BC Business
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Economists? What do they know? So-called industry experts? Forget about it. For the real dirt on which way the market is heading, you’ll need to start digging for answers in some unexpected places.
Anyone who’s read a real estate article or two will be familiar with the oft-quoted usual suspects: developers, realtors, condo marketers, economists working for banks, real estate companies and government agencies. Undeniably these are well-qualified people who know a great deal about the subject. Most of them even work in the field, and of course anyone who’s ever held a job knows what “work” means. Between reports, secondments, committee meetings, ancillary projects, emails, phone calls, lunch dates and farewell gatherings in the boardroom, if these experts spend two or three hours a week thinking and writing about real estate, they’re performing some kind of magic. No wonder so many of them were caught flat-footed by last year’s sudden downturn, then blindsided again when things picked up this spring.
A BULL, ON THE BEARS: “Bears are the most negative people here. Since they are negative by nature, they are unable to accept any real, assumed or potential risk. Hence they are poor decision makers, hence are being referred to as ‘basement dwellers.’ . . . They get offended rather easily and may threaten to collect their toys and go to their own sandbox. Any light at the end of the tunnel, to them, instantly becomes an oncoming train. If everything else fails, they will resort to personal attacks on others.” [Post on Real Estate Talks by Steinbock on May 3, 2009]A BEAR, ON THE BULLS: “There is apparently no shortage of greater fools with the means to borrow huge sums of money. These people can’t see beyond their monthly payment, so they’re getting suckered by low interest rates like lambs to the slaughter. I blame government for manipulating free markets and thus enabling all this insanity. . . . Of course, it won’t be long before this house of cards comes crashing down. But hey, it hasn’t happened yet (which happens to be the typical bull’s reasoning).” [Post on same by Feuille on May 4, 2009]
Now contrast the official sources to another type of real estate expert, one who’s never quoted in the newspaper articles. This is a person who doesn’t spend an hour or two a week obsessing over real estate; 100 hours is more like it for her or, more typically, him. This analyst hasn’t taken into account a mere handful of current rates and trends; he’s researched dozens of variables and is currently graphing sell/list ratios in 20 major markets across North America. This expert certainly didn’t miss the 2008 downturn; he’s been calling it since 2003!
We speak of the hard-core bulls and bears who frequent a handful of websites and blogs devoted exclusively to B.C. real estate – and when we say “frequent” we mean “eat at three times a day and fall asleep in front of most nights.” They are proudly self-identified real estate nerds who start threads such as “I’m 30 and still living at home. Rent or buy?” and “Nuclear war in Korea: Good or bad for B.C. RE?”
Now, the first impulse of most people would be to run not walk from any advice they might offer, but hear us out. These Cassandras and Pollyannas have thrashed out every variable and eventuality that could possibly affect the local market. They are to property price trends as medieval monks are to angels on the head of a pin. Yes, it took them thousands of posts and millions of words to achieve such learnedness, but fortunately there’s no need to wade through their vast oeuvre, not when we’ve done it for you. That’s right: in the short write-ups that follow, you’ll find their most important obsessions cogently summarized, along with brief referee’s notes attempting to find middle ground and explaining what it might mean for the other 99 per cent of humanity who, well, have lives. It’s the last word on B.C. real estate, and all without a single quote from someone named Helmut or Bob.[pagebreak]
Nothing correlates more closely with real estate price trends than months of inventory (MOI): the length of time it would take to sell all current listings at the prevailing sales pace. At the peak of the recent boom, Vancouver’s MOI dropped to three and even slightly below. A year ago, when plunging sales and an increase in listings sent the MOI skyrocketing to more than 20, average sale prices dropped 15 per cent within weeks. This year Vancouver’s MOI has returned to a balanced level in the four-to-six range, and prices have stabilized, even nudging up a little. In many other areas of the province, MOI remains high and prices continue to fall.
BULLS contend that, with very low interest rates and a gradually improving economy, sales will strengthen sufficiently to prevent another big run-up in MOI.
BEARS believe that there will soon be a flood of listings created by building completions, distress sales and sellers attempting to beat further price drops. Meanwhile, sales will fall due to economic conditions and the prospect of lower prices to come, a combination producing much higher inventory and therefore price slides.
THE REFEREE SAYS: This could go either way. Buyers and sellers should keep an eye on local MOI and adjust their urgency level and price expectations accordingly.[pagebreak]
Vancouver definitely profits from its role as Canada’s gateway to Asia, but is Asia recovering as quickly as current indications suggest, and if so, will this be enough to counter ill winds elsewhere?
