VREP #40 | Market Predictions for 2017 with Tom Davidoff

Sauder School of Business Associate Professor, Tom Davidoff, joins Adam & Matt to discuss recent market trends and to offer his predictions for 2017. Get out your crystal balls!

 

* Voice: Hello, hello this is the Vancouver Real Estate podcast.

 

– Speaker 1: And welcome back to Vancouver real estate podcast, I’m your host Adam Scalena.

 

+ Speaker 2: And I’m the other host Matt Scalena.

 

– Speaker 1: And Matt today we’ve got a milestone to celebrate.

 

+ Speaker 2: It’s a 40th milestone.

 

– Speaker 1: It’s really it’s not either of our birthdays although it probably could have been Matt’s birthday but it is the 40th episode and we’re so incredibly excited for one reason We were told early on in our podcasting that if we got to episode 10 we had something like, you know, we’ve got that on a month time or so.

 

+ Speaker 2: We’re golden here and we’re feeling good.

 

– Speaker 1: We’re also Yeah we’re also super excited about our guest today. We’ve got Tom Davidoff, He’s the director of the center of urban economics and real estate at the Sauder School of Business And Tom has been on the podcast before.

 

+ Speaker 2: Yeah he’s been on twice before, He’s been a fantastic guest, he offers kind of a more academic look at the marketplace which I find is always useful.

 

– Speaker 1: Right.

 

+ Speaker 2: He was back on.. He first made his debut in episode five.

 

-Speaker 1: Right.

 

+ Speaker 2: Very early on in the podcast. Back when the market was blistering hot still worth it listen though that was a really fantastic one that was popular.

 

– Speaker 1: Yeah if you haven’t heard that episode go back and listen, If anything it will kind of shape what what overall what where we’ve been with the market in the past year or so.

 

+ Speaker 2: For sure, then he was on Episode 21 right when the foreign buyers tax was announced.

 

– Speaker 1: Yeah.

 

+ Speaker 2: We had Tom back on to talk about that, Another really fascinating conversation and we thought hey it’s a 14th episode, It’s the start of 2017. Why not get Tom’s crystal ball out and talk about future predictions for this year.

 

– Speaker 1: His crystal ball is better than most.

 

+ Speaker 2: Yeah

 

– Speaker 1: it’s aaa.. it’s aa.. it’s.

 

+ Speaker 2: Data driven.

 

– Speaker 1: It’s a data driven crystal ball so we’re we’re excited to have Tom give his perspective on the year to come.

 

+ Speaker 2: Yeah and we covered not only the market it’s it’s sort of a free wheeling conversation really really good ones so So stay tuned.

 

– Speaker 1: Yeah, And before we get to Tom’s interview Matt we we’ve also got well we’ve had a lot of people reach out.

 

+ Speaker 2: Yeah it’s started 2017 kind of an obvious time to re-evaluate your real estate goals.

 

– Speaker 1: Right,

 

+ Speaker 2: And it’s been really really great. We’ve had people call about trading up trading down. We’ve had people call about investments here in the lower mainland and even outside the province.

 

– Speaker 1: I even Yeah I mean we’re right now we’re dealing with somebody who’s looking at multi-family in the prairies which is.

 

+ Speaker 2: And is essentially you know what I like to think that we’re really good soundboards, we have a lot of experience with this type of stuff and we can help you get from point A to Point B.

 

– Speaker 1: And we’ve also got amazing realtor level resources and tools that can help you as well, so if you want to get amazing information just you know on sold prices and also on days on the market and just more elaborate resources, feel free to call us we can set you up with that and it will give you a better gauge of the market.

 

+ Speaker 2: Absolutely.

 

– Speaker 1: But Matt the final thing is next week tune back, there’s something exciting to announce.

 

+ Speaker 2: Yeah I mean it’s a 40th episode, The Vancouver real estate podcast is growing Scalena Real Estate is growing and we’re hiring.

 

– Speaker 1: Which is exciting so next week we’re going to have more information about what we’re looking for and if you know anyone please do pass it along, we’re just a excited.

 

+ Speaker 2: We love to have a listener on the podcast.

