income and employment, rather than lower prices. And we do that by increasing supply.

The biggest problem with Vancouver markets, and housing markets all over North America, is that demand changes overnight and supply takes way too long to catch up.

How does that demand affect rental stock?

Right now we’re really stressing out the rental stock with people in their early 30’s who can’t qualify to buy a home at the high interest rates. So the demand from demographics for housing is there, it’s just a matter of unlocking it. Lowering interest rates is the fastest way to do it. Lowering housing prices through more supply is another way, but that takes longer.

What is the headline for 2023?

The big headline is if we have a recession in 2023. Or maybe more accurately, “What if we have a recession and no one comes?” This might be the most forecasted recession in history but more and more we’re asking ourselves if it’s even going to happen.

For 2024, I think the headline will be about how it’s the year of recovery. I think it’s going to be a strong year for the housing market, unless everything shifts and the recession happens later in 2023 (UPDATE: we are heading toward a Recession at the end of 2023). But right now, we’re set up for a strong 2024.

What is the best case scenario for BC real estate?

Best case scenario is rates come down and we get back to a normal pace. I’ve been waiting for that my entire career! I’d love to see 85,000 sales with prices growing 2% across BC. I’d love to see a boring few years after so much up and down.

But it’s hard to get there with so many structural issues on the supply side. We’re so focused on the demand side but not the supply side. It’s hard to foresee a situation where prices stagnate given all the demand.

What regions in BC are you most excited about in the next 3-5 years?

I used to say Surreyand the Fraser Valley, but that was before prices spiked during the pandemic. Those are still growing markets and Surrey is a very young city too. I also liked to talk about Northern BC with all of the economic activity, but that’s starting to fade as some of the projects are ending. We also saw a ton of movement out to the Island, when that used to only be where retirees went.

For me, it’s always about demographics – so it’s fast growing cities like Surrey and Kamloops. Those cities saw a lot of growth in the last couple of years so they may not be able to go up as much in the next 3-5 years. But long term, I think those cities will grow.

Vancouver will still be the economic hub of BC and it’s a cool city young people want to be in. The affordability part is pretty challenging though. Young people who want to live in the city are probably going to be renting, but it’s hard to find rentals too. So we also need to work on rental stock.

Do you include environmental factors in your forecasting?

It’s tough to incorporate environmental factors in economic forecasting. It’s hard to model the housing market and even tougher when you add in climate change.

With markets in the Interior that endure these extreme weather events, all it seems to take is one season that’s normal and doesn’t see fires for the demand to pick back up. People seem to have very short memories for this stuff. The only way that might change is if insurance companies say they’re not insuring these incidents anymore.

The 5 Wire: Getting to Know BCREA Chief Economist, Brendon Ogmundson

What is a book you’ve read recently and recommend?

You ask for one but I always give you a few. I think last time I said The Nineties by Chuck Klosterman. I just read Everybody Loves Our Town: An Oral History of Grunge by Mark Yarm and Long Road: Pearl Jam and The Soundtrack of a Generation by Steven Hyden. So if you’re into 90’s music, that’s a good trio to read.

What new belief, behaviour or habit have you adopted recently that has improved your life?

I’ve tricked my brain into doing cardio by setting up an Xbox that I can play while I’m on the treadmill. So I’m doing that every morning. I don’t play video games any other time so it’s a nice way to start the day.

Favourite movie?

I love movies, so this is hard to narrow down. On my wall right now is The Godfather, Pulp Fiction, A Christmas Story and The Royal Tenenbaums. They’re all close to my heart.

Favourite band, music genre or live performance on YouTube?

I’ve seen Wilco live a few times and have some ska performances I love. Definitely check out this live performance of “The Mermaid Parade” by Phosphorescent.

What is something you’ve recently purchased for under $1500 that had a positive impact on your life?

For Christmas, we got our kids gift cards for Skip The Dishes and let them order food all month long. It was great! They’re always complaining about what’s in the fridge so this way they could eat whatever they want. Food was showing up constantly! Part of it felt so awful but they loved the food and didn’t bug me about it.