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episode # 161

Has the Vancouver Real Estate Market Bottomed Out? With Tom Davidoff

Professor Tom Davidoff is back! For new listeners, Tom wears many hats – the architect of the Speculation Tax, a leading go-to real estate economist, an Associate Professor at Sauder, the Director at UBC Centre for Urban Economics and Real Estate, and a VREP fan favorite, to name a few. And to Vancouverites, depending on your politics, he could be a villain or a hero. But for our more seasoned listener, Tom is an unfiltered voice on the market, a check-in point, and someone who is never afraid to share his predictions or his concerns. This week is no different. How’s the market? What has caused the slowdown? Which policies, if any, got it right and what will be the repercussions? Will we see prices continue to drop? These are just some of the questions that drive our conversation. This one is not to be missed!

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Episode Summary


About Tom:

Tom is an associate professor at UBC’s Sauder School of Business and is a popular past guest on the program. He is an economist that teaches real estate. He has studied aging, housing and insurance and the intersection between these topics. He is also versed in land use regulation and property taxes, which has become an area of policy interest in the last few years in Vancouver.

On the current real estate market:

There is the for-sale market and the rental market. Both had an explosion around 2014, which was a bit of a puzzle. Some people thought it was due to foreign money – some thought it was millennials coming of age and buying homes. Turns out the answer was probably both. The speculation and empty homes taxes were introduced to address the out of town buyer – where we have seen a real slow down in the market. On the rental side, rents exploded in Vancouver up 20% after the introduction of the foreign buyer tax, but now rents have slowed as well. The answer that makes the most sense is that it was a bit of both groups.

For the rental market, the big increase in rental was at the bottom of the market from 2016-2018. Young household formation groups that were driving demand, but the tricky one is why this has now slowed down significantly in 2018-2019. This could be due to the strata crack down on Airbnb rentals which is forcing condo owners to rent their homes to full time renters versus offering for short term stays on the Airbnb market. The other issue might be presale completions – as lots of units have been coming online in the last year providing more rental supply to the market.

Does this situation get easier to understand after more time for Economists?

It might be comparable to the explosion of prices in the USA real estate market prior to the sub prime housing crash. In areas like Phoenix, Arizona, prices shot up to double of construction costs over a short time for confusing reasons. In this case, the answer was probably the sub-prime mortgages, but this doesn’t explain why Phoenix had price increases, but Raleigh, North Carolina didn’t have the same growth (comparable cities).  This boom has become easier to understand over time, but parts are still unknown.

Will we every understand what was driving prices and rents in Vancouver over time? Between millennials, a strong lending environment and global investment demand it may never become clear which factors weighted heavier in the growth. At this point, it is hard to say if we will ever know.

On a possible global real estate slowdown as major global cities are now seeing price deceases in the luxury real estate market:

Hong Kong is complicated. London has shut it self off to outside money with the Brexit mess. New York has built a lot of luxury product which may suggest oversupply. These markets have different factors that could be influencing prices, so it is really hard to know. It is possible that real estate trends are becoming more global and there might be a global slow down happening. This clouds our understanding of Vancouver as well. People can say that Vancouver has slowed due to the B20 Stress test or the Speculation Tax, but Hong Kong and New York to not have these drivers and they are also slowing down. Finding similar causes to what is happening to all these cities is challenging.

On what will happen to the B20 Stress Test in the coming months – will it be relaxed?

Long term bond yields have corrected down recently a lot. This suggest mortgage rates will remain low and the stress test would still be required. If mortgage rates continued to rise, you could argue that the stress test wouldn’t be needed because buyers would be “in stress” to meet their higher mortgage payments. There is a Federal election coming in 2019 and a good strategy for politicians may be to get rid of the mortgage qualification rules to appease voters, but we will have to see.

Interest rates are at a bizarre low level at this time. It appears the Vancouver housing market is in some soft of a correction – at least it seems this way. It is a real possibility that interest rates may not increase from their 2%-3% levels in the foreseeable future and this will affect home prices. You have to think that a lot of people assumed interest rates would rise to historical levels and it now seems like this is not going to happen soon. Rates like 7%-8% appear like they are not going to come back and this should affect how you would price real estate. Most people would agree that it is more probable today, than it was a year ago, that we may see permanently low rates for mortgages.

On if he predicted the current market slow down:

Most people must have been expecting some type of slow down. Vancouver has had various demand side measures that have addressed demand for first-time home buyers (stress test) and outside money (foreign buyer tax). There is also lots of new inventory coming online. People shouldn’t be shocked to see a bit of a correction. There is a possibility of a real condo catastrophe soon. The presold units can come back on the market in a variety of ways – rentals, flips, flips because outside buyers do not want to pay the speculation tax and people that will not qualify for their mortgages that didn’t know the stress test was coming.  This could flood the market.

The gap in condo and single-family homes is closer today than it has been in the past. This suggests that condo prices will have to come down or single-family home prices will have to increase. It seems most likely that condo prices will drop.

On people calling for purpose-built rentals and other supply even though we may have a flood of condos entering the market:

There is a world where supply coming online may further reduce housing prices. More supply is a great thing for people that are renters, but not home owners. A push for purpose-built rental might be a little bit misplaced. The first order question is, “can we get roofs over peoples heads”. A secondary question is what type of supply (purpose-built, private homes) this is.

