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First Half of 2019 Marked by Continued Volume Slowdown

 

Under Nanaimo

 

Written by on July 9th, 2019
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First Half of 2019 Marked by Continued Volume Slowdown

Single Family Prices and Volume

112 single-family homes sold in June, 24 less than the 136 sold in May, and 4 more than the 108 that were reported as sold in the same timeframe last year. The average home price decreased by 2.19% in June to $580,330 from May’s average of $593,326, however this is still over 4% higher than reported last June when the average home price was $556,879. The median sale price decreased by a fraction to $574,888 in June from May’s $575,000 which is 9.3% higher than the same time frame last year when the median sale price was $525,900. 191 homes were listed in June, which was 20% less than the 240 homes listed in May, and 18.4% less than the 234 listed in June of 2018.

Insights: Nothing overly notable to comment on here. Transaction volume remains subdued, as does the number of new listings. Lack of supply has been a bit surprising but is certainly helping to keep our pricing figures looking fairly strong in Nanaimo, despite what is happening in other markets. While buyer demand is down, at the lower end of the pricing scale there are just so few homes being listed that when homes do come up they go very quickly and there continues to be upward pressure on pricing.

If you have been following our commentary, you will recall that earlier this year the theme seemed to be that the sub-$600k category continued to be quite competitive, while the higher end of the market (which we had defined as $800k+) in Nanaimo had experienced a noticeable slowdown with active listing numbers starting to climb fairly steadily. However, the last couple of months we reported the $800k+ market had started to show some signs of life. So far we have only 5 June sales registered over $800k, a noticeable slowdown from the 16 in May. There are currently 141 homes priced above $800k on the market in Nanaimo, which is up from 128 at the end of May. Based on June’s absorption, this equates to 28.2 months of supply. While there continues to be very little supply below $600k, the higher end of the market is continuing to experience elevated inventory levels, which we continue to believe at some stage is going to result in downward pricing pressures at various price points.

So what are the factors driving the volume slowdown? In our opinion, there are a few factors at work here. Firstly, it is important to note that the reality is local buyers continue to face affordability constraints and there are just not enough homes at price levels to be absorbed by the market that local buyers can afford. A second contributor to the slowdown is that in higher-priced neighbourhoods, sellers are likely still referencing what their neighbours sold for in 2017 or 2018 and using these figures to anchor their opinion of value, as opposed to recognizing that conditions are shifting and there is more choice for buyers at higher price points with less buyer demand, so pricing competitively is increasingly more important if there is motivation to sell. Thirdly, we are seeing less out-of-town buying for a few reasons. Slowdowns in other markets are resulting in some nervousness from buyers, price declines in other markets while our market has remained relatively resilient is closing the “value gap”, where buyers can no longer to the same extent cash out on their mainland property and buy a much more impressive home in this area and pocket the rest for a rainy day. Further, the foreign buyer and speculation taxes have both served to reduce out-of-town buyer demand. Taken together, it doesn’t appear that volumes will be significantly picking up any time soon.

So how did Nanaimo stack up against other Island communities north of Victoria for the month of June? Looking at the average price, Nanaimo up 4% year-over-year was only eclipsed by Port Alberni/West Coast up 25% (on low volume). Coming in behind Nanaimo, but still in positive territory were Campbell River and the Cowichan Valley, both up 3%. The Comox Valley was down 1%, but more notable was Parksville/Qualicum, which was down 6%. Volume wise, Nanaimo up 4% and Cowichan Valley up 1% were the only zones to see an increase. Port Alberni saw volume fall 31% from the same month last year, Parksville/Qualicum was down 15%, Campbell River was down 9%, and the Comox Valley was down 4%. Looking at the entire Vancouver Island Real Estate Board totals, the average sale price was up 4% while volume was down 7% from June of 2018.

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 increased to 59% in June, which is up over 28% from June of 2018 when the ratio was 46%.

The sell price/list price decreased to 97% in June after four consecutive months at 98%, which is down from June 2018 when it was 99%.

The average days on the market increased by 6 days to 30 in June, which is 50% higher than June of last year when days on market averaged at 20.

As of the end of June, the number of active listings was 392, up almost 3% from May’s 381 active listings, but 2.5% less than at the same time last year when there were 402 active listings at month end.

