HOUSING COST – METRO VANCOUVER REAL ESTATE
December 11, 2017 – By James Schouw
TIGHTENING SUPPLY AND AFFORDABILITY
Three general factors underlie Metro Vancouver’s residential real estate market: 1) standing inventory, 2) rate of new construction, and 3) rate of population change (growth). These factors are analogous to bread at a supermarket or gas at a gas station: don’t expect prices to fall when stock is running low amid customers aplenty.
For several years I’ve been advising friends to be cautious about selling their Metro Vancouver real estate, because the same money won’t likely ever buy back what they’ve sold. Here’s why.
1.) STANDING INVENTORY
These are new, completed, unsold homes, of which there have typically been thousands available across Metro Vancouver at any particular time during previous years. Recently, however, standing inventory has become extraordinarily scarce because new construction volume hasn’t kept ahead of increasing demand – fueled by population growth.
By summer of 2017 there were only 31 condominiums, 19 townhomes and few houses newly completed and unsold across all of Metro Vancouver. That’s not a typo. For perspective, even 100 homes would represent only about 1/100th of one percent of metropolitan Vancouver homes. In other words, the stock room is virtually empty.
2.) RATE OF NEW CONSTRUCTION
Roughly 40,000 homes (of all types) are currently under construction across Metro Vancouver, which is of course a combination of new and replacement housing stock. About half of them will be completed over the next year. That’s historically strong volume, but has begun to decline from the peak of a small construction boom that took hold in about 2012 – following a slow period induced by the credit and market crisis in 2008.
The construction surge during the past five years was effectively catch-up after the preceding few slow years, because much of the underlying property had already been acquired prior to 2008 by its respective developers – many of whom delayed development for a few years until market optimism returned. That’s an important point because construction volume may be difficult to maintain once the catch-up phase has run its course. Good development sites have become increasingly hard to find since a decade ago, and consequently vastly more expensive.
Also, significant permit backlogs and ever-increasing regulatory factors tend to throttle construction volume. Notwithstanding officials’ virtuous intentions to mitigate increasing housing costs, most resulting regulatory measures have the opposite effect: increased costs, increased delays, and therefore also tighter housing supply.
3.) RATE OF POPULATION CHANGE
British Columbia’s population grows by an average of more than a thousand per week – the majority in Metro Vancouver – as it has for a very long time.
As of July 2017, StatsCan estimated BC’s population to be 4,817,160, which is:
59,502 more than one year prior,
54,174 more per year averaged over the preceding five years,
52,617 more per year over the preceding 10 years,
53,934 more per year over the preceding 25 years, and
56,015 more per year over the preceding 46 years (since 1971).
During those years, in which BC’s population more than doubled, there’s been remarkably consistent population growth. There’s been significant migration to and from Alberta, Ontario, Quebec, USA, Mexico, Brazil, UK, Netherlands, Germany, France, Italy, Greece, Poland, Russia, Ukraine, Kazakhstan, Syria, Iran, Israel, Lebanon, UAE, Egypt, Somalia, South Africa, India, Pakistan, China, Hong Kong, Japan, Korea, Vietnam, Indonesia, Philippines, Thailand, Singapore, Australia and other regions.
With 52 weeks per year, it’s easy to calculate that BC’s population growth (net migration and births minus deaths) has typically averaged over 1,000 every single week, decade after decade, regardless of what was happening in Hong Kong, Iran, or wherever the source of currently popular immigration narrative.
To put that thousand-per-week growth into housing context: Although some folks live alone and others with a family of 10, the average number of inhabitants in each BC home is about 2.5, quite consistently. Therefore, our residential development and construction industries must turn out about 400 units of new housing in BC every single week – in addition to the number of old homes demolished to make way for the new – just to stay apace with population growth.
OTHER CONSIDERATIONS – RENTALS AND FOREIGN OWNERS
Metro Vancouver’s rental vacancy rates are extremely low – below one percent in most areas – so unsurprisingly, rents are high. Regarding housing cost, therefore, there’s no buffer to be found lurking in rental stock.
The foreign-ownership market, an appealing realm for regulatory (vote-courting) intervention, is more resilient than many believe. Metro Vancouver’s foreign-ownership mix is fairly typical of desirable world-class cities, and most non-owner-occupied, foreign-owned homes constitute rental stock, while some serve as seasonal or vacation homes. The same is true of non-owner-occupied, Canadian-owned Metro Vancouver homes, of which there are many. Many residents of Whistler, Sechelt and Abbotsford, for example, keep downtown Vancouver condos for game nights, weekends and visitors.
Anything short of Draconian foreign- and absentee-ownership penalties won’t likely induce substantial long-term price moderation because supply – new construction volume – tends to adjust to demand variations. It’s already been happening, of course, in response to the 15 percent foreign-buyers’ tax introduced in 2016. Shortly after its introduction, I wrote about anticipated consequences of that tax, and those expectations have already substantially borne out.
Similarly, I expect (mild) market and supply alignment as a result of impending bank – not credit union – regulations.
We should also consider that, regardless of political virtue signaling about pruning the cost of housing, most existing, voting property owners aren’t keen on having their values trampled by government intervention. “Make housing cheaper” sounds great; “make my house cheaper” doesn’t.
Respecting the inescapable relationship between supply and demand, and notwithstanding minor bumps along the way, I expect Metro Vancouver real estate to become incrementally more expensive over time. I never predict to what extent home values will change next month, next season or next year (and I recommend checking the track record of any prognosticator who claims to, no matter what bank or institution their desk is in). There will be periods of vigorous escalation, flat periods, and possibly dips.
That said, Metro Vancouver’s underlying market factors are like a ratchet – a tendency for values to generally increase over time, incrementally reaching new heights and leaving behind valuations that will never be revisited. Simply put, I suggest careful deliberation before parting with Metro Vancouver real estate, because it’s quite likely that most other assets – not least cash – will relatively lose ground over time.
One last point, regarding the mystery of perception inherent in large markets (groups bigger than our immediate circle):
As individuals, we often perceive a free market as independent of ourselves, which is a fallacy that can lead us to interpret a market as a set of numbers isolated from ourselves and others like us. Consequently, it’s easy to overlook the relative nature of affordability.
For example, in a constrained market such as Metro Vancouver, the owners of the 500,000 most desirable homes are generally owned by the 500,000 individuals and families most able and willing to afford those homes. If you’re not among that fortunate group, no political sleight of hand will make those homes more affordable for you while less so for them.
If economic factors cause homes to become cheaper for you, then they’ll similarly become cheaper for everyone else, including those of greater means. Such a price correction alone, therefore, won’t help you outbid wealthier folks and take over their homes – which clearly illustrates why market prices will balance accordingly.
You will, however, be able to afford a more desirable home if some combination of these four things happens: A) You get wealthier. B) There’s a significant increase in the supply rate of new homes more desirable than you can currently afford. C) There’s a significant decrease in the population growth rate among people wealthier than you. D) Owners of homes not occupied full-time are abruptly induced or forced to sell en masse (resulting in temporary relief).
As I’ve stated before, I recommend against depending upon B), C) or D) – so waiting for Metro Vancouver prices to decrease may continue to be a futile long-term strategy. Instead, setting one’s sights on what’s currently, comfortably affordable shouldn’t be disregarded, in my opinion.