Jan. 12, 2018
2017 Market Recap & 2018 Forecast
Single Family Prices and Volume
1,605 single-family homes were sold in 2017, down 5.5% from the 1,699 sold in 2016. The average sale price for a single-family home increased 16% to $518,449 from 447,440 a year earlier, which was itself a 14% increase in the average sale price for a single-family home from 2015. The median sell price is relied upon as a secondary measure which will not be skewed by a few high priced homes selling at the top end of the market with 2017’s median price coming in at $489,900, up 18% from $415,000 in 2016.
Strength of the Trend
Factors we also look at when analyzing a market to validate its strength are sell/list ratio; sell price; days to sell, and current inventory numbers:
The sell/list ratio decreased year-over-year to 70% from 79%, suggesting a lower percentage of homes listed are successfully finding a buyer, with 30% of homes listed not selling, which in a market with such strong demand and low inventory, suggests some buyers are not being realistic with their pricing expectations or this figure would be higher.
The sell price/list price remained constant at 99%. This doesn’t mean that all homes are going to sell for 99% of the list price, as those selling significantly above the asking price in multiple offer situations are offsetting those sitting on the market for long periods and selling below 99% of asking. What this suggests is that for buyers it is still not deal hunting season. We remain in a sellers market, and if as a buyer you are finding that everything “is overpriced”, it’s not. This is the current state of the market. Limited supply and strong buyer demand means any attractive options are going to sell very close to, at or above asking. In the past, it may have been normal to offer 5-10% below asking to leave some room for negotiating. Not in this market, you likely won’t even get a response.
The average number of days on the market decreased 14% in 2017 to 24 days, down from 28 in 2016. This figure may be a bit misleading as the most attractive options throughout 2017 were consistently selling in less than a week. Where we see higher days on market is when homes are listed beyond their fair market value and have either waited months for the market to come to them or have ultimately had to price drop to secure a sale. With limited inventory and decreasing days on the market, buyers are having to react quickly, and therefore being pre-approved for financing prior to making an offer is all the more vital.
The number of active listings as the calendar turned over was 191, only 1 more than the 190 on the market at the end of 2016. What is interesting to note is that 2017 actually saw 114 more single-family homes hit the market than in 2016. With all this talk about historically low inventory numbers, it is important to point out that the lower inventory numbers are a result of a higher percentage of listed homes selling over the past couple years, than the number of listings being down. For example, if we travel back in time just 5 short years to 2012, there were 2,214 homes listed, less than in 2017. However, the percentage of homes listed that sold was only 46 percent, resulting in higher inventory levels throughout the year, culminating in a year-end inventory of 420 homes, more than double what we ended 2017 with.
Top Performing Neighbourhoods & Categories
In 2017, all 18 sub-areas defined by the real estate board in Nanaimo experienced a price increase, however, the weight of the increase varied significantly depending on the sub-area from 10% on the low end in Departure Bay to 29% on the high end in South Jingle Pot. Despite the headlines, not all neighbourhoods are moving in the same direction all the time. With real estate being location specific, it is vital to know what is going on in your area when determining whether the timing may be right to sell your home. For buyers, neighbourhoods will experience differing price action throughout the cycle. Again, it pays to know what is happening in each sub-area, to determine whether a purchase would be prudent.
There are 8 sub-areas that experienced average price increases of at least 20% - Brechin Hill, Cedar, Extension, South Jingle Pot, South Nanaimo, University District, Uplands, Upper Lantzville - with only South Nanaimo of the 8 also appearing on this same list for 2016.
However, price alone does not tell the story of a market as volume also has to be taken into consideration. Of the 18 sub-areas in Nanaimo, 7 experienced volume increases, with Cedar, Extension, Old City, Uplands and Upper Lantzville all experiencing volume spikes between 10 - 20%.
Patio homes were the top category in terms of the average price increase for 2017, up 32%. Following this, waterfront homes came in second at 26%, followed by lots (25%), single family homes (16%), apartment-style condos (15%) and lastly townhomes (14%).
Once again time to pull out the old crystal ball...Well not exactly...Here at the Jahelka Real Estate Group we have assembled what is likely the most formally educated, and arguably qualified team in our region to be able to interpret this market and make some sense of where it is going. While market timing is nearly impossible, there are signs and symptoms that do give us reasonable insight into the health of the market. I would equate this to going to a doctor for a check-up. They can’t predict the number of days that you have left, but they can rely on their years of formal education and experience to reasonably accurately determine if you are generally in good health. They will also use their training to identify major risks that could drastically shorten your life expectancy such as the discovery of a tumour or clogged major arteries, before setting out a prescribed set of actions to best deal with the situation. Working with an educated, experienced Realtor is actually quite similar. You can choose to work with those qualified to competently guide you through the various real estate cycles you will encounter over the course of your life, or you can work with the guy you enjoy having a beer with who they just pulled off the scrap heap at the used car lot who will tell you “I don’t know where the market is going, I don’t have a crystal ball”, “We are at the start of a 7 year cycle” or “You should buy now to avoid missing out” or “I don’t see this ever slowing down as Nanaimo has just been discovered.” While we make light of it, these are all responses we have heard in conversations with licensed Realtors during the current market cycle. Again, your choice...Realtors are being paid like Doctors in many cases, shouldn’t they require some level of qualification or understanding of the market to earn your business?