 

– Speaker 1: Yeah for sure, So look forward to that, We’ll be talking about that next week. And of course the new Website coming,. Can’t wait to formally announce that

 

+ Speaker 2. Yeah, for sure.

 

– Speaker 1: And without further ado Matt why don’t we get to our interview with Tom Davidoff.

 

+ Speaker 2: Enjoy guys.

 

*Transition*

 

– Speaker 1: OK so we’re here with Tom Davidoff director of the center of urban economics and real estate at the Sauder School of Business, How you doing Tom?.

 

* Speaker 3: Very well thank you for having me.

 

– Speaker 1: Great.

 

+ Speaker 2: Thanks for coming on.

 

– Speaker 1: So Tom we’ll just start with a general question to get the ball rolling, Would you buy a house in 2017 in Vancouver?.

 

* Speaker 3: Boy that’s a fantastic question, I’m gonna go with not in January, You know obviously you know it could be a home run to buy a home in Vancouver. You know if you’re going to hold it for 30 years probably gonna to do just fine, But there’s a lot of negatives in the market that facing the market, There’s at the lower end of the market these new mortgage qualification rules which I think a lot of people find onerous and of course at the top and middle of the market the foreign buyers tax I think really slowed things down And the other fact is quantities tend to lead prices That is when you see a slowdown in transactions that’s common after a long run up in prices that slow down and transactions is commonly followed by a decline in prices, So we’ve got really rich pricing here of course There could be further upside but I think if you’re renting a home you’ve waited this long. Hold out a little bit longer see if things don’t turn around a bit. That’s my best guess. But it is of course just a guess.

 

+ Speaker 2: OK so kind of moving on. You touched on the foreign buyer ta, So it’s your impression that we’ve seen the foreign buyer tax work?.

 

* Speaker 3: Oh yeah. I mean obviously you see the stark drop off between July and August where you had 13 percent and then something less than 1 percent in Metro Vancouver foreign buyers. Now a lot of that of course was everybody who was going to transact in August and September and even some probably in October told their sales forward to August 1st to avoid tax So I don’t think one per cent was ever going to be sort of the steady state level of foreign buyers And I think 13 was an overstatement but I do think you’ve probably gone from something on the order of 10 percent foreign buyers to something on the order of 3 or 4 percent That’s bad in and of itself is a pretty significant difference And I suspect strongly that the foreign by your presence was actually stronger earlier in the year of 2016 before the tax came into the spring And I say that based on changes in currency and evidence that the market had been slowing down even before that tax came in But yes I think the foreign buyer tax was clearly followed by a drop in transactions and certainly a softening of prices at the high end, So I think there’s every reason to think a really significant tax of 15 percent has in fact had a cooling impact.

 

+ Speaker 2: Do you see it do you think that there’s still a contingent of foreign buyers operating in the Vancouver market?.

 

* Speaker 3: Well it’s three three or four percent that are self-identified as 4 And if you ask how many homes are purchased with money that comes from overseas. The number is probably significantly larger. You’ve got people who are legitimate permanent residents but the money doesn’t really come from Canada, You’ve got people funding local buyers to purchase homes that can’t be nobody does that. Sometimes it’s legitimate if you buy to a family member sometimes you may be pulling stuff to skirt the tax that may actually be subject to prosecution but hard to tax, So I can’t believe there’s zero for in money in the market today.

 

+ Speaker 2: No no in fact no .

 

* Speaker 3: I know there’s not given.

 

+ Speaker 2: I was going to say Most certainly not even even with

 

* Speaker 3: it’s not it’s not zero but I suspect it’s you know it’s you know somewhat north of 3 percent how much North is impossible for me to know you guys would have a better idea than I do.

 

+ Speaker 2: So when we spoke with you last right after the foreign buyers tax was introduced we were talking about there being some wiggle room for the provincial government potentially dropping it to 10 percent potentially upping it to 20 if that wasn’t working. Do you think that the 15 percent foreign buyer tax is here to stay? especially based on your seemingly dire predictions for 2017.

 

* Speaker 3: Yeah and you know I mean I’m not I’m not one of these prices are going to fall 80 percent guys I’m just staying on balance I think

 

+ Speaker 2: Maybe dire was a bit much.

