Recreational property prices on Vancouver Island and across Western Canada will likely rise this year as many owners hang on to properties despite interest rates, short-term rental restrictions and a proposed capital gains tax increase, according to two key reports.

Royal LePage’s spring recreational property report predicts the average recreational home price to rise five per cent this year — with the median price for a single-family recreational home in B.C. at around $1.1 million.

According to Re/Max Canada’s cottage trends report, Canada’s recreational property market hasn’t seen a flood of listings. Re/Max predicts Western Canadian recreational properties could increase between five and 10 per cent in 2024.

Despite these predictions, new provincial short-term rental restrictions effective as of May 1 could cause some investors to offload their properties in B.C.

“The short-term rental regulation has affected the market a lot,” according to Judy Gray, owner of Re/Max Mid-Island Realty, who recently sold one property for $1.35 million, two units for $485,000 and $520,000, and a cottage for $540,000.

“There’s still a lot of interest here. People are a little bit nervous because they’re not sure about the changes of the short-term rentals and how that’s going to affect things moving forward,” she added.

Tofino and Ucluelet have divergent price trends related to the short-term rental restrictions and the planned federal capital gains increase, but according to Re/Max, both communities have shifted from a balanced to a buyer’s market.

Although exempt as a resort municipality, Tofino has opted into the provincial legislation, affecting two residential buildings. Ucluelet has opted out but is amending bylaws to ensure short-term rentals conform.

“Most short-term rental properties in Ucluelet are already zoned nightly rental and are not affected by the new legislation,” Gray told Western Investor. “Only nightly rental units attached to homes have had administrative fixes by (District of Ucluelet) council to continue to operate.”

A Leger survey commissioned by Re/Max found the short-term rental bans have not swayed recreational property owners to sell, and 58 per cent are holding onto their properties while about 29 per cent are looking to sell.

Proposed tax increases from 50 per cent to nearly 67 per cent on capital gains over $250,000 aren’t expected to spark a widespread flood of sales, Gray added, but she said six properties were recently listed for sale to beat the change, expected to take effect June 25.

“People are still putting their properties on the market to avoid the capital gains increase because they expect that it’s going to come back,” she said.

An uncertain climate

In the Comox Valley, buyers are often looking for active lifestyles — from mountain biking in Cumberland to winter sports at Mt. Washington. This trend grew during the pandemic, but Mt. Washington recreational property sales have since been declining due to interest rates.

Ryan Williams, owner of Ocean Pacific Realty, said recreational property sales in the region face another challenge — climate change. Global warming has been impacting winter sports while forest fires have affected summer recreation. These factors — and their associated fire hazards — are also increasing insurance rates on Mt. Washington, which has been experiencing low snow levels.

“The drying in the summer and warmer conditions in the winter are two major environmental issues for recreational property,” said Williams.

As far as capital gains changes, Williams said the effect on recreational properties depends on when a purchase was made.

“If they bought two, three, four years ago, they’re not going to see big gains,” he explained. “They’re going to see losses, probably, on Mt. Washington if it stays warm and we don’t get much snow.”

Metro Vancouver hotels in May had the highest occupancy rate among large Canadian metropolises, at 83.9 per cent, with hoteliers in the region able to charge the highest average daily room rate in Canada: $317.41.

The city's hotel occupancy rate in May was also higher than the 82.9-per-cent rate seen last May, according to CoStar, a global provider of real estate data, analytics and news. CoStar in May 2023 pinned the average daily room rate in Metro Vancouver at $226.21, meaning that the average daily room rate in the region in May jumped 40.3 per cent year-over-year.

"There just have not been many hotels built over the last decade, and actually supply and inventory have contracted in the past decade [in Metro Vancouver,]" CoStar's national director of hospitality analytics, Laura Baxter, told BIV this afternoon.

May is the first month this year that CoStar's data shows a higher occupancy rate in Vancouver than in the same month in 2023, and it was also for the first full month in which new provincial rules for short-term rentals came into effect. 

The B.C. government's legislation, which took effect May 1, holds that short-term rentals are only allowed in the principal homes of hosts in 60 new B.C. communities. Another 17 communities newly chose to adopt those regulations even though they were exempt from the provincial legislation.

