Vancouver Housing Bubble? Real Estate Market Collapse? Slowdown?
Vancouver Housing Bubble? Real Estate Market Collapse? Slowdown?
People sometimes get a perverse kind of pleasure at seeing things go “wrong” and winking “I told you so”. The present real estate market has done so well that it is ripe for this kind of buzzards circling mentality. It’s not like this has just started either. Here are some headlines from the last six years:
Stocks Fell First, is Real Estate Next? - National Post August 11, 2001
Housing Sales Decline Forecast – Vancouver Sun, November 29, 2002
It’s Looking More and More Like New Bubbles have Formed in the Bond Market and Real Estate – Vancouver Sun August 16, 2003
The Hot Housing Market Suddenly looks Chilly – The Globe and Mail, June 12, 2004
Will the Price Bubble Burst?: If Sydney is anything to go by, soaring prices won’t last – Vancouver Sun, July 18, 2005
Pop Goes the Market – BC Business, August 2006
Apparently, the sky is falling…again and the end is nigh…again; if you keep saying it long enough, eventually it will be true – kind of like a Mantra, only in this case we are praying for something bad to happen.
The reality is we live in a market economy and eventually things are going to get grim but it is not likely to happen anytime soon in BC and Vancouver. Why? - Because the basic economic indicators that effect demand for real estate are not likely to worsen in fact, they are likely to get better.
Short term interest rates are expected to stay level if not go down. Inflation is likely to stay within the Bank of Canada’s target of 2%. Unemployment rates are near record lows and expected to stay that way. Conservative growth expectations are now looking at single digit percentage gains and a return to a “balanced” market. For all the doom and gloom, long term outlooks suggest that real estate will nearly double its 25 year historical inflation adjusted average returns. So what does that mean for you? If you’re looking to buy a home in Vancouver it is a great time to buy. If you are looking to sell your home to take some of your equity out of Real Estate, that’s ok too.
That’s right; interest rates are not going to shoot through the roof. One of the significant points made by doom and gloomers was that interest rates have been at historical lows and that a move of several points up would push many mortgage payments up past home owners’ affordability and trigger a sell off that would plunge the real estate market into chaos. We have edged up since then but nowhere close to the numbers that would create such a panic. Why are short term interest rates not going up? The US economy is not enjoying the kind of windfall British Columbia and Alberta’s resource based industries are and neither is most of Canada. As a result, interest rates are being held steady. Cameron Muir, Senior Analyst for the Canada Housing and Mortgage Corporation (CMHC) flatly states: "Mortgage rates of 20 per cent like those seen in 1981 and 1982 would pull the rug out of any market. We see no big economic shock like double digit interest rates anywhere on the immediate horizon." Derek Amery, Portfolio Manager for HSBC, goes further saying: “In fact, many [analysts] are expecting a decrease in [short term] interest rates and the bond market is already anticipating this.”
Another claim for the bubble people has been that the real estate market’s large gains were just underreported inflation. In his Canadian Market Outlook in June 2006, Derek Amery talks about aggregate consumer pricing saying: “Near term momentum in pricing will be temporary…Inflation will moderate through the rest of 2006 and…we are close to the high point for consumer pricing”. Craig Alexander, VP & Deputy Chief Economist for TD Economics, states that: “the average rate of inflation from January 1995 to December 2005 was 2%, which is bang on the Bank of Canada target. There is every reason to believe that the Bank will deliver a similar track record in the future.”
BC and as a result, Vancouver’s, economy is booming and that means labour is scarce, unemployment is low and migration is up. Low unemployment creates a high “wealth effect”. Wealth effect is simply the result of the happy confident feeling one gets when they feel like they have money to spend, they have a steady job, have equity in their home and can pay for their groceries. It’s what happens when one’s outlook for the future is good because they feel “wealthy”. People who feel financially stable are logically more likely to feel confident about buying a home than someone who has just lost her job and has no prospects of finding a new one. In my opinion, we are experiencing a high wealth effect in Vancouver and that is likely to stay the same for at least a few more years. Large public spending contracts for the Olympics means continued strain on our labour pool and that is good for the wealth effect. Increasing migration to BC both inter-provincially and internationally means greater demand for housing.
The Vancouver real estate market has made huge gains over the last several years and everyone agrees that the kind of gains made over the last several years can not be sustained but that does not equate to a real estate market collapse. That equation is a logical fallacy. The new home market supply is still well below historical norms. The CMHC’s Vancouver Housing Now – September 2006 detailed that new home building starts were up year to date In August 2006 by 13% over 2005 but that only 114 completed and unoccupied apartment units were available in the Vancouver area compared to the 5 year average of 650 and 10 year average of 1560. Demand clearly appears to be robust. You read it right, in the new home market demand is up and supplied inventory is down.
What about speculators? This has been another rallying cry for a bubble. The idea claims that all the homes are being purchased by “flippers” who are just quickly turning over properties but if the market wanes here or in the US, they will all pull out. Here is what Helmut Pastrick, Chief Economist at Credit Union Central of BC had to say: “speculation is not present in a way that suggests at bubble.” According to his Land Registry data only 7% of properties are being bought and resold in less than six months. Compare this to rates of 21% in 1981 and nearly 14% in 1990.
Craig Alexander (TD) talks about long term real estate gains and here is where real prudent investment thought begins. Alexander says “Over the past two and a half decades, the average annual increase in resale home prices has been 5.6% per annum.” And “Over the past 25 years the average annual rate of inflation has been 3.7%, implying that the after-inflation (real) increase in home prices has been 1.9%.” Following from his earlier statement that we should rely on a 2% inflation rate for the future, average inflation adjusted returns for real estate will be about 3.6%. Alexander points out “the historical trend in real resale home prices combined with the outlook for inflation suggests that national average home prices will rise at close to 4% per year over the long term.” That is nearly double the rate over the last 25 years! With this kind of thinking, you haven’t missed the real estate boom, it is just beginning but you’ll have to think long term and not for the quick buck.
So why do I keep hearing about slow sales in September and October? - Fear. People are reading the papers and watching the news about some American markets dropping off. Remember, although our economy is tied inexorably to the US we are none the less a very different market with both similar AND very different factors at play. The economic factors described above give a rational basis on which to act in the Vancouver real estate market.
I believe that now is a great time to buy. We are in a dip in confidence that has briefly slowed sales and it is a prime time to negotiate. If you’re selling and you have already listed your property, no problem, just be patient. If you are looking to sell, wait a couple of months. Come January or February, my feeling is that we will see a renewed growth in the market. Although you will likely miss some of the coming upside, you have likely made the most significant gains already. As for every real estate transaction, use a competent realtor.
Re/Max Real Estate Services.