 

* Speaker 3: 1880s a lot and That said you know we have a provincial election coming up and then it’s a long time until the next one and we have a government that historically has been very tight with the real estate industry so would it shock me to see a meaningful decline after the election in the foreign buyer tax it wouldn’t shock me in the least. You know they probably wait a dignified amount of time but if the market crashes nobody is going to be happy. I mean even a lot of renters are probably indirect. We connected to the real estate market just to the province doing well financially through direct employment through indirect employment. So you know there was a nasty nasty downturn in the housing market. I think it would be natural for the province to look to do something and easing the foreign buyer tax would be something they might do, You know hard to read I think it’s very politically popular and there might be a bit of an uproar if it went away and looked like sort of political scheming or something like that. But you know it. I think when you look at Vancouver’s future I would say that tax is a risk factor, I think it affects pricing and it’s not a certainty.

 

+ Speaker 2: It seemed I was just saying to Adam before we went live here no matter what happens it seems like it would be politically unpopular to drop it though like I mean 10 percent or 5 percent or even just to do away with it altogether it would be politically unpopular to say the least.

 

* Speaker 3: Well you know so So the province had some other steps they could take right. So we just saw this first time buyers you know low equity loan program. And when you think about it it’s my best guess is what the province was up to. I don’t think it was good policy but I do think it was probably to give them credit intended to avoid a precipitous drop in prices because you know having lived through the U.S. in the late 2000s Nobody likes a devastated housing market I don’t know that we’re going to have one we might have prices pop along maybe at consumer price index maybe more. But there’s a real risk of a significant correction given how out of whack prices are with local incomes and the possibility of a significant interest rate increase. So should we see that not most likely but statistically possible nasty downturn. I think the politics of housing prices might switch.

 

+ Speaker 2: We talked to a lot of kind of real free marketer types in real estate obviously and it seems to me like in the last six months the provincial government you know with the foreign buyer tax and then with the first time homebuyer loans are doing a lot of tinkering here with the market just as a general question do you think that’s I know a fact that a lot of people we work with are not big fans of that of that kind of interventions or those types of interventions I should say, What’s your thoughts on it?.

 

* Speaker 3: Well I think I have a pretty different perspective and it may come from being American which is when I first came to this market I thought I thought my property tax assessment was a joke I couldn’t believe how low it was at you know half a percent you know in California You’re your tax base is frozen at the purchase price which is kind of crazy But the first year you buy a property you’re at somewhere in the order of one and a quarter percent So and I you know I was like wow what low property taxes And then you realize how it’s made up you open up your income tax bill, You know it’s a big number.

 

+ Speaker 2: Yeah.

 

* Speaker 3: So now this happens to be an area of research of mine which is if you think about it where do you want to have high property taxes and Where do you want to have high income taxes. You know in a place like Rich Coleman’s favorite Salmon Arm or someplace where it’s easy to build homes you want to have a tax base that’s primarily income and sales because if you have a property tax you’re screwing up people’s decisions to build or not. But in Vancouver where we basically forbid people from doing anything with their property or property taxes just give us money. It doesn’t really change anybody’s economic behavior. It’s not like you’re going to you know build smaller townhomes on your single family law because there’s a higher property tax rate, So if you wanted to have a sort of less a fair efficient economy you’d have higher property taxes and much lower income and sales taxes that could be a really dynamic economy. And you know higher property taxes would be bad for real estate but they’d be good for the overall economy and there’d be some positive feedback even into housing. So if I was you know trying to maxed out on free market I’d say boy we really got to move in the direction of higher priced taxes lower income and sales taxes will effectively. That’s what the province did with the foreign buyer tax. You know we at UBC said you know go directly in that direction people who don’t pay income and sales taxes ought to be paying higher property tax. And you know they sort of approximated that with attacks tax on foreign buyers who aren’t subject to our crazy high income taxes and have been benefiting from low property taxes. So that’s a very long winded way and I apologize to say it’s not like we were starting from an ran to begin with. Right now we’re starting from you know a tax system that has a high level of taxation and really puts its thumb on the scale of let’s be a town where people buy real estate and jobs are sort of a second consideration. So we kind of have things messed up to begin with is where I’d go. But yes you’re absolutely correct since then it’s kind of entertaining to watch the provinces really thrown caution to the wind with you know a couple of pretty bold things. You mentioned the foreign buyer tax And then this first time buyer you know major league subsidized encourage people to take on debt program.

