Housing sales set to drop

British Columbia is experiencing the slowly approaching end to its real estate market cycle due to astronomically high prices in the most expensive regions, Credit Union Central B.C. reported Friday.

In releasing its housing market forecast for the next two years, the agency predicts overall housing sales to drop to 128,000 units in 2007 from an expected 133,000 this year. Housing starts should dip to 36,600 next year, the report forecast, compared with 37,000 this year.

However, price gains are expected to continue, the forecast projects, with increases of six per cent in 2007 on the heels of 18-per-cent gains this year.

Provincewide, the average Multiple Listing Service recorded price is expected to hit $415,000 in 2007, compared with $392,000 this year.

Credit Union Central chief economist Helmut Pastrick said in an interview Friday that this represents "a gradual market adjustment" brought about by the affordability squeeze.

First-time buyers, the so-called low-equity purchasers, are being priced out of the market, which will reduce pressure on sales and housing starts, Pastrick said.

However, because the B.C. economy is still experiencing job, wage and population growth, sales will remain at relatively high levels and keep at least some upward pressure on prices through 2008, when he predicts price increases to slow to three per cent.

The cycle, however, is shifting. Pastrick said unit sales have been declining for the past 14 months, and housing starts have eased over the last seven to eight months.

Prices, he added, "are always sticky downwards."

"Perhaps we won't really see a negative sign in front of prices for the next couple of years," Pastrick said.

However, in regions outside Greater Vancouver, the Fraser Valley, Victoria and perhaps Kelowna, Pastrick is forecasting stronger-than-average housing growth.

Pastrick added that this cycle shift is unique.

"There hasn't been a phase like this," he added, "in the sense that the market adjustment is price-driven, affordability driven."

"Every other housing cycle has ended because of negative economic fundamentals [such as] rising mortgage rates, recession: those kinds of things."

However, B.C.'s fundamentals still look stable. Pastrick estimates job growth to continue, though it will slow due to labour-supply constraints. And, because of tight labour supplies, Pastrick is forecasting the average family income will climb to $76,600 by 2008 compared with $69,700 this year.

David Baxter, an economist and demographer with the Vancouver-based Urban Futures Institute, said he would refer to the real estate market's shift as a plateau rather than a downward adjustment, because sales and construction will remain at high levels.

And Baxter believes the slowing of housing demand is coming at the high end rather than at the low end with first-time buyers.

By that, he means people who wanted to cash in the equity they've earned in their properties through rising prices have "already done their thing."

Baxter added that B.C. markets have exhausted all of the price increases that were sparked by low mortgage rates that increased buyer ability to take on more debt. However, he believes that income growth could put more upward pressure on prices.

"We never have a normal market," Baxter said. "But we're going back to a stable or steady market. . . . We all know the market had to slow in terms of price and volume just because it can't continue at an exponential rate."

Tsur Somerville, director of the centre for urban economics and real estate at the University of B.C.'s Sauder School of Business, said high prices alone typically don't bring markets down, because buyers adjust.

Somerville added that higher-priced markets than Vancouver, such as San Francisco and London, have even higher home ownership rates.

High prices "put a brake on demand, but as long as there's not a lot of speculative building in the face of slowing sales, you're not going to drive some awful stake through the market," Somerville said.

(prepared by Derrick Penner/Vancouver Sun)