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Single detached in the GVA have lost the investment value and may last for 3-5 years - EN

The Bank of Canada hiked the overnight rate again, to the highest level since 2001: https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/


After keeping interest rate unchanged for six months, the Bank of Canada raised interest rate again by 0.25% today, to 4.75%, the highest since 2001. The single detached in Greater Vancouver Area (GVA) have lost its investment value and may last for 3-5 years - the Future Perspective


A recent survey by BMO shows that a large number of Canadians have plans to buy homes, but they are waiting for interest rates to fall: https://betterdwelling.com/most-canadians-are-waiting-for-rates-to-drop-to-buy-a-home-bmo-survey/. From a realistic point of view, the determination of the Bank of Canada to resist inflation has not changed. Even if raising interest rate is a double-edged sword, in the case of raising or not, the central bank has chosen the former because: stable prices and stable Canadian’s livelihood are more important than anything else. We can indeed feel that the prices of some groceries/commodities and energy are falling, but the significance of raising interest rate this time is to show the market that any possible rebound will be contained.


At present, the single detached in GVA have basically lost the meaning of investment, because the value of land has been squeezed to the ceiling by the extremely unbalanced supply-demand relationship. For builders, the cost/risks of obtaining land are too high, and the holding cost is too long and risky, but the new houses cannot be sold profitably. Therefore, in the next 3-5 years, the demand for single detached homes in GVA is highly likely from those owner-occupied buyers, not investors. In terms of investment income, if you buy a house now and aim to sell it without losing any money including all holding costs after 3-5 years, then this is how much you would like to put into the offer.


For sellers, because of the high proportion of owner-occupied in GVA, many sellers are targeting at the previous high point and are no longer willing to cut prices. If it is not for some financial reasons, few will take the initiative to sell at a reduced price, even if the price listed is higher than the current market value, because they know that they will sell at a higher price in the near future. This kind of logic was okay in the past, but now, "higher price" are subject to some strict conditions . Housing prices in GVA are complicated, but they can also be very simplicity:


It is complicated because Canada is a country powered by immigrants with multicultural backgrounds coexisting. However, the values of new immigrants are quite different, and it is not easy to be replaced by common acknowledgements. The complicated reason is that a large amount of overseas money has poured into the local real estate market and good news is that most of them are still willing to stay in the local market, but because these overseas money come from different countries, where affected by different politics, economy, and macroeconomics aspects, the flow of these money is unpredictable and uncontrollable. Benefiting from a good international reputation, a stable financial system, and a more inclusive cultural environment, we are not worried that these inflowing money will flow out in large quantities. On the contrary, we will continue to see more new money slowly flowing into Canada. However, compared with what it was happening 10 years ago, the current increase of the amount of capital inflow is very low, let alone a geometric multiple increase, it becomes even more difficult to push up housing prices to a higher position again.


The simplicity side is that there are four elements that are optimistic about the real estate market in the long run in GVA: land scarcity, newcomers, ideal environmental aspect, and high proportion of owner-occupied properties. In the long run, unless there is force majeure, there is almost no risk of falling. Macroscopically, the GVA benefits from its unique geographical advantages, which is no more new land, making land rare and expensive. This is the fundamental reason of the extremely high housing prices in the GVA, and highly UNLIKELY you would see a decline in future.


The main contradictions at present are: the newly built houses are insufficient, the inventory is low, and the asking prices from the market are too high to exceed the purchasing power of buyers. For buyers, it is difficult to obtain mortgage and the high cost of monthly payment are also critical reasons that prevent them from accepting higher prices. It is believed that this kind of contradictory relationship will continue to exist in the GVA for a long time. The fundamental reason is that land resources are very scarce. Compared with other big cities in North America, GVA is a very typical large residential area with a high proportion of owner occupied, so the money entering into the real estate market will be sitting in the properties deeply, ranging from 7-8 years to decades at most, and basically, it is rolling locally. We don’t see overseas money growing exponentially in the short term and it’s unlikely that it will enter into the GVA again with a large amount in the short term, because it’s easy to increase average price from 500,000 to 1 million, but from 1 million to 2m or even from 2m to 4 m, the need of amount of new money is almost astronomical and unrealistic. Although Canada is a financially stable market, it is not the best choice for international hot money to get high profit from. We are unlikely to seeing more and more money coming into Canada. The existing money can keep the local market from falling, but it cannot form an upward momentum.


Through our daily business practice in the primary and secondary markets: the biggest obstacles for buyers at present are: high interest rates, pressure on mortgage, and low inventory. However, because the limited inflow of overseas money and the amount of profit generated from the historical transaction, the real estate market are far below the total amount supporting the continued rise of the market, it is stuck in an embarrassing situation: purchasing power has not changed, supply is small, and prices are high. This is the reason why the rental market has been booming in the past 12 months. Those who are temporarily on the sidelines or who are unable to buy a house choose to rent a home and wait, which has pushed the rental market to its peak in the short term. Many of them are looking forward to the decline of interest rates, so that they have the opportunity to buy a house, however, the reality is crucial, isn’t it?


In the next 3-5 years, no matter what type of properties you would buy, the buyer's realistic goal is to be: after holding it for 3-5 years, you are able to sell it at a price at least equal to all the cost you have paid for. If you are still interested in investing in the local real estate market, you can try townhouses or apartments aged at 15-30 years, definitely no pre-sales, no brand-new attached. The ideal price range is between $500,000 and $1.2 million. and the goal is to have a flat or positive monthly cash flow with a holding term of 3-5 years, eventually, the proper profit should be between 10%-20%.



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-2023-



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