 

+ Speaker 2: Yeah, speaking of that what’s your what’s your thoughts on on the new first time homebuyer plan?.

 

* Speaker 3: Again I think it was probably done to stimulate the market There’s been studies of the U.S. which you know when you have a struggling housing market first time buyer programs definitely tend to juice the market because getting people out of their parents basement or out of a rental and into a starter home is a very important driver of the market. You know so it’s a first time buyers are very important to the market and a big problem for first time buyers tends to be they can’t scrape together a down payment. The other problem of course is they can’t afford payments. This new program doesn’t do anything on the payment side but it does I believe allow people to go. 95 percent insured will own two and a half percent from the province. Two and a half percent down payment. Instead of needing a 5 percent down payment. So you know giving people that extra two and a half percent may really get a lot of buyers in who wouldn’t be otherwise. And that that relative to a world without that program may indeed use the market now. So I I have to believe the province’s intent was to stop the slide of home prices before election season because of course if your goal was to make Vancouver affordable just the foreign buyer tax into federal interventions to make mortgage credit harder We’re doing a great job of driving down prices and those are you know lower prices is great for affordability too So the status quo is good for affordability. So I don’t think this was really let’s help people who don’t own houses yet I think it was Let’s make sure prices don’t crash.

 

+ Speaker 2: OK, You also see it I mean is there a component here of it being reactionary to the fact that the foreign buyer tax has worked to kind of chop the top off of the market right where we are now we’re looking at the situation where the people that were were most vocal about affordability First time homebuyers millennials a lot of people that were having a tough time getting into the market they’re not in a better situation right now are they?.

 

* Speaker 3: Yeah you know I, The condo market I think isn’t as hot as it was but I agree You know certainly the pre-sales market seems to be going gangbusters even even as the rest of the market has slowed down So yeah I guess one could look at this as let’s help people at the bottom But if you really wanted to do that I think you know just say hey if you’re a renter Here’s a check as opposed to writing a check Implicitly by subsidizing debt, The difference is when you subsidize these loans because it’s hard to build in Vancouver it’s not like oh you know hey hey I hear these programs in effect we’re going to build a bunch of new apartment buildings because supply it’s so hard for supply to react when you get people into the market and paying more for houses to make sure they get in and get the benefit. A lot of that benefit goes to the seller rather than the buyer. So that’s why I think this program again was designed to benefit you know not necessarily benefits so much as make sure there wasn’t a big contraction in the market. Again if you wanted to just really give a break to people struggling with affordability you’d say hey if you live in an expensive housing market you get you know a tax rebate because you know I should say that a very costly program you know I spent some time trying to figure out how expensive the loans are to the province and you know you’re getting something like 10 percent of the loan amount in interest forgiveness there’s going to be some administrative costs so you’re probably at 12 percent But then the biggest item is these are risky loans You know usually risky loans you have to charge mortgage insurance. Instead the provinces insuring itself so taxpayers are taking on risk in the amount of probably 20 percent of the loan amount So you’re up to like a third of the loan amount is basically being given away to the borrower And so why don’t you just take that program and just give money to people who are renters And if you give cash away that does a lot less to push housing prices back and claw back the benefits of the program away from first time buyers and towards sellers.