Rules for short-term rentals did not change in the City of Vancouver because that city since 2018 has limited short-term rentals to the principal residences of hosts, and charged licence fees. The B.C. government's new short-term rental rules do newly apply in many Metro Vancouver municipalities, such as Burnaby, New Westminster, Delta, North Vancouver, West Vancouver and Surrey.

The aim of B.C.'s legislation was to free up housing units for longer-term rentals to limit the rise in the average rental rates in the region for residents.

The Metro Vancouver hotel data for May includes information from 195 hotels that combine to have nearly 26,000 rooms across the Lower Mainland and into the Fraser Valley, Baxter said.

"I think it is too early to tell whether all of that growth [in the region's occupancy rate] is related to the new regulations on short-term rentals," she added.

Tighter vacancy at Metro Vancouver hotels in May has been a trend, given that in May 2022, the region's occupancy rate was only 76.5 per cent. 

Occupancy rates and average daily room rates in other major metropolises in Canada in May included, in order of highest occupancy:

• Ottawa's 78.3-per-cent occupancy rate and $223.53 average daily room rate;

• Toronto's 76.4-per-cent occupancy rate and $254.88 average daily room rate;

• Montreal's 76-per-cent occupancy rate and $233.68 average daily room rate;

• Edmonton's 67.3-per-cent occupancy rate and $152.98 average daily room rate; and

• Calgary's 67-per-cent occupancy rate and $168.49 average daily room rate, according to CoStar.

Baxter said Vancouver's anticipated record-breaking cruise season for passengers is likely a contributing factor in the higher occupancy and room rates. 

Indeed, B.C.'s tourism economy blooms when spring arrives. The Vancouver Canucks' playoff run may also have prompted out-of-towners to visit Vancouver to attend games, and then stay in hotels. 

In July 2023, Vancouver hotel rooms charged an average $347.08 daily rate, which was the highest figure that CoStar had ever recorded for a major city in Canada. 

Baxter said there is "every possibility" that Metro Vancouver this summer will set a new record for the highest-ever average daily room rate for a city in Canada within a calendar month.

A precipitous decline in Metro Vancouver land sales last year could turn around this year, but developers are taking a long-term view with any purchases as market uncertainties continue.

“Developers need to replenish some of their inventory; that’s starting to happen,” said Justin Mitchell, an investment and development land broker with Goodman Commercial Inc. “The larger, experienced developers have been doing transactions and putting properties under contract.”

This marks a shift from last year, thanks in part to higher financing costs and land values that saw sellers reticent to lower price expectations in the wake of the post-pandemic surge in 2021.

A total of $3.3 billion worth of land changed hand in Metro Vancouver last year, according to Altus Group, including $1.9 billion transacted worth of residential land and $1.5 billion worth of ICI land.

Residential land sales slowed more sharply than commercial deals, falling 66 per cent versus a 55 per cent drop in ICI deals.

“There still pretty strong demand from industrial users to purchase and develop their own facilities, and a lot of that is driven by the fact that there’s still really good financing available to them from the banks,” Mitchell said. “[Residential] bank financing is still very difficult to get.”

Provincial pressure on municipalities to draft plans that show how they’re going to meet their housing targets underpin developer interest, with transit-oriented areas seeing a pick-up in activity.

But pricing is key.

While there’s been significant activity along the route of the Surrey-Langley SkyTrain line, the higher densities mandated for transit-oriented areas isn’t necessarily attractive to developers or the buyers they supply.

“When the transit line was announced, it freed up a lot of land,” said Neil Chrystal, president and CEO of Polygon Realty Ltd., a Vancouver developer with sites in the Fraser Highway corridor near the planned Fleetwood and Langley City Centre stations.

“[But] we’re focusing a lot on the woodframe as opposed to the highrise. Mostly we’re focused on the more attractive entry point for home buyers,” he said. “In today’s climate of higher rates, affordability becomes more of a challenge.”

