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episode # 200

Brace Yourself Vancouver: 2020 is HERE with Andrey Pavlov

2020 is HERE! So, who better than SFU’s Professor of Finance at Beedie School of Business, Andrey Pavlov, to join Adam & Matt to not only dissect the year that’s passed but also inform the year ahead! Where’s the market going? What mistakes have we made along the way? And what’s posing the biggest threat to our market and affordability? Trust us, this is a no-holds barred account of government, policy, money, and everything in between. We sift out all the gold nuggets this market has to offer and you’re going to love it. You spoke, we heard, and this is the content the VREP community wants! Download and share this gem today!

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Episode Summary


Tell us about yourself.

I do research in real estate as a Professor of Finance at the Beedie School of Business. Vancouver is a fascinating market and I’m lucky to be here to research it up close. I have studied many other places, like San Francisco, Los Angeles, New York and London, but Vancouver is fascinating. It’s so unaffordable, especially to the locals.

Is Vancouver a global city? Is it in conversation with London, New York, San Francisco, etc.?

It’s difficult to compare New York or Los Angeles to Vancouver. I don’t think Vancouver is quite at that level in terms of size, arts, etc. But it is unique in its gateway to Asia, both in location and liberal immigration policies. Asia is a very dynamic place so that’s a unique opportunity for Vancouver.

Is there another city or market that reminds you of Vancouver?
Every city is unique. Seattle and San Francisco are also gateway cities to Asia thanks to geography and culture. But Vancouver has a unique location being in Canada, with different immigration policies to the US. For example, at Simon Fraser we have great international students. Many have offers from the US but they choose Canada because it’s easier to get the paperwork to study in Canada and they see a path forward to working here.

Why real estate? Why study it?
Pragmatically, it’s a relatively under-researched field. So I saw that as an opportunity. On the other side, real estate really, really, really matters. Buying a home, selling a home, getting a mortgage – all of these decisions impact your financial and emotional well-being. These decisions matter. It’s more important than your stock portfolio because it affects how you live. It affects you every single day when you walk through the door. Real estate matters a lot and that attracted me.

What was the most surprising thing about the market in 2019?

Because of the speculation and vacancy taxes and other housing regulations, demand was reduced, especially for high-end properties. The market suffered from that but now people are coming back. Transactions are up and prices should be going up soon. Spring is supposed to be a busy market. Many people postponed buying a home but you can’t postpone forever. Those buyers haven’t gone away. We haven’t lost population and we’re not building enough. There’s still a housing shortage so it’s only a matter of time before those buyers who were holding out have to come back into the market.

We seem to be moving back into a seller’s market. If that was the downtown, it felt short. Was that your sense?

It was short but it was severe, especially for high-end properties. So we shouldn’t underestimate it. The decline was up to 40% in the high-end market.

We still have pressure and population growth on the demand side. And we have done absolutely nothing on the supply side. So if you’re considering buying, you might be worried about prices increasing as the population grows and supply doesn’t.

Have we hit the bottom of the market?

It appears that way. If the government stops here and reverses some of their policies, this could be the bottom. But I worry about this government. Are they going to come up with new policies to undermine property rights and reduce prices artificially?

What are your thoughts on policy moving forward? Do you sense there’s more coming?

First, let’s talk about affordability. At the entry-level, affordability hasn’t improved – it’s been made worse. Even if prices are lower, the mortgage terms are harder and banks don’t like to lend in declining markets. So financing terms become worse. The risk on the investment also goes up, as we factor in what the government will do next. So it makes it harder to buy, even at the lower prices. We also have higher taxes and utility bills that make ownership costs higher too. So ownership costs have gone up, even if house prices have gone down.

On the higher end of the market, prices have declined more. But it still requires a higher down payment and a harder mortgage. So I’m not sure affordability has changed much in that sector either.

So the measures have not improved affordability, even if prices have gone down.

In the past, the BC government has taken measures to undermine property rights. Ultimately it’s telling you what you can do with your property. They do have the power to bring the price to whatever they want but I hope they don’t go there. They have unlimited ammunition to expropriate property rights.

Sounds like you’re pretty negative on the NDP.

I wasn’t negative when they got elected but I was negative when they introduced the speculation and vacancy tax, and the school tax. In my view, these infringe on property rights – we’re stealing from homeowners. They think that property owners are the enemy and need to be penalized.

The biggest threat facing the Vancouver market is the government. And it has been for a long time. I understand we have an issue of affordability and that may require some government intervention. But that should be on the supply side. They should be stimulating supply, not the current building code or permitting process that actually restricts supply.

Do prices in Vancouver make sense compared to other markets?

Vancouver is unaffordable; there’s no question about that. The question is what is the cause of that? And I think it’s due to government restrictions on supply. Just look at how long it takes for a building application to get approved. Look at our infrastructure – it’s insufficient and condenses us all into a tight area. If you restrict supply for a decade or two, you will get high prices because Vancouver is desirable.

How does Vancouver fit into the larger traditional market cycle?
The reason we have cycles in regular markets is because it’s difficult to predict demand and projects take a long time to build. So if you start a project when demand is high, you might finish it when demand has dropped off. But in Vancouver we’re practically not building, so we’re never in an oversupply situation. And that’s due to government intervention. It’s about what the government does and not about normal market forces. This makes it riskier and generates a larger supply shortage.