 

+ Speaker 2: Right, Right, So Tom we wanted to get to your research I know that you’ve been doing some research on the market and you know there’s depending if you’re reading you know the province or the sun or looking at the board stats. You’ve been doing some independent research can you speak to that a bit? base on stats right

 

* Speaker 3: Sure, Yeah that’s right. What we’ve done is we’ve looked at West Side single family west side multi-family East Side same thing And when you break it into segments it sure looks like the segments that are most attractive to the foreign buyer have struggled the most And so what we do is we sort of say controlling for quality as best as we can what’s happening to the price of a home very easy to price it to home sell one in December 1 in November. You can’t look at the difference in those prices and say that’s what happened to housing prices because they might have been different quality houses So controlling for quality as much as we can we find the single family market on the west side is down significantly You know certainly double digits from where its peak was in the summer of 2016, Condo is not doing as badly but certainly down as well I think in the 5 to 8 percent range. It’s imprecise. You know the market slowed down so we don’t have that many transactions to look at but there’s no question that prices have softened since the peak in the summer of 2016.

 

+ Speaker 2: And just so I’m clear Tom when you say control for quality because the real estate board uses the benchmark price range which is which

 

* Speaker 3: Yeah I think they’re doing something similar so I’m not totally sure why they’re coming up with different numbers, I think they may do some smoothing across time as sort of rolling average So maybe they don’t put as much weight on the most recent month but yes the realtors are ours are clever. They have clever people doing what everybody does which is to do your best to control for the quality of the homes sold.

 

+ Speaker 2: Maybe changing gears here. Lot of talk about interest rates in 2017. Any thoughts on what’s going to happen with the rate?

 

+ Speaker 3: You know I am not a bond market forecaster So I just look at it like everybody else you know post-election we saw a significant uptick And I think that could be a couple of things it could be just stimulus creating real growth in the U.S. because you know the Republicans of course I don’t know how much people know Cantor but the Republicans were determined not to let Obama have a successful presidency. And so even in a sluggish economy where again stimulus with Trump in a way of course he’s the king of debt. So he’s going to have every incentive to borrow and the Republicans I think are going to be less inclined to say no to him than they were Obama. And I think the market’s optimistic about that. Also there’s going to be massive tax cuts which A may stimulate the economy but B create potentially inflation down the road. So interest rates in the U.S. after the election jumped probably both because of us inflation potential. And you know expectations of real actual growth in the economy real growth in the economy would affect Canadian interest rates and push them up U.S. inflation I’m less sure that it has that impact on Canadian interest rates. So you know we haven’t seen a major increase. We’ve seen some increase but not huge mortgage rates here in Canada. You know since the election though you know the Fed raised rates but actually we were over 2 percent at the U.S. Friday. And now we’re back into the one point eight. So there’s been some retreat of yields and not clear that we’re going to see continued growth of yields. I think a lot of economists who do spend time thinking about this are not optimistic about growth in the coming even decades. So you know definitely there’s risk of interest rates going up where it just unbelieve really low rates by historical standards so there’s certainly the possibility of an uptick, But I would I certainly wouldn’t call it a certainty.

 

+ Speaker 2: So Tom

 

* Speaker 3: And I should take a step back and just point out you know if interest rates went too you know when I first bought a house in 2002 the real estate agent I was you know shopping with said well you know I think if interest rates get below 7 percent that will be a real psychological barrier, So I you know I’m guessing Millennials just don’t even know that 14 18 percent rate But even if we went back to historical levels of 4 to 6 percent I think we could all agree that would be catastrophic for this market. I don’t think that’s the likely outcome but I think the reason you ask and the reason we’re all interested is a very big driver of the Vancouver market of course in every other market has been just historically low rates that make it very cheap to borrow and buy.

 

+ Speaker 2: So circling back around to the third maybe is a close here When we asked would you buy a house in 2017 he said not in January Based that all you’ve talked about here would you buy one in November or December?

 

* Speaker 3: It depends what happens. Right. You know I think there’s there’s a real possibility of a downtick. The other thing is again given the political uncertainty I don’t know what the future holds for China at all. But there is a real possibility that the future of Vancouver is international playground for the rich. And part of that would be a change in our current tax regime which has given the local buyer I think a real break. So if I had some kind of inkling you know if I had insider information which I certainly felt that the tax was going away that would be a major trigger for me to get in or if I got an inkling that it was going to be ruled unconstitutional I don’t think it should. But it could. You know I think that political risk is probably to me the biggest upside risk for people who are holding out from buying you know rates aren’t going to get significantly lower which is important. Yes. So without some kind of demand from the outside I just don’t see these price to income ratio staying as bad as they are. The other thing in Vancouver if I may one final thought is the rental market is really something to keep an eye on You know I started collecting Craigslist rents in March of 2006 and in between March and June there was this giant bump in rents. I don’t know how much of that was seasonality but the market is up you know very rapidly from March through the summer but then it flattened out. And what was particularly interesting is the end especially after the foreign buyer tax came in high end rents really fell. You know if you want to buy a house in the British properties was that set you back 5 mill? 4mill?

