Why are Metro Vancouver home values falling, and is it a bad thing?

METRO VANCOUVER (NEWS 1130) – To read a new report from commercial real estate and property tax appraisal firm Burgess Cawley Sullivan and Associates indicating Metro Vancouver homeowners have lost a combined $89-billion in home equity over the past year, you’d come away from it with many concerns.

The report is getting wide circulation through its distribution from a group called StepUpNow. It describes itself as a non-partisan group, though two of its directors have made significant financial donations to the BC Liberals in the past.

There’s no doubt that if you bought at the peak of the real estate market in 2016, and were immediately looking to sell in the coming years, to fund retirement for example, you’d be in a tough spot, and there’s a good chance you’d lose money on the sale of that property.

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How many fall within that category?

It’s important to keep in mind the drop off over the last year has come after many years of exponential increases in real estate values, in the view of wealth advisor Sophie Salcito with Vancity credit union.

“It was an unnatural run up,” says Salcito. “It was unexpected gains and much more than people who owned a home would have expected normally to receive. Everything has a market cycle. That’s typically what I’ll tell my clients, whether it’s your investments, your stocks, your bonds, your home, everything has a market cycle. There’s ups and downs to it, and the unnaturally long upward swing that we had, I didn’t think was going to continue forever. So now we’re having a little bit of a step back, and a breather, which is healthy for the market, I think.”

Because real estate tends to go up and down like any other asset, Salcito doesn’t factor in changes in home value on an annual basis when doing retirement planning or reviews with her clients, preferring to look at that number every two years. She acknowledges the shock value of this report’s $89-billion figure, but suggests many people were equally or even more alarmed about the rapid escalation we saw before this dip.

“That $89-billion number, they just love to throw that out there and scare people,” says Salcito. “But in actual fact, I think we were all pretty scared at the rising rate of values going on — because people realized, oh my goodness, how am I going to keep up with this, right?”

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As for why home values are falling, economist Tom Davidoff with the Sauder School of Business points to a number of factors.

“It’s challenging to attribute price declines in British Columbia to a single cause,” says Davidoff. “We have a foreign buyer tax that was put in a few years ago and then enhanced in 2018. We have the speculation tax, we have the empty homes tax in Vancouver, we have the tax on $3-million-plus homes. So there’s been a lot of demand measures, it’s true. On the other hand, we’re starting to see condo supply come online and we’ve got the [mortgage] stress test federally and real estate markets are generally cyclical.

“After a lot of up years, we may have been due a bad year anyway. It’s quite challenging to attribute the price declines to any one cause. I will say, the start of price declines in the middle of 2018 is consistent with a strong role for the provincial measures [in this decline].”

But Davidoff says the question of whether this price drop is a good or bad outcome, regardless of cause, depends on who you are.

“People who have been trying to get into the property market are finally seeing some room to negotiate and better pricing, but as the report indicates, home equity has fallen considerably, particularly at the high end of the market,” says Davidoff.