Here’s our take on what is to come:
Demand: Demand remains solid as we head into 2018, with 2017 fourth quarter single-family home sales numbers eclipsing 2016’s Q4 figures by 29 percent. While pending changes to lending qualification parameters may have played a role, the spike in sales numbers was likely more a result of the pent-up demand from the previous months and those who are actively searching having more homes to choose from with 25% more new listings hitting the market in Q4 2017 than Q4 2016. We see this pent-up demand carrying over and remaining relatively strong through at least the first quarter of the year. Beyond the first quarter, the number of new listings hitting the market will play a factor in determining how long it will take to satisfy the pent-up demand that currently exists before markets revert to more balanced conditions.
Longer term, you have to look at the underlying factors that drive demand, and here is where we start to have some questions. While Nanaimo’s population growth rate exceeds the provincial average, it is by no means excessive and not driven by any major economic activity that would lead you to believe population growth will play a major role in driving demand beyond a normalized level in the coming years. Although improving, Nanaimo is still a community in transition from a traditionally blue-collar economy to more of a white-collar, service driven economy.
It is important to consider that demand varies at different price levels and for different asset classes. Starting with price levels, Nanaimo has experienced average single family home price increases of 14% and 16% in 2016 and 2017, so when you consider that the most recent census indicated that the median household income in Nanaimo is $62,822, with an average total income of $76,942, and with mortgage qualification becoming increasingly challenging with the stress tests that have been put in place, it is inevitable that at some point you hit a wall where regardless of whether or not buyers would like to purchase at a certain price level, they are simply unable to qualify for it. Using CHMC’s Mortgage Affordability Calculator in a scenario where a buyer had a downpayment of $25,000, property taxes were $3,000 per year, and heating costs were $150 per month, with no significant consumer debt, at the Bank of Canada’s current qualifying rate of 4.99%, the median household income in Nanaimo would qualify for a mortgage of $244,470, and the average household income would qualify for a mortgage of $284,237. Yes, you read that right. The average household income in Nanaimo would qualify for a mortgage $234,212 less than the average home price in the city… In addition to the mortgage amount, of course, you would add your down payment to this figure to determine your maximum house price, but in the World’s most indebted nation, how many citizens of Nanaimo with a household income of $76,942 or less have $234,212 readily available to use merely to purchase what amounts to an average home? Homeowners who have been in the market a while and rode this cycle upwards resulting in substantial home equity that they could turn over, maybe; first time home buyers and young families just getting established, no chance. Make no mistake, this will have a significant impact on demand and ultimately housing prices. We see this as the number one headwind the Nanaimo housing market currently faces as the largest block of our population is the baby boomers, many of whom are now empty nesters living in the 3,000+ square foot homes they bought in the $200,000 - $300,000 range a decade ago, that are now valued well beyond the grasp of the average household in town based on income qualification. This leads us into the consideration of demand for different asset classes. With the aging population, it is no secret that baby boomers now becoming empty nesters will be looking to downsize in the coming years. However, selling their 3,000+ square foot homes requires buyers, buyers require financing, and buyers will likely not be qualified to finance the homes coming onto the market at higher price points. You know where this is going… Where we do see sustained demand over the next decade is for low-maintenance, stratified properties catering to local empty nesters entering retirement and those increasingly seeking out Central Vancouver Island as their retirement destination of choice.
Supply: It’s difficult to predict with certainty how the market will react to rising prices, although greed seems to be playing an increasing role. While rising property assessments have many homeowners briefly considering “cashing-out”, the reality is selling your primary residence requires finding somewhere to go. Given the demographics with many baby-boomers becoming empty nesters, it is likely we will see some looking to downsize in the coming years giving serious consideration to making a move this spring to capitalize on heightened values. Overall, we see inventory levels slightly elevated from 2017 numbers, while subdued inventory levels and outright greed may keep sellers who should be considering listing on the sidelines in hopes of the market continuing to creep higher.
Looking out longer term, the coming years will likely see a significant supply of 3,000+ square feet homes hitting the market as empty nesters downsize to reduce expenses and housekeeping square footage to enjoy retirement. Increased supply without increasing demand at these price points puts downward pressure on pricing. Conversely, the supply of ground-oriented patio homes, condos, and low maintenance detached single story homes is likely to be insufficient to meet the needs of the downsizers. As such, the gap is likely to close, with a premium being paid for housing options well suited for seniors, while larger family and executive homes will likely become more affordable relative to incomes in the coming years.