 

+ Speaker 2: Starting starting Yeah Two points of entry level.

 

* Speaker 3: Entry level right? You can rent something up there for you know four gets you a really nice rental up there. I don’t understand you know if I was a yuppie kid struggling with rental affordability paying 2500 to live in somebody’s basement I’d get three or four pals and get a party house up there. So that segment is really the point is you know it just highlights the difference between the buying power of the foreign buyer who I think was driving the train up there and a local buyer you know and I talked to a millennial friend and this guy is paying 2000 bucks a month in rent and struggling to do it and has a roomy you know living behind a curtain not a patio. All this crazy stuff. And that’s the guy who’s buying the $600000 condo. So you know there’s a lot of fragility in this market. I’m not I am not going to be Mr. it’s definitely going to crash because of course there’s so much that’s great about the Vancouver market and so many people all over the world who do anything to be here. So there’s a lot of positives. But if this is a local’s market especially with the possibility of increasing interest rates I just think in the near term there’s significant downside risk and less upside. But again if the outside money starts pumping back in I think things could could pick up again after a slowdown. So you know January. On balance I’d say not be a buyer but the other thing I’d tell people is be opportunistic. You know talk to a smart guy like Scalia’s and start shopping around. Don’t torture them but just just you know get them to you know put you on that list where they send you houses that match your criteria and be prepared to jump if you find the right thing that’s sitting around for a while.

 

– Speaker 1: Sounds like good advice to me.

 

+ Speaker 2: Yeah, Hey Tom we appreciate your time And if people want to read more of your work do you have a blog or a Web site that people can visit?

 

* Speaker 3: I’m on Twitter for accessible on stuff But my day job has research my published research is more on the U.S. housing markets and the reverse mortgage market. But if you’re interested. Absolutely. I met sites dot Google dot com slash site slash Tom David author even better just Google me and you’ll find me.

 

– Speaker 1: Perfect Hey thanks again for your time Tom. And it’s always great having you on the podcast.

 

* Speaker 3: Real pleasure, Thank you.

 

+ Speaker 2: Thanks.

 

– Speaker 1: Take care.

 

*Transition*

 

– Speaker 1: So there you have it folks Our discussion with our very good friend Tom Davidoff.

 

+ Speaker 2: We’re yeah I’m a huge fan. I know you’re a fan of Tom’s. He’s always got super interesting and insightful things to say about the market And you can tell that he’s a he’s a big fan of the Scalia brothers as well.

 

– Speaker 1: That’s for sure that’s for sure. He I think even made a pitch in there for people to get in touch with the school brother.

 

+ Speaker 2: Yeah But if you are googling it it’s a it’s a

 

– Speaker 1: The N it’s not silent.

 

+ Speaker 2: Yeah it’s pronounced Scalena And you know we say that not to embarrass him but just to make sure that you know how to find us. So speaking of how to find us Matt How can people find you?

 

– Speaker 1: It’s SCALENA and it’s 7 7 8 8 4 7 2 8 5 4 or math at Scalena real estate dot com.

 

+ Speaker 2: Or you can try me at 7 7 8 8 6 6 4 5 7 4 or Adam at school in a real estate dotcom.

 

– Speaker 1: We also got that nonpartisan line

 

+ Speaker 2: Info at Skyliner real estate dot com, So have a great week, We can’t wait to be back next week because we got a really great episode

 

– Speaker 1: Number 41.

 

+ Speaker 2. Yes some exciting news so.

 

– Speaker 1: That’s a Dave Matthews Band song, All men.

 

+ Speaker 2: Did you just?.. Is Dave Matthews?

 

– Speaker 1: Have a good week guys.

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