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episode # 310

Has the Vancouver Real Estate Market Peaked? With Scott Brown

We have been on a wild roller coaster ride straight out of the gate this year & haven’t even hit the spring market yet. But does the market continue to soar or stutter from here? President & CEO of Fifth Avenue Real Estate Marketing Scott Brown sits down with Adam & Matt to discuss where we have been, where we are at, and most importantly where we are headed for the balance of 2022 and beyond. Do the Covid trends we have all discussed so much continue? Will interest rates send the market spiralling? And where are the opportunities right now? Here’s to 2022!

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Episode Summary


 

What was Fifth Avenue’s business strategy in 2021? 

We view BC as craft beer. Fifth Avenue has always been pure about staying focused on the suburbs and the Fraser Valley. We don’t go into other markets. 

But we’ve been propelled by some developers to go into the downtown market, so we partnered with some experienced people there. We now have that downtown focus but with a separate organization and culture. 

We also have a company in the Okanagan, another craft beer, with great experience in the Kelowna area. We bought that business in 2021 and they had a record year. On the Island, we invested in a group that needed a partner to help them grow. And they’re going through high growth right now.

So in each region we