The graphic above first appeared on HHV in 2009. Since then, interest rates (or "Today" on the graphic) shifted left (or down) while the median price did almost exactly as Reid (the maker of the graphic) predicted: rose to around $550K.
In all the time we've been writing and reading about the Victoria market, perhaps the single biggest correlating factor in local prices has been to interest rates. I'm inclined to believe, that above all else, interest rates are driving the Canadian, and the Victoria, real estate market.
BMO Bank of Montreal released a survey recently that suggests more than half of BC households won't be able to manage their current mortgages if rates climb 2%. I know most of you are thinking rates wont climb 2 % anytime soon; and I am inclined to believe that too; the economy just doesn't appear to be headed in the necessary direction to make rate hikes happen anytime soon. But stranger things have happened and there is a strong possibility given all the noise by "people in the know" lately that rates will rise quicker and faster than expected.
Again, you'll have to shift your eyes to the left a bit (or just subtract roughly 1% from the numbers at the bottom), but you can see the cause effect relationship between cheap money, high home prices and stagnant incomes.
I know that a fair number of you will suggest Victoria is insulated because:
- lots of people own their homes outright
- a few people pay cash for houses here
- there isn't much turnover in our market anyway
To that I say it matters not a whit.
Ultimately, what matters is what the people doing the buying at the bottom tier of the market can afford. Real estate markets are like a game of Jenga. Remove the blocks at the bottom and the whole thing comes tumbling down quickly.
If the people doing the buying in the $400K-$500K segment today see $100K disappear in their mortgage qualification amount over the next 2 years, we can reasonably expect to see prices reflect that to a degree. I see no reason why prices would be more sticky when they are falling than when they were climbing--in other words, why would the market reflect falling affordability differently than rising affordability?