BULLS side with analysts who believe Asia will shortly replace the U.S. as the world’s primary economic engine, soon pulling the rest of us out of recession. This looks to be good for Western Canada, which supplies so many of the commodities a re-energized Asia would need, and doubly good for Vancouver, which is not only a major North American transshipment point but a crucial entrepôt through which a lot of Asian trade is brokered. There is also the Asian predilection to invest spare cash in real estate, a tendency from which the Vancouver market has historically benefited.
BEARS point out that the supposedly crucial role of offshore investors has failed to play out in several studies, which generally suggest that 80 to 90 per cent of real estate purchasers are local. They also note that the bulk of our international trade continues to be with the U.S., where things aren’t likely to go so well. Finally, pessimists by nature, they find it hard to believe that anything, Asian or otherwise, can pull the local economy out of what they perceive to be a downward spiral.
THE REFEREE SAYS: B.C. is on a knife’s edge and it’s impossible to predict which way things will go, especially as the high commodity prices that would help the province prosper would be harmful to the fragile American economy, which it also needs to prosper. That said, the province has rarely run in lockstep with North American economic cycles.[pagebreak]
Until the spring of 2008, the accepted wisdom was that Vancouver would be immune to a real estate downturn till after the Games. That view proved to be wrong – or did it? Arguments continue over the role the Olympics might have played in real estate’s surprising recent resurrection.
BULLS look fondly back at Expo and its role in both easing a local recession and bringing Vancouver to the attention of the world. Two dozen years later, they say, history is already beginning to repeat itself.
BEARS counter that Games in other cities have mostly failed to ignite real estate markets and sometimes even had a deleterious effect by leaving hosts with big deficits and higher taxes (hello Montreal). As well, the difference between our summers and winters is frequently pointed out, sometimes accompanied by the phrase “two weeks of rain.”
THE REFEREE SAYS: They’re both right, but Expo happened to coincide with an era of Asian unease, which was probably the main driver of investment here, and the comparison to other Olympics is likely a better fit. Still, there’s little doubt that the $10,000 or $20,000 many homeowners hope to make by renting out their places has played a role in propping up prices by keeping some homes off the market and prompting the purchase of others.[pagebreak]
We can’t believe we’re saying this either, but location, location, location.
BULLS say prices in cities such as Vancouver and Victoria will always be higher than elsewhere in Canada (and almost anywhere in North America) because, even if space weren’t at a premium, the housing bundle is so rich with amenities, and, as survey after survey proves, the cities are such great places in which to live.
BEARS focus more on our stunted average incomes and take a distinctly darker view of local charms, focusing instead on incessant rain, high crime rates and growing income disparity. In any case, they point out, similarly blessed coastal cities such as Miami, San Diego and San Francisco subscribed to the same set of “it’s different here” beliefs but experienced real estate meltdowns anyway.
THE REFEREE SAYS: Bears seem strangely blind to the desirability of B.C.’s cities and the role played by the sea, the mountains and the Agricultural Land Reserve in both enhancing the glow and ensuring that property is in short supply. Still, while it may genuinely be different here, average Vancouver prices could drop another 25 per cent and still remain Canada’s highest.[pagebreak]
Perhaps more important in good times than in bad, population composition, mobility and growth cannot be underestimated as a factor affecting B.C. real estate.
BULLS point to an imminent population of three million to four million for Greater Vancouver and wonder how real estate prices cannot continue to rise. Promoters of recreational real estate continue to believe that many in the large boomer cohort will migrate from places such as Alberta to areas of B.C. where they can enjoy a pleasant lifestyle. And Canada remains committed to high levels of immigration, which means that continued population growth is assured, especially in the cities.
BEARS counter that population growth in Vancouver and B.C. merely ticked along at long-term levels over the last few years, indicating that real estate prices have little correlation with population growth. Some dispute the idea that there’s a shortage of developable land, given that B.C.’s population density of 4.7 people per square kilometre is less than Alberta’s and about one-seventh of Washington state’s. Finally, citing market crashes in places such as Phoenix and Las Vegas, they suggest that demographic effects don’t support real estate if the aging/growing/migrating population cannot afford the prices.