The conversation around purpose-built rental recently is probably mostly due to the increase in rental prices from 2016-2018, as people are looking for a solution. In past years, there was probably an argument to be made that renters were less secure with the possibility of being evicted by landlords for a potentially false renovation of faux family occupancy. This play is not as realistic today because of the increased surplus and rental cooling; suggesting purpose-built rental with added security is not as important as the discussion suggests. The empty homes and speculation tax will bring more units to the rental market than in the past as well.

Are we going to add enough housing supply to the Vancouver market over the next 3-5 years?

There is a slow down in private sector construction. Less new housing starts in 2019 and less in 2020. You would think there would be a bid-ask spread that would evolve between sellers and buyers. If a land owner has already spent money developing for a multi-family deal, they are probably not willing to sell for what a developer would need to pay to make the development make fiscal sense. This may open the door to the Province stepping in to build affordable housing. This doesn’t make sense when there is a bottle neck in the construction industry, but if there is a slow down in development, the Province can step in to built purpose-built rental. 2020 is a much better time than 2017.

From an economist’s point of view, government-built housing doesn’t make sense. If you have a hungry person, you give them money to afford food on the market – the government doesn’t grow the food. This then follows that the government should be providing money to people so that they can afford housing and not stepping in to build the housing that is needed for these groups. That said, Vancouver might be unaffordable for a long time and the government has access to cheap money. This suggests it is not crazy to build some affordable housing in this market.

On if we still have a missing middle in the market:

It’s easy to see death penalty at the top of the market. There is lots of different types of supply being built right now. Are we going to see this market downturn progress to create downward pressure to get people living in condos to be able to upgrade to a townhome or to stop segments of the market from turning away from Vancouver as a place that they ever hope to afford to own. The worst case scenario for market health is when that segment of the market gets meaningfully less expensive.

On if Vancouver is in a better place today than 1 year or 2 years ago:

People were waiting to see what the NDP government was going to do, because people hate unaffordability, but they hate seeing a crash or an erosion of their home value even more. If we see prices as nominally constant over the next 3 years, this is probably the best you can hope for. If we start to see deeper price declines, this might take the economy with it. Not to say we don’t want to see deeper affordability in some areas, but where we are today is a relatively good place for the market stability.

On the NDP:

The most recent budget was encouraging. They could have taken bigger steps towards addressing the property market, but we didn’t see that. That suggests they recognize there is some uncertainty out there and they are waiting to take in more information and see what’s next. That is promising.

On any unforeseen consequences of the speculation tax:

I’m sure there are people that have been negatively affected – in that they may have to sell their vacation property or something similar, but it has been interesting to see the market clearly respond to it. Seeing luxury houses come on the market in fairly significant numbers suggests the speculation tax is impacting the market. We can conclude that holding property for reasons other than being a landlord has been a thing in the market and we had to address it someway.

When the speculation tax was proposed, it was suggested that municipalities could chose to buy in and benefit from any surplus. In practice, the province made the decisions for where it would be implemented, and the Province benefited from the surplus cash. Some neighborhoods were upset about that.

On market predictions for 2019 and next 5 years:

If you look at the price index, you need to consider the homes that didn’t sell. For example, if you have 10 homes for sale in an area and one sells for $2.5M, the index reports that this is the price, but those other 9 homes are not worth that amount because they didn’t sell. This suggests we are going to see index declines as inventory piles up in the short run.

On the other hand, seasonality is a big thing in the market. We might see a fight between seasonality and a pile up in inventory. The harder question is the middle of the market – there are a lot of frustrated buyers that were sitting on the sidelines and couldn’t buy previously. Presumably, you would need to work through those buyers before you would see a crash, if those buyers are still around. If you were buying to protect yourself against rising prices, why would you buy if prices are not rising anymore.

On if real estate will be more expensive in 10 years in Vancouver:

If you think of this question from a superstar city standpoint, it would be surprising if prices were not higher in Vancouver in 10 years in the rental and real estate market. A segment that is of the greatest risk of not coming back (inflation adjusted terms) – the top of the market that needs outside money versus the bottom of the market – the tough to qualify for a mortgage stuff (Fraser Valley condos for example). Those two segments are the most worrisome.

On Vancouver’s new city council:

The new city council has been fascinating. They could have decided for no more growth, forget about it. But, if you look at the NPA leadership, there are some pro-growth instincts. So, to the extent that supply continues to be relevant in a down market, this council is surprisingly tolerant of supply in the market. It is a positive surprise that the council has a tolerance for growth.


The five-wire:

  1. Favourite neighbourhood in Vancouver: Kitsilano, where he lives, but it is so much less cool than anywhere east of there (East Van).
  2. Favourite bar or restaurant: Home cooking is his favourite, but he likes 05 Rare tea + Kombucha Bar
  3. First place he brings someone from out of town: Kits Beach
  4. West-side mansion or downtown penthouse: Westside mansion
  5. Something he’s purchased in the past year under $500 that’s positively impacted his life: Serbian Real Nettle Leaf Tea ($2.50 tea) at Kits Natural Foods

Find out more about Tom:

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