Insights: When considering both month-over-month and year-over-year figures, 3 of 8 market indicators in this section improved and 5 deteriorated. These figures and the month-to-month volatility we are seeing here is consistent with a market that continues to transition to more of a balanced overall market from the strong sellers’ market we have experienced for the past number of years. By and large, the numbers we are seeing by historical standards are still quite respectable.

Top Performing Neighbourhoods & Categories

10 of the 18 sub-areas defined by the real estate board in Nanaimo saw an increase in the average selling price (trailing 12 months) from May to June, with 11 of the 18 also experiencing increased prices year-over-year. When looking at these neighbourhood figures, it is important to note that we use trailing 12-month figures to limit volatility caused by lower transaction volumes in some neighbourhoods, where a few high priced or low priced transactions could tremendously skew results. A trailing 12 figure will always be slower to react than simple month-over-month, so that is why the results here are not going to be as pronounced as the figures used in the stats we report above. Moving on, these year-over-year average price changes range from -7.65% in Brechin Hill, the bottom performer for the third month running, to 14.32% in Hammond Bay. The top riser month-over-month for the second month running was Hammond Bay with Central Nanaimo the second highest. Top performers year-over-year were Hammond Bay, Cedar, South Nanaimo, Pleasant Valley, and Diver Lake. Looking at volume, 7 of the 18 sub-areas saw increases month-over-month with Pleasant Valley and the University District coming in as the top risers, while only two neighbourhoods, (North Jingle Pot and Upper Lantzville), saw increases year-over-year.

Insights: Difficult to draw any significant conclusions here. Some neighbourhoods are up, some are down, with seemingly no particular rhyme or reason. I’d suggest the results here are simply reflective of a market trending more towards balanced conditions.

Apartment-style condos and lots were the only categories that saw an increase in average sale price from May to June, while all categories with the exception of single-family waterfront homes experienced increases from June of last year, but this should be taken with a grain of salt as only 2 waterfront homes sold in June, so the low volume of transactions does not provide an overly accurate picture of the category. No categories reported month-over-month increases in sales volume, while single-family homes and lots did experience increases year-over-year.

Insights: Again, struggling to draw any meaningful conclusions here along category lines. From month to month, there has not been a lot of consistency with top performing categories. This lends further support to the belief that we are trending towards more balanced market conditions. The month over month volume decreases are not a huge surprise as May typically tops the charts as the highest volume month of the year, so a step down in June was somewhat expected.

Opportunities

For the past number of months, there has been very little new to report in this section of our recap. From our perspective, we see overall, that so far in 2019 the market has continued to trend towards more balanced market conditions. However, the key term there is “overall”, as within the overall local market, we continue to see some fragmentation or noticeable variances among price brackets and categories. The general trend over the past number of months, when you zoom in on different price ranges for single-family homes, is that there has been some noticeable disparity amongst price ranges. Again, while we don’t like to generalize, you could look at the sub-$600k range as still being very much a seller’s market as long as the home is priced reasonably. The $600k – $800k range is more balanced, but trending towards a buyer’s market at the higher end of the range, with the $800k + range with approximately 28 months of supply based on last month’s absorptions numbers would be considered in buyer’s market territory.

The sub-$600k market is still overheated, as affordability constraints of local buyers and a subdued supply of listings in this price range has created a competitive market in this price range. If you are a homeowner or investor thinking about selling your home priced below $600k – $650k, with the lack of suitable options for buyers and still strong demand, you have a great opportunity to sell into strength. While we don’t have a crystal ball, we see that in the coming years if inventory levels remain elevated at higher price points, at some stage motivated sellers are going to adjust their pricing expectations to secure a sale. We’d anticipate that there will be somewhat of a ripple effect, where we are going to see more value at various price points than we are seeing now. While we don’t foresee average prices correcting much, if at all, in the coming year or two, what we do see is that dollars will likely stretch further and buyers will be able to buy nicer homes at more affordable prices than they can today. When you have 2,000 square foot 60s and 70s homes in marginal areas on the verge of needing $50,000 worth of work to replace all the majors (windows, roof, furnace, etc.) listed above $500,000, we don’t see that as sustainable, as Nanaimo household income levels simply won’t be able to support it. The only reason sellers are getting away with this so far this year is that there is limited supply at this price and lots of buyers. When the homes that are not moving at higher prices start to be priced more competitively (if they do) and become competition, these homes will eventually have to be priced more attractively to move. The other important factor is that if prices start to come down and the masses become fearful that prices could be declining, those fearful of a falling may list their homes to limit their downside risk. The result of this is increasing inventory, more choice for buyers and the weaker options at a given price point will need to adjust their pricing to remain competitive. In summary, if you are thinking about selling a home that may need a fair amount of work or that isn’t in the most ideal location, sell into strength – strong buyer demand and limited inventory, don’t wait until inventory levels pick up and buyers have more choice and room to negotiate, as is starting to happen at high price levels.

