Mortgage in arrears have increased 22% since Eitel Insights indicated a rise was imminent. That is only a tenth of the anticipated increase to occur over the upcoming years. Rising mortgages in arrears does not make the market go lower in and of itself. Rising numbers or delinquent mortgages is a symptom of the BC real estate market in decline and a weakened economy.

Evidenced by the chart, this is only the third time in four decades that delinquent mortgages were this low. In every instance previous once the data broke above the low resistance level, mortgages in arrears rose dramatically. Simultaneously the home prices across greater Vancouver declined. The most recent example was 2008 – 2009. The recession was short lived, due in large part to the winter Olympics of 2010 coming to town. That made it nearly impossible for the economy to slow down for long. However a 21% recession still managed to occur even during the short time frame.

The 1990’s prices peaked in 1995 and subsequently declined for years. The ultimate bottom occurred once prices dropped over 26%. Prices did not achieve a higher price until 2004, a 9 year market cycle. That cycle was fuelled partially due to the mortgage in arrears produced by a weakened market.

The mortgage in arrears data is accumulated across BC, however in the current market place most of the outlying or tertiary markets are outperforming Greater Vancouver as the exodus from city centers continues. That would imply many of these newly upcoming additions to the delinquent mortgages will be from right here in the highly volatile Greater Vancouver market.

The cold hard facts of the current market decline appear to be at odds with many bullish headlines. That is because the Real Estate Boards continue to paint a rosy picture in order to find a positive sounding headline. Recent example: “Highest October for sales in decades”. While true, a perfect example of a half-truth.

October has never been a high-water mark in any year previous… ever. Comparing strictly historical October data in order to come up with a fantastic headline is simply too big of a pill to swallow. The high data point of 2020 is October, compared to previous years high-water sales data, 2020 was no more than average. Hearing the excitement over average data points, we believe the next phase will lead to sincere weakness, as opposed to tepid strength, reported as herculean. In the sales chart below you can see the “historic high month of October 2020” is smack dab in the middle of the 15 year chart. To get a true historic high data point one would have to discount 177 other months of data leaving just the 14 previous October’s.

The question is, based on the data, what will occur next? The first six months of 2021 will be crucial, as detached home values based on a 5 year term will be underwater. The initial peak of the detached market occurred during the initial two quarters of 2016. Over that time the average price was $1.790M and 11,400 sales occurred in Greater Vancouver. The overwhelming majority will be up for the 5 year mortgage renewal in the first two quarters of 2021.

The 5 year fixed interest rates have decrease substantially from 2019 when interest rates were around 4%, according to Statscan. Current rates are 2.24%, a significant difference. However compared to the 2016 levels the change is less significant, actually barely noticeable. The first 6 months of 2016 interest rate average was 2.62% making the current interest rates decrease an insignificant factor for those about to go through the renewal process.

A true frenzied market would compare similar to that of 2016 with over 11,400 sales occurring in a six month span with an average sales price of $1.790M. The most recent six months of data, which have been touted as the record breaking, has only achieved 6,300 sales, with an average sales price of $1.645M. So, maybe the market wasn’t as strong as the headlines would have suggested.

All that said markets do ebb and flow. The past few several years of ebb and flow has resulted in the lower highs coupled with lower lows, resulting in a downtrend. Another way to say that would be a period of frenzied strength which created a market top during 2016 -2017 then a market that weakens 2018 – 2019, a period of temporary strength 2020 ultimately resulting in another wave of weakness which results in a market finding the bottom 2021.

2020 technically was supposed to be better than 2019, however the Covid-19 pandemic really emerged as a catalyst for buying up the available detached properties. Prices in January 2020 were just below $1.6M, importantly there was less than 4000 active detached properties. The demand to move from a condo to a detached property was pushed to extremes as most employees began to work from home along with school shutdowns. Parents decided they could not go through another shutdown in a small box, they would rather have a larger building footprint and a yard during the looming second lockdown. There will inevitably come a time when all who wanted and could afford a detached home have purchased. Which will lead to a period of weakened demand.

Inventory will be a major story in 2021 one way or the other. If the inventory remains in the doldrums below 5000 active listings, even with less demand there won’t be much of an impetus for sellers to decrease prices. If however, inventory can surpass 5000 or even 6000 active listings prices will fall off with gusto. Given the 11,400 upcoming mortgage renewals it wouldn’t be impossible to see 20% of those come to market in an attempt to stem the losses. That would result in an increase of 2,200 additional inventory. Which would push the data above those key indicating levels.

Can owner occupied demand continue to lift prices to the previous peak of $1.830M in the detached market. The answer is no, since it was not solely owner occupied demand that enabled the market to achieve the all-time highs. There was clearly demand from locals along with many foreign buyers purchasing along with investors continuing to bid each other higher. Now the investors have stopped purchasing, and overseas purchasing has all but stopped. Investing will begin to occur once the proverbial blood hits the streets in the form of distressed sales and foreclosures. As the mortgage in arrears and other analytical indicators suggests that time is coming.

Dane Eitel
Founder & Lead Analyst, Eitel Insights
604 813-1418

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