Low activity and low inventory characterize the market this year. But signs of growth are beginning to appear on the horizon.

The BC housing market is currently stuck in a low-activity equilibrium. Rather than robust buying activity and plentiful supply, the market is characterized by sales and listings far below normal levels. The result is that after a year-long adjustment to prices spurred by the sharp, rapid rise of interest rates, most markets are seeing a nascent return to rising home prices.

An uptick in home sales to start the spring, despite still high mortgage rates, indicates how much pent-up demand there is in the market waiting to be unlocked. However, unlocking that demand will almost certainly require a more substantial decline in interest rates. With the Bank of Canada on hold and fixed mortgage rates still stubbornly high, home sales are unlikely to fully normalize this year. As such, we forecast that annual MLS ®home sales will reach 75,530 units this year before lower rates and strong population growth push sales to 90,100 units next year.

While home sales remain close to 25 per cent below normal, the inventory of homes for sale has not accumulated significantly as potential sellers have held off on listing their homes in a slow market. While there is significant uncertainty surrounding the economic outlook, the current market shows no signs of financial vulnerability or highly motivated sellers. As sales recover into a under-supplied market, prices will likely continue to rise month-over-month and finish the year higher than at the start. However, on an annual basis, average prices are still expected to be down about 6.1 per cent from a record high in 2022.

Looking beyond this year, the impact of record high immigration and a likely decline in interest rates will put further pressure on prices. However, we are hopeful that an uptick in market activity will bring more listings to the market, and that recently announced changes to provincial zoning will expand the housing stock, moderating future price growth.

Economic Forecast

As we head into the second half of 2023, a widely anticipated recession has yet to materialize. The question of when or whether this recession will arrive—and with what severity—remains a matter of discussion and debate. Job growth in Canada has been robust, the unemployment rate is still at a record low, and consumer spending is still propped up by a strong labour market and the mountain of savings accumulated during the pandemic. That said, cracks in the economy may be starting to show.

In Canada, economic growth stalled in the fourth quarter of 2022 and in BC, we see early signs of slowing growth. Our Nowcast tracking measure shows annual growth slipping below 3 per cent for the first time since early 2021. We expect growth to continue to slow through 2023 with the economy ultimately expanding by less than 1 per cent this year. There is an emerging downside risk to the forecast related to the rapid pace of rising interest rates. A common saying about monetary tightening is that central banks should keep raising rates “until something breaks.” That something may have been the system of small regional banks in the United States which were revealed to be taking excessive risks with their deposit base, culminating in the failure of Silicon Valley Bank and plummeting confidence in the viability of select other small regional banks.

While Canadian Banks are not at risk, the extent of the fallout in the United States is not yet known, and there could be a general drawback in credit in the US and Canada as lending practices are tightened. A more significant slowdown in the US economy would naturally have consequences for BC export growth, compounding the impact of already sharp declines in global commodity prices.

High interest rates have prompted a slowdown in the highly rate-sensitive housing market. Home sales began the year down about 50 per cent from 2022, and even with some recent improvements remain about 25 per cent below normal activity levels. The impact of high rates and slow sales may also show up in the new home construction market, though very strong long-term demographic and population growth drivers will likely keep housing starts at higher than normal levels.

Lower resale market activity, combined with the knock-on wealth effect of lower home prices, would normally lead to a decline in consumption, particularly in spin-off consumption activity such as purchases of home furnishings, appliances, and building materials that tend to follow rising home sales. However, consumption is holding

up reasonably well, as indicated by retail sales growth in BC, trending between 3 and 4 per cent in 2022. A more pointed decline in consumption has likely been stemmed by the household savings accumulated over the past two years. How rapidly those savings are spent down will be a major determinant of how the economy will perform over the next year.

Ultimately, a recovery in the economy will rely on a shift from the Bank of Canada to lower rates, an outcome that can only arise from inflation returning to normal. Fortunately, inflation has been trending in the right direction. The three-month trend in both total CPI inflation and core inflation has fallen for three consecutive months, and total CPI inflation is now trending below its 2 per cent target. Looking ahead, gas prices have started to subtract from year-over-year inflation and will continue to do so in greater magnitude, absent a significant shift in oil prices.

Additionally, raw materials and shipping costs should benefit from a downtrend in global commodity prices and a normalization of supply chains. Given the Bank’s overnight rate is currently set about 150 to 200 basis points above where the Bank judges it should be in the long term, there is significant room for interest rates to come down once inflation has returned to its target of 2 per cent.

While it is still uncertain if the economy will fall into recession this year, the number of headwinds facing the economy make at least a substantial slowdown very likely. Our forecast is for the BC economy to eke out meagre growth this year, likely near 1 per cent growth in real GDP along with a material uptick in unemployment. That said, while some challenges to growth may persist into next year, we do anticipate the slowdown to be brief and for the economy to recover in 2024 as inflation normalizes, interest rates fall, and the housing market returns to more normal activity.

Lower Mainland Real Estate Forecast

Sales have trended downwards in the Lower Mainland- Southwest region of BC since monetary tightening by the Bank of Canada began roughly one year ago. Prices in the region are currently down about 9 per cent from their peak in February. The latest month of data shows tentatively increasing sales and prices, and declining active listings, which could indicate an inflection point for the regional housing market coinciding with the pause in rate hikes, but this remains uncertain.

Active listings are up 53 per cent from their nadir in December 2021, but are down about 10 per cent from their peak in November 2022. Listings, however, remain below the level we would like to see for the market to stay sustainably supplied to keep price appreciation in line with the consumer price index.

Growth in the BC economy appears to be slowing. The BCREA Nowcast, as of the latest data in February, indicates that real GDP grew 1.8 per cent year-over-year. The economy of the Lower Mainland region appears tobe slowing in a similar fashion to the broader provincial economy. However, despite ticking up sharply in February, the unemployment rate remains low at 4.8 per cent. The tailwind of a generally strong labour market has prevented prices and sales from declining more steeply from their peak last year.

Although the central bank has placed a conditional pause on further rate hikes, the Bank of Canada’s overnight rate has risen 425 basis points in roughly one year. Financial markets anticipate that rates will decline, but five-year fixed mortgage rates remain above 5 per cent and continue to siphon demand out of the housing market. It remains to be seen if the bank will raise rates further or if GDP or employment will stall in 2023.

Generally, our forecast is for sales and prices to stabilize in 2023 as interest rates likely decline, before sales and prices rise again later in 2023 and into 2024. In Greater Vancouver, we estimate prices will decline 4 per cent in 2023 before rising 2 per cent in 2024. In the Fraser Valley, we expect prices to fall 13 per cent in 2023 and increase 2 per cent in 2024. In Chilliwack, we forecast prices to fall 13 per cent in 2023 and rise 2 per cent in 2024. In 2023, sales are expected to fall by 4 per cent in both Greater Vancouver and the Fraser Valley, while increasing 5 per cent in Chilliwack. In 2024, we expect sales to continue recovering strongly in each region, with double-digit percentage increases.