The overheated demand could go on forever. We have a growing local population and people moving into Vancouver from Canada and the rest of the world. As long as these factors remain, the demand will keep growing. In order to get a normal market cycle, we need to increase supply so much that we have more supply than the growing population needs. But that would basically require doubling the size of the Lower Mainland over the next 10 years.

What’s the easiest way to do this?

We need density and new land projects.

Clearly, density needs to increase. Auction off density rights. That way density will increase where it’s most needed and developers will pay the highest price – this is a suggestion by Tom Davidoff. Instead of paying the city, pay the neighbours. If you’re within a certain distance, you get compensation for the increased density. That will turn people who oppose the project into people who support it.

The other way to increase supply is through new land. There are farms within 15 km of downtown Vancouver. I’m not saying force the farmers to convert to housing but give them the option. If it’s more valuable as farms, it will stay farms and if it’s more valuable as housing, it will convert to housing. We also need to improve infrastructure so you can get from those new developments to downtown Vancouver.

On laneway houses

Laneway houses are what we call gentle densification. You can increase density without hurting the neighbours. Generally speaking, neighbours don’t mind laneway houses. But in certain neighbourhoods, like Vancouver West, the impact is big. In expensive areas, the impact of laneway houses is huge, reducing prices of neighbouring homes. But in lower priced areas, it has no impact or even a positive impact on pricing. So gentle densification is good but shouldn’t be applied across the city. It needs to happen where people are okay with it.

On the city-wide plan

I know we need to densify so any steps we take are welcome. However, one plan for Vancouver is the wrong way to do it. The evidence doesn’t support it. Different neighbourhoods like different things. Densification should happen where people don’t mind it. If you shove it down people’s throats, you kill the whole thing and slow down the process.

People will start changing their minds. Instead of seeing density as a pure negative, people will realize they like having amenities, restaurants, shops, people on the street, etc. And they could get paid for it! So instead of developers fighting for property rights, we would have homeowners fighting for more density.

Have you studied larger multi-family developments in communities that would embrace high density? Any areas that seem right for development?

Yes, I do have a paper on this. We looked at the Rental 100 program, which gives a density bonus if you develop a purpose-built rental. We studied the effects of the program and the effects on the neighbours. If the neighbours are condo-owners, there are no impacts. Homeowners don’t mind it much; there’s a small negative effect but it’s not significant. So clearly the program is successful as the neighbours are not upset about the density.

That would be a good start for densification as we have evidence that neighbours in those areas don’t mind densification. Another conclusion is that condo-owners cared less than home-owners, which tells us new density should be near currently existing density.

We’re seeing upward pressure on the low end of the market. One bedrooms are on fire! And we’re seeing downward pressure on the high end of the market. People said there would be trickling through the market with lower prices on the high end trickling down. Will that happen?

Yes, it could. For example, someone who sells their one-bedroom for well over asking is now significantly richer. And they need to live somewhere. So they might move into a higher-end property. And at some point, people will see that they only have to spend an extra $100,000-300,000 to get an actual house. It takes time, but those things happen. The gap will decrease – but we don’t know if it’s the low end getting cheaper or the high end getting more expensive. It seems like it might be the high end getting more expensive but those markets are definitely linked.

On the stress test

When it was first introduced, there was a worry that interest rates would be increasing by 2%, so it was clearly very beneficial. Nowadays, no one is talking about interest rate increases – it’s all about zero interest or negative rates. So why are we still keeping the stress test? I can understand it at purchase but why do we still have it at mortgage renewal? All it does is lock borrowers into their current bank which hurts the borrower who can’t shop around.

What are your thoughts on the market in 2020?

Clearly, people are coming back to the market. Unless the government intervenes, I think we’re going to see a pretty fast recovery. Demand has been going up and we’ve built very little. This will translate into higher prices.

Any thoughts on potential policies coming in?

Given the track record of the current government, they have shown they have no problem undermining property rights of current owners. For example, there was a proposal to lower the threshold for when the school tax is applicable. They could also raise the rate of the tax. The speculation and vacancy tax can be made stricter or they can raise the rates. They have many mechanisms and it will very likely reduce property rights.

Would you buy property in Vancouver right now?

Looking ahead 10-20 years, the demand will still be there. We may look good relative to other foreign governments. We’re clearly not building enough. So the market only has one way to go. The only unknown is government intervention but even that is limited as we have elections coming up. There’s a limit to how much people will take before they vote them out of power.

What property type would you buy in 2020?

I like buying land because we’re not accessing new land. We will increase supply through densification. I would buy the biggest lot in the nicest location, regardless of restrictions.

5 Wire:

Favourite neighbourhood: Kitsilano (or neighbourhoods that offer similar services, walkability)

Favourite bar or restaurant: Anywhere in Vancouver for Sushi

One piece of advice you would give your 18 year old self: I saw a saying on a poster: “don’t buy your kids what you wanted to have, teach them what you wanted to know”; just learn more!

A book you would recommend: The Big Short by Michael Lewis

Something you have bought recently for under $1,000 that has changed your life: A short ride in a rented Lamborghini for his son’s birthday! He appreciates experiences over material things.

Learn more about Andrey Pavlov.

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