Interest Rates: Given macroeconomic conditions across the country, we see the prime lending rate gradually increasing throughout 2018, with the first hike as early as this month based on solid economic numbers of late. The consensus among economists is that we are likely to see three .25% rate hikes this year, which we feel is a reasonable forecast.
Government Intervention: This area is always a bit of a wildcard. The Feds have continued to take action to try to contain the inherent risks in our country’s rising real estate market and household debt levels. They continue to implement tougher rules on mortgage lending and could clamp down further in this area. We are expecting the Government will take a wait-and-see approach, evaluating how recent intervention will impact the market, with many analysts predicting the housing market will cool nationally in 2018. If conditions nationally do cool, government intervention is not likely to have a major impact in 2018. Closer to home, there has been talk that continued strength in BC could see the 15% foreign buyer tax implemented in areas outside of the lower mainland. While we saw the Vancouver market largely rebound after the cooling that immediately occurred when this tax was brought in back in 2016, the impact would likely be greater in smaller centers where many foreigners have been buying higher end real estate to avoid this tax. At this point, it is still unlikely that the foreign buyer tax will be implemented in Nanaimo anytime soon, it is important to note that government intervention can have a significant immediate impact on real estate markets. Although trying to predict what is to come here would be foolish, given the political climate and market conditions, we just want to caution that market conditions can change very quickly as a result of government intervention.
Other Markets: For buyers coming from out of town, Nanaimo is always being compared to other markets and affordability plays a huge role here. The Greater Vancouver market is really the “straw that stirs the drink” in our provincial housing market. It is important to keep an eye on the Vancouver market as these same affordability challenges are even more prominent. The BCREA predicts the Real Estate Board of Greater Vancouver will see volume decrease by approximately 10%, with overall prices up a further 5.5%, and single-family home prices up slightly at 1.2% in 2018. Should a scenario similar to this unfold in 2018, it should not have a material impact on the Nanaimo market. However, if the Lower Mainland was to be hit by a more serious correction, a ripple effect is likely to impact Vancouver Island communities, which would no longer be as attractive from an affordability standpoint relative to Vancouver.
The primary opportunity we see in 2018 remains undoubtedly on the sell side.
Buyer demand is still quite strong, the sell/list ratio is high, days on market is low, and competition about 30% of the time is driving transaction prices above the asking price and likely beyond market value. Markets can turn quickly, while we don’t know how much further this market cycle has to run, we do know conditions are solid currently and trying to time a top is a recipe for disaster.
Current market conditions present a solid opportunity for those looking to downsize in the coming years to lock-in their recent gains. We have already started to see increasing demand for properties well suited to senior living, such as patio homes (prices up 32% in 2017), ranchers, etc., and we expect this trend to continue in the coming years. With this being the case, we see price appreciation is more likely in these categories of housing than others, so 2018 may present a good opportunity for those empty nesters in larger homes to transition to their retirement home at a reasonable price point before prices continue to be bid up to an unreasonable level.
In our view, given the rapid price acceleration in recent years, it may be prudent for investors to take some money off the table to move into other markets that appear to have more immediate upside potential, or in a worst-case scenario, to limit exposure to a possible market correction in years to come. Without a substantial down payment, finding cash flowing residential properties in Nanaimo is nearly impossible, so we would take extreme caution if you are looking to expand your investment portfolio in Nanaimo. It is our view that purchasing a negative cash flow property has only one certainty...You will lose money...While we don’t know how long this will be the case as rents generally do rise over time, buying a home and speculating that prices will rise in the coming years is a flawed strategy when you could buy in other markets or asset classes (eg. commercial) and guarantee positive cash flow.
For developers, we see the best opportunity in developments catering to the aging, downsizing population. Low-maintenance, ground-oriented, stratified properties with higher-end finishings, enough room for family to visit, and plenty of storage for all that “stuff” should garner strong demand. Single detached ranchers, and lifestyle properties in close proximity to golf courses and marinas should also be well received.
For buyers, as noted above we see opportunity for downsizers to potentially secure their retirement residence at decent price levels. Yes, prices are up for all asset classes, but you are better to sell high on the higher priced property, and buy high on the lower priced property than sell lower, and buy lower down the road. For example, if you sell a larger home for $600,000 and buy a townhome for $300,000, you have an additional $300,000 to fund your retirement. If the market corrects 10% across the board, you now sell for $540,000, buy for $270,000 and have only $270,000 remaining to fund your retirement. It is also important to note that given the demographic-driven demand, the buy lower option may never come.
When we say we see the primary opportunities being on the sell side, we are by no means suggesting that now is the time to sell for everyone, as individual circumstances differ, as do investment objectives, etc. Remember, we all need a place to live and over time real estate generally appreciates. We just know there are peaks and valleys and we have reason to believe we are closer to the peak than the valley.
If you have any questions about market conditions, would like more details specific to your neighbourhood, or for a consultation specific to your situation, please feel free to contact us anytime as we would welcome the opportunity to help.
All the best for 2018!
250.751.0804 | firstname.lastname@example.org | www.jahelkagroup.com