The Risk of a Boom-and-Bust Cycle in British Columbia’s Real Estate Market

British Columbia’s residential real estate market is at a critical juncture, with new forecasts from the B.C. Real Estate Association (BCREA) indicating the potential for a damaging boom-and-bust cycle reminiscent of the volatility that followed the 2008 recession. The insights from the latest BCREA report highlight alarming trends including high unsold inventory, constrained construction activity, and a significant slowdown in pre-sales. If corrective measures are not implemented soon, the province could face a steep decline in housing affordability later this decade.

Understanding Current Market Conditions

One of the most pressing concerns outlined in the BCREA report is the unprecedented rise in completed but unsold housing units in British Columbia. Currently, there are over 7,000 unsold homes available — the highest since the late 1990s. Notably, condominiums make up almost two-thirds of this inventory, indicating a drastic deceleration in the pre-sales market.

This accumulation of unsold homes follows a period of economic turbulence. High policy interest rates set by the Bank of Canada, intended to combat post-pandemic market inflation, have dampened housing demand throughout 2023 and 2024. Furthermore, global economic uncertainties and growing fears of recession have thwarted any tentative recovery, particularly in major urban centers like Metro Vancouver.

The Dangerous Parallels with the Post-2008 Era

The BCREA report draws stark comparisons between current housing dynamics and the post-recession period of the late 2000s. Weak demand once again leads to increased inventories and a slowdown in construction. When demand rebounded in the latter half of the 2010s, the lack of new housing supply caused home prices to skyrocket — rising by approximately 47% between 2010 and 2019. This surge positioned affordability at crisis levels, creating a troubling situation for homeowners and renters alike.

The Need for a Consistent Supply

Having a steady stream of new housing supply is vital for a functioning market. The concept of "vacancy chains" suggests that new construction not only provides opportunities for households to move into newer, often more expensive homes, but also simultaneously frees up older properties for families seeking more affordable options. The BCREA emphasizes this concept, stating that without consistent new construction, the housing market becomes stagnant, leaving fewer options for consumers and making home prices susceptible to demand fluctuations.

The report highlights that although high inventories may offer temporary price relief, a slowdown in construction poses a long-term risk. Delayed housing supply can emerge at inconvenient times, often coinciding with market rebounds, which exacerbates affordability issues.

The Consequences of Inaction and Market Predictions

BCREA forecasts that unsold inventory will likely rise until at least 2026 before peaking. As developers halt or cancel projects, housing construction starts are expected to decline, which ultimately leads to a tightening of active listings around 2027. With demand returning to historic levels, inflation-adjusted home prices could escalate by nearly 27% by 2032. This trajectory mirrors the unsettling pattern observed post-2008.

Policy Recommendations for a Sustainable Future

To circumvent another affordability crisis, the report advocates for comprehensive policy changes on both the demand and supply sides.

• Demand-Side Initiatives: One significant recommendation is to expand the federal Goods and Services Tax (GST) exemption on new housing, moving beyond first-time buyers to include all purchasers. Such a shift could help to mitigate unsold inventory and improve new developments’ feasibility.

• Revising Foreign Buyer Restrictions: BCREA contends that allowing non-resident buyers to participate in new construction pre-sales would be beneficial. This could help projects meet financing thresholds and consequently boost supply. Drawing parallels from Australia, where foreign investment in new builds is allowed but restricted from existing homes, could be a model worth considering.

• Supply-Side Interventions: Rapidly rising construction costs, which have nearly doubled since 2017 due to expensive materials and increasing municipal charges, require immediate governmental attention. The BCREA proposes exploring tax-advantaged municipal bonds, enabling local governments to fund necessary infrastructure cheaper while keeping housing costs manageable.

Conclusion: Urgency for Action

While the last few years have resulted in a period of comparatively flat growth in home prices, underlying market dynamics remain fragile. The BCREA asserts that immediate governmental action is crucial to reduce unsold inventory and stabilize construction, ensuring a healthier housing market for British Columbians. As demand is expected to recover, the consequences of inaction could be dire, potentially leading to another period of sharp price increases and decreased affordability.

In the words of the report, “Simply put, we should not wait for demand to come roaring back to take action.” The time for policymakers to address these unfolding challenges is now, as swift action could set the foundation for a more sustainable and equitable housing market in British Columbia.