On that note, where do we see opportunities for buyers? Well, with 141 homes priced above $800k currently on the market, there has to be a few motivated sellers out there getting increasingly anxious and who may be ripe for reasonable price concessions. For buyer’s looking at higher end homes, we’d caution you to take your time as seller sentiment is still optimistic that the current slowdown is still just a hiccup on a further trek upwards in pricing. However, upon further examination, when you start looking at what has caused the higher end of the market to stall out, our take is that there is a reasonable likelihood conditions get worse before they get better, so some patience from buyers is likely going to be rewarded. So you may be wondering what has caused the higher-end market to stall out? Here is our take… On the demand side, the cooling lower mainland market and intensified media coverage of the slowdown is making lower mainland buyers fearful of buying, and the foreign buyers’ tax and speculation tax has nearly killed demand from foreign buyers. When you look at the origin of buyers of higher priced homes at the peak of this cycle, much of it was mainland and foreign buyers who had the income levels to finance or the cash required to purchase these higher priced properties. When you remove the out-of-town buyers, local buyers simply can’t support the current price levels. Looking at the supply side, contributing to what we feel will be some pain here is the fact that increasingly you have the largest block of our population (aging baby boomers) who are living in these $800,000+ homes and are looking to downsize in the coming years. This will likely only lead to an increase in the supply of homes priced towards the top end of the market, as Nanaimo income levels will not qualify buyers for financing to absorb the increased supply of homes coming on the market. Until we see substantial renewed demand from out-of-town buyers with deep pockets, this should result in even more choice and negotiating strength for buyers at the higher end of the market.

While sellers of higher-end homes may have missed the top of this market cycle, life circumstances will continue to drive sellers to list their homes. With more listings currently on the market and fewer buyers, it is all the more vital that the home is priced accurately and competitively to maximize exposure when interest is the highest. So if you are listing, selecting a Realtor with a strong marketing platform and an active approach to marketing your home is becoming increasingly important. While we went through a period for the last few years where a For Sale sign and an MLS listing were enough to entice buyers to write an offer (definitely not our approach), in this market that haphazard approach is simply not going to cut it.

For investors, on the buy side, patience is going to be rewarded. If you are considering an income property, our take is that currently you are likely best served by looking at other markets or waiting it out as there is no way you are going to cash flow on a leveraged purchase. Given what we have outlined above, we would not recommend speculating on further price appreciation with a negative cash flow property in this market. For multi-family investors, cap rates are at historic lows and therefore valuations at all-time highs. Factoring in the significant number of purpose-built rental apartment buildings currently in the development permitting or building permitting stage, the increased supply of rental units in the coming years is going to potentially put downward pressure on rental rates, and push up vacancy rates which are already starting to increase. While expectations are that further interest rate hikes are likely on hold for the foreseeable future, rates are still below historic norms, so it is likely that at some point over the next few years we will continue the climb to a more normalized interest rate environment. When that happens, eventually cap rates will start to see a similar increase towards more normalized levels. Without the upward pressure on rents, this is setting the stage for decreasing values. We’ve not exactly described the ideal conditions for investment.

Remember, over time real estate generally appreciates. We just know there are peaks and valleys. Buy on the way to the peak and you are positioning yourself for success, buy on the way to the valley, not so much. It is our mandate to provide you with information that you can use to determine which side of the peak we are on, and ultimately to help you make informed decisions that you will not regret. On that note, a word of caution: Be very careful where you get your information on the real estate market. The reality is most who are providing an opinion (us included), have their income level influenced by the real estate market and therefore have a vested interest in keeping this juggernaut going. When we once again reach all-time highs in Nanaimo for average single-family home sale prices, statistics like this can be used to paint a picture that simply isn’t the reality.

For a consultation specific to your situation, or if you have any questions about market conditions, please contact us at info@jahelkagroup.com and we would be happy to help.

Check out the Nanaimo Market Statistics Here: Market Statistics June 2019

Source: VIREB