With costs on concrete highrises typically about 15 to 20 per cent higher than for woodframe construction, the numbers don’t pencil out. This has pushed Polygon to seek opportunities beyond Metro Vancouver, such as a 1,400-acre tract in the Silverdale area of Mission it acquired in partnership with Madison Development Corp. in 2017.

Partnerships are also key to Vancouver-based Townline Homes Inc., which says high costs mean many sites aren’t viable even if land costs are nil.

“Our appetite is good, but cautious,” Townline president Daryl Simpson said. “But even with land at zero today, there’s a number of projects and a number of markets that simply don’t make sense given the significant environment of increasing costs that we operate in.”

These costs include government levies, as well as high prices for materials, labour and debt.

Townline hasn’t acquired any land recently, despite carefully scouting opportunities, but it is working with partners – both institutional groups and First Nations – to feed its development pipeline.

“In Metro Vancouver, South Vancouver Island and the Interior, you have institutional partners with a very low cost of capital that have land holdings and are looking for executional partners, and that’s an opportunity for someone like ourselves,” he said.

The challenges are familiar to Mitchell, who said developers are pursuing several strategies to make deals work.

“You can’t over-pay for a site at the moment,” he said. “Developers are definitely interested in purchasing properties if they’re priced really well – not just priced to market, but I think they need to feel like there’s a cushion if things are more difficult for longer.”

Some of the options include seeking out deals with longer completion timelines as well as distress sales that offer a hedge against future cost increases. A low price today promises to offset upward cost pressures down the road.

There are currently a lot of troubled sites on the market, said Tom Huang, managing partner with Tera West Properties Ltd. in Richmond, in part because of speculative buying by developers who now find themselves in a changed business environment.

On one hand, financing costs have increased significantly over the past two years, not only increasing developer costs but pushing residential buyers to the sidelines.

“With a market softening combined with record high interest rates for a record high duration, it’s been a deadly combination that together have killed a lot of developers,” Huang said.

Tera has been able to pick up several properties as a result. Earlier this year, for example, it picked up a site at West 28th Avenue in the Cambie corridor for $18 million. The previous developer had paid $23 million.

“The last developer paid so much for it, but that doesn’t mean we got a really good deal,” Huang said. “We simply got a project that works.”

And it will only work if the buyer demand doesn’t soften in the next couple of years.

The market today can bear a cost of about $1,400 per square foot for townhomes, Huang said, and if construction costs rise or the residential market softens, then the model breaks.

“We will very quickly be losing money,” he said.

Yet land remains in demand, simply because of the constraints facing the Lower Mainland. This has brought developers like Tera back, knowing that opportunities today are not likely to last.

“We know the market is likely near the bottom, so we’ve been active for almost a year now,” he said.

Signs of life are also being seen on Vancouver Island, thanks to a steady influx of buyers seeking more affordable housing options in a temperate climate.

While land is relatively plenty east of the Rockies, there is also optimism given the anticipated drop in interest rates.

This holds true for developments of all stripes, both residential as well as commercial.

“Rates have stabilized at or near the top, but as soon as we get a little bit of relaxation in rates, I think the buying activity will pick up quite a bit,” Chrystal said. “That will drive our purchase decisions.”

BMO Financial Group reported April 30 that 72 per cent of aspiring homeowners are waiting for the Bank of Canada to cut interest rates before buying, up four percentage points from a similar survey last year.

A drop in interest rates is also expected to drive investment in industrial properties in markets such as Lethbridge, where a conservative attitude has constrained construction.

“Land is going to notch up in its absorption here in the next couple of years,” said Josh Marti, a principal and senior associate in Avison Young’s Lethbridge office focused on industrial.

Lethbridge industrial vacancies are steady in the 4.1 per cent range, due in part to a lack of new construction and low appetite for the product that remains. New space is needed, but there was nothing to give tenants options. The only deals being done were for owner-occupiers.

Marti said that’s going to change, especially as interest rates start to edge down – something expected this summer, with the Bank of Canada’s next policy rate announcement due June 5. A lower financing cost will make it more economical for developers to move ahead, and help pull land deals forward.

“Pricing was getting more expensive, financing was more expensive … but those excuses are no longer there anymore,” Marti said. “There’s no inventory to be had, so you’re forced to build.”