Vancouver Housing Market – Peeling The Onion
Vancouver Housing Market – Peeling The Onion

A QUICK POST On Vancouver Real Estate Market

Wow, are people really pulling at straws, looking for the magic elixir as to why the Vancouver real estate market is performing the way it is.  The latest of course is the great “Flippers” debate.  Great for headlines, great for talk shows, but not so great for average homeowners, investors or potential buyers.  Please remember as you read this, I am not a realtor, I don’t profit whether the Vancouver market is hot or cold. But I study it in great detail and this post is just to spark discussion before we go too deep into these emotional responses to hot market conditions

Truth be known, there is no ‘one answer’ or ‘one reason’ that the Vancouver market is performing as it is. Thinking that there is, is simplistic and naive.

The Vancouver market and the surrounding areas are impacted by many factors, all of which contribute to its current performance. So the addition of a simple ‘foreign tax’ or ‘vacant tax’ or an added ‘flipper tax’ may make people feel good in the long term those two solutions will have very little effect on the market. Frankly, those who these taxes would be placed upon would just consider them a cost of doing business and in the majority of cases would not slow it down.

The Unintended Get Caught in The Vacant Property Tax

Scenario #1: Can you imagine the complexities and the costly and inefficient bureaucracies that would have to be created to even begin to enforce any of these 3 proposals? The costs would easily surpass any gains that they might create. A vacancy tax?  The scenarios are endless: What if the home-owner has decided to go away to take care of his/her family Member in another jurisdiction because of a terrible medical condition. And this goes on for 1 or two years. Should they be taxed a ‘vacant tax?’ What if, for retirement after working their whole lives, the homeowners decide to do a year long trip to celebrate – property is vacant for that year (or more). Are they subject to that tax?  Where do you draw the line?  What is the appellate protocol?

Hey Wait, That Was Their Retirement!

Scenario #2: What if you are a home owner? You lived in Vancouver your whole life, bought a Vancouver special way back in the day, raised your family, built your community and stayed in place as you worked hard at your job.  A part of your long term retirement plan (whether right or wrong) is based on selling your home (with no capital gains tax) and investing that money to fund “The Best Years Of Your Life.” Then, right when it is getting time to put your plan into play, new policies come into place that limit the market for your home. The value of your home drops, you have a much tougher time selling and suddenly your plan goes down the pan. Not a great scenario

The Greater Vancouver Market is NOT A Math Equation

My first BC Lower Mainland property was purchased in the mid 1980’s. Young, foolish and a bit crazy to do so… but even crazier to have sold it a couple of years later.  I have been watching, studying and owning in this BC market for many decades. (typing that made me feel old – did I say I was young when I bought that first one? Good)

Throughout those many years, I have witnessed a number of Vancouver’s real estate cycles and each one never cease to surprise me but what does is the emotional reaction that occurs each time. That is why many years ago, we began to analyze in more depth and I built up a research team to do so the one key we discovered to understanding the market is the importance of “peeling the data onion.” Peeling the data onion means ignoring the headline numbers, ignoring the ‘averages’ and focusing on both geographic and type supply/demand. By doing so one begins to understand the market dynamics more and reality becomes a lot clearer. It is easy to start the market in simple demand/supply ratios (as the below graph shows) but it does not tell the whole story:

 

Sometimes The Data Onion Gets a Little “Dirty”

The Vancouver and region housing market is made up of many components and many regions (I know: “Thanks Captain Obvious”). However, breaking it down to its core components often allows us see the trends/bubbles/collapses in a much clearer light.  Our team looks at markets not just from a real estate perspective but also with an view of the underlying economic and demographic fundamentals.

Because I promised you this was to be a “Quick Post” I won’t bore you with a whole essay. However we can look at where a strong-overvaluation is really occurring. That part of the market can be described in one word “Dirty.”  I don’t mean dirty as in corrupt, or ‘not-pretty’ I mean dirty as in “Based on Dirt.”  Properties that include ‘dirt’ are driving this unheard-of record average sale price for Vancouver real estate.

These properties, the majority of which are classified as “Single Family Homes,” play a significant role in driving market averages to their headline creating highs.  Any property that has a yard is in great demand – just beginning to be felt in town-home-style properties. This demand curve increases coupling with limited supply is leading to multiple bidding and competitive fervor.  So not only sis there a demographic and economic demand for these types of properties, they also just happens to be the market where a lot of foreign money likes to park (from Asia and US.  But now more recently capital influx from Europe – a ‘foreign investor’ source many analyst are missing but will grow exponentially as European turmoil increases).

Here is some data that is showing the dramatic increase in price on dirt vs the rest of the market. An onion beginning to be peeled (this is benchmark not average so as to give a more realistic view):

 

But wait there’s more – it’s never as simple as that

Condos Are King?  Really?

In the much discussed condo market we are seeing a different pattern emerge. A pattern of relative affordability and consistency, especially when compared to the ground-oriented market.

The benchmark pricing is relatively flat, since 2008, in the condo/apartment market as shown in the graph above )  How this is occurring is also quite simple to explain. It is easier to spread the cost of the dirt amongst many suites thus reducing the underlying dirt value increase. We are witnessing increased demand from those not able to afford ground-oriented units and have seen builders create a supply to keep up with this demand. Of course, one of the unspoken secrets to keeping the prices this flat for so long, despite increasing costs is through the magic of decreasing size of the units being built and sold. In order to keep the condo prices relatively affordable (vs rest of the market) developers have decreased the size of the units adding more units to their buildings and at the same time keeping mortgage payments lower than rent. The perfect response to the maxim:  “Developer: Know Thy Market.” 

But Condos Are Still Unaffordable – No Matter What You Say

The politicians and advocates have told us for years that Vancouver is unaffordable to buy and for many it is, that is true.  If you are working in an entry level job and trying to qualify for a 1 or 2 bedroom condo downtown with a view, or a new build property with amenities: who are you kidding, you may wish to start elsewhere. However, once again, peeling the onion we uncover an extraordinary fact on the affordability of condos in Vancouver real estate market. The ‘price’ today is very close to the same as the ‘price’ in 1994!

Yup, the facts do bust up a bunch of myths sometimes. Affordability is really the ‘ability to afford on a monthly basis.’ What does it cost to own and maintain a benchmark (once again not inaccurate average) property every month you live in it?  Interestingly enough from 1994 until today, that number has really only increased by just over $100/month.  Here, take a look at these figures from CMHC’s research team:

 

This graphical representation of detailed research once again proves that one number does not make an equation, and one emotion does not create viable analysis or create great policy.

I could go on for another 15,000 words describing the research we do behind conclusions. In fact there is a LOT more research behind the scenes on this important subject. However, in this case I just wanted to get this short post out to help provide some perspective, spark some discussions and hopefully bring some facts to the potential of future policy decisions.

By the way, please feel free to share this post with whomever you feel may wish to read, argue or gain knowledge from it.  Also, if you haven’t already, take a read of this you may find it helpful: The Canadian Real Estate Cycle is Changing & So Must Your Tactics http://www.donrcampbell.com/your-tactics-must-change-the-real-estate-cycle-of-2016

Cheers!

Don R Campbell
Senior Analyst
Don@reincanada.com

Vancouver Housing Market – Peeling The Onion was last modified: February 9th, 2016 by Don R. Campbell
 

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