Published in the Vancouver Sun July 3, 2010
Written by James Schouw

Real estate news and statistics can mean different things to different people. A headline announcing either a dramatic drop or a wild increase in real estate sales attracts a lot of attention, and such fluctuations are truly cause for concern or excitement among those who sell real estate for a living. However, such news isn’t necessarily a reflection of values, and needn’t necessarily alarm real estate owners.

For example, early last year we saw headlines like “Real Estate Sales Plummet Eight Percent in April 2009”. Scary news. But the story the headline referred to was specifically the volume of sales compared to April 2008, a year prior. That news should have concerned realtors, but not necessarily homeowners, because it wasn’t a reflection of value. In fact, April 2009 represented an average three percent increase in Greater Vancouver real estate values and a 31% increase in volume compared to the previous month. Those numbers are now water under the bridge but important lessons should be taken from them. As a developer, I’m primarily concerned about value. As a realtor, I’d likely be more concerned with volume. Value and volume can fluctuate in parallel or in opposition, depending on underlying market dynamics.

In the case of Greater Vancouver, real estate values have now approximately recovered to their peaks of about two years ago prior to the global economic and credit tsunami. Greater Vancouver’s recovery surprised some, but it shouldn’t have. Although the principle of supply and demand is widely recognized, its context within a real estate market is often misunderstood. There are a specific number of people living in Greater Vancouver, and a finite number of homes. Some homes are owned by residents and others by landlords. Although that ownership balance varies over time due to market, economic and credit conditions, it’s a diversion from the critical fact that a certain number of homes are required to keep everybody housed, regardless of ownership structure.

Let’s get specific about supply and demand. Within a given real estate market, the overall supply is the total number of finished, habitable homes. In Greater Vancouver, that’s about a million. Demand, on the other hand, is represented by the total number of all individuals and families who need those homes. That includes just about everybody; not just those in the market for a new home. It’s an important distinction that supply and demand refers to the total of all homes and the total housing requirement. Real supply and demand has little to do with the number of homes listed for sale on a particular day, or the number of active shoppers. Those dynamics affect the ebb and flow of market perception and confidence, but they don’t affect the underlying, relatively stable housing requirement.

Most of Greater Vancouver’s roughly one million homes are occupied. Every week, many new homes are completed and many old ones are demolished. The net result is a housing supply that’s increasing, but at a considerably slower rate than existed prior to the global economic fright that took hold in 2008. Demand for housing, however, is growing as fast as ever because our population is increasing. Greater Vancouver’s share of provincial population growth is the better part of 1,000 per week, and has been for years.

In the future, the extent to which the total real estate demand approaches the total supply will continue to influence market pressure, regardless of the number of properties listed for sale at any time. Imagine if a town or city literally ran short of homes for its growing population. Prices would literally go through the roof. In reality, that won’t happen in Greater Vancouver because rising market prices would encourage more development to meet the rising demand.

It should also be noted that each real estate listing in a stable or growing population center such as Greater Vancouver doesn’t just represent an intention to sell. Each listing also typically represents a desire to either buy or rent, at a different address. Most sellers don’t evaporate from the market. They move around within it as their lifestyles cycle through changes, including those related to growing and shrinking families.

In the immediate term, apparently conflicting market dynamics are at work in Greater Vancouver. A slow development industry and robust population growth are combining to reduce the number of vacant homes, representing a decrease in effective inventory. Conversely, apparent inventory has grown with increased active listings during the spring – a common seasonal trend exacerbated by owners’ desire to capitalize upon recovered market values. The abundance of current listings may dampen perceptions and sale volume in the weeks ahead, but strong underlying supply and demand factors ought to preserve value in the months beyond.

BC’s HST will have interesting effects on Greater Vancouver’s real estate market. Developers of new properties will be able to reduce pre-tax sale prices due to newfound input tax credits on some construction supplies that were previously subject to PST. However, even though developers can and will incrementally adjust pre-tax selling prices in order to compete, tax-inclusive development costs and selling prices will increase due to additional tax on some previously exempt development costs. The upward pressure on prices will make existing real estate incrementally more attractive, and therefore more valuable.

The subject of interest rates is bound to arise during any real estate discussion. In this regard, the economic performance of Canada, and more specifically BC, relative to the USA and other countries is important. In general terms, scary economic tremors around the world tend to suppress interest rates, including our borrowing costs at home. If our economy continues to compare favourably to other jurisdictions, we’ll likely maintain access to lower interest rates than our local economy deserves. Rising interest rates could dampen appreciation of real estate values in the future, but could more significantly suppress sale volume, because more homeowners would stay longer in their existing homes.

In the long term, Greater Vancouver’s real estate market health will continue to be significantly related to demand, a function of population. Lifestyle, security, culture, economy and other factors will influence population patterns. In many regards we are extremely fortunate because many of the attributes that diehard Vancouverites find so endearing are now bankable, from a global real estate market perspective. Our natural surroundings, the widely coveted concept of Vancouverism and our fortunate avoidance of the scourge of urban freeways should not to be taken for granted. Many other factors are also working in our favour, not least the extraordinary promotional success of the Winter Olympics.

Economic factors are of course important to any real estate market. However, absolute measures of our local economy can mislead real estate expectations. Rather, our performance relative to other jurisdictions across Canada and beyond can be more influential, because it affects immigration, emigration, and domestic migration. There’s little concern of an exodus of job seekers leaving BC for other regions if those regions suffer even weaker economies than ours. We did demonstrate poor economic performance relative to much of Canada in the 1990s. Our real estate market suffered for it, and a relapse would negatively affect values again. Over the long term, Canada’s immense per-capita resource wealth, and Vancouver’s geographic and cultural connections to Asia will be increasingly significant as the global balance of population and commerce shifts toward that part of the world.

Where does that leave us? Don’t expect any extreme market undulations in the immediate future, but do expect underlying supply and demand conditions to exert gradual upward pressure on values well into the future. HST will likely augment this pressure, whereas interest rate increases may eventually moderate it. During the years ahead, Greater Vancouver will gradually move toward status as a leader of North American real estate markets, but not without market fluctuations. I’m not a cheerleader for a mad panic to buy real estate, but nor do I recommend waiting on the sidelines without a good reason, any more than I did a year ago. Have a great summer!