THE REFEREE SAYS: There’s little doubt cities such as Vancouver and Victoria will continue to grow and are squeezed for space, but equally little doubt that current prices are a stretch for most. It remains to be seen whether the local outcome will look more like New York City, where people deal with perpetually high prices by accepting a lower accommodation standard, or California, where prices have dropped dramatically even as population growth continues. As for the recreational market, baby boomers may yet decide to relocate from Alberta and the Lower Mainland en masse, but history suggests migrating retirees are more of a trickle than a flood.[pagebreak]
Long an issue in B.C. and especially Vancouver, affordability was stretched to implausible levels during the real estate boom. Current low interest rates combined with a 10 to 15 per cent price drop have barely returned it to historical local norms.
BULLS contend that Vancouver and B.C. have always been expensive markets where real estate always goes up, and the pain of high mortgage payments – “forced savings,” as proponents sometimes refer to them – will all seem worthwhile later in life, as home equity accumulates and household income grows. A failure to grasp this has turned many bears into embittered permanent renters.
BEARS argue that massive government deficits and an improving economy will inevitably result in escalating interest rates, creating great distress for homebuyers they believe are being tricked into the market by low rates. Alternatively, if rates stay low, it will be because the economy is so sick the same buyers may face salary freezes or job losses. Better to rent until prices drop to more affordable levels.
THE REFEREE SAYS: Since interest rates have nowhere to go but up (unless, of course, the recession persists), buyers should be wary of the temptation to max out their mortgage, instead limiting it to an amount that would still be manageable if rates rise. They might also consider locking into a longer term at current low rates, although this will mean higher rates in the short term.[pagebreak]
Residential real estate doesn’t always lend itself to the precise mathematical scrutiny typically applied to stocks and bonds, but investors and even homebuyers often consider metrics such as cost to own versus cost to rent (with, say, 20 times annual rent regarded as a trigger to buy) and whether a unit brings in enough revenue to offset some combination of mortgage, tax and maintenance costs.
BULLS point out that those who make fundamentals their first consideration have been shying away from real estate since 2003 or so, and property values have doubled while they’ve been on the sidelines. They contend that considerations such as tax advantages, forced savings, long-term appreciation and the “ownership premium” – or the pleasure of owning your own home – are as important as the numbers.
BEARS typically cite fundamentals as the biggest objection to buying B.C. real estate, suggesting they would happily plunge into the market if it made even a hint of business sense, something that could only occur after steep price drops of up to 50 per cent in Vancouver’s case.
THE REFEREE SAYS: It remains something of a mystery why B.C. property values are so high when rental rates are relatively low. As long as this remains the case, the numbers will make little sense and investors and developers will shy away from building or buying rental properties. On the flip side, this will keep the vacancy rate perpetually low, a boon to homebuyers who rely on the revenue from secondary suites to make their own calculations work.[pagebreak]
The puzzle of why Canada’s real estate downturn has been so much gentler than the fiery pipeline explosion south of the border can be partly explained by looking at our respective banking systems. Their institutions encouraged injudicious borrowing, foreclosed on millions of mortgagors, then, in many cases, promptly collapsed, freezing credit markets and throwing the economy into deep recession.
BULLS take comfort in the health of our banks and their more conservative mortgage portfolios, which are for the most part free of subprime liabilities. Lacking a U.S.-style overburden of distressed property hanging above it, our real estate markets may fall or rise, but they should do so based on factors related to economic conditions and supply and demand, not credit availability or competition from bank foreclosures.
realestatetalks.com In theory a place to go with your real estate queries, except that almost every thread devolves into bull/bear name-calling.nvcondos.ca There’s virtually no chatter on this realtor’s site, but Vancouver bulls and bears rely on it for daily MLS sales summaries.robchipman.net/blog More numbers and a busy comments log, generally displaying above-average rigour and literacy.vancouvercondo.info Habitués respond – often with considerable élan – to posted news stories with a potential real estate angle.housing-analysis.blogspot.com Data are charted and analyzed from a dedicated bear point of view, with typical posts ending, “Not looking good,” or, “We know the endgame.”
BEARS are suspicious of pretty much everything, but especially that Canadian financial institutions harbour dark secrets of their own, among them a boom-time legacy of since-discontinued 40-year mortgages that could run into default problems as the economy declines and real estate prices drop.
THE REFEREE SAYS: Buyers and sellers can probably save most of their worries for other matters. Foreclosures may well rise from their current very low rate if economic weakness persists, but analysts and regulators are virtually unanimous in vouching for the health and integrity of Canadian banks.