When home prices are on the rise, there are few foreclosures. Owners not able to make mortgage payments can easily sell or refinance to get themselves out of a bind.
When prices fall, however, it’s a different story.
“Any drop in prices can lead to an increase in people defaulting (on their mortgages) because people who are stretched tightly don’t have an exit strategy,” said Andrew Bury, a Vancouver-based partner at Gowling WLG, who specializes in handling foreclosures for banks, mortgage investment companies and other lenders.
At the moment, mortgage default rates in B.C. are very low, Bury said. But looking back, he said, “in 2008, it didn’t take a huge decline in prices. In short order, there was double and then triple the number of defaults because of price declines.”
The concern comes as the B.C. Real Estate Association forecast this week that average home sale prices will fall by as much as 8.7 per cent in the Greater Vancouver area next year, from an average of $1,030,000 for 2016 to $940,000 for 2017. That marks a 13.8-per-cent drop from the association’s previous forecast for 2017, which it made in late August, and the first time in five years the industry association has forecast a year-over-year price decrease.
It’s not that falling prices lead directly to foreclosures. Ideally, it’s better to hang on to an asset that is declining in value and sell it later when prices rebound. However, if “something goes wrong, and in life, stuff goes wrong — you lose your job or you get a divorce,” said Bury, there isn’t the option to tap into a home’s equity for a lifeline when prices are declining. And for speculators who have taken equity out of one house to buy another, there is less to tap when it comes time for refinancing.
Andrey Pavlov, a professor of finance at SFU’s Beedie School of Business, said a decline in property prices could lead to a “significant risk” of foreclosures, especially in Vancouver, where the market has been overheated.
“I am concerned that anyone who over-extended themselves to buy a property at the top of the market is at risk,” Pavlov said.
And in B.C., where real estate and construction account for about a quarter of the province’s economy, Pavlov said, “a real estate decline, even if it’s just a decline in transactions, would put a lot of incomes at risk.”
BCREA chief economist Cameron Muir said the forecasts are based on economic and housing variables, including “data from sales, listings, new ones, active ones, pricing over different product types and areas” as well as populations growth, migration sets, job growth and, importantly, interest rates.
David Hutchinson, a Sutton realtor, monitors Vancouver market activity daily and has seen a number of “notable price corrections” recently. Listings show a house in east Vancouver’s Collingwood neighbourhood that was listed earlier this month for $1.6 million, was re-listed this week for $999,000 — a 38-per-cent reduction in the asking price in three weeks.
“It’s kind of a fickle market at the moment,” Hutchinson said. “The market is still up from 2015, it’s just not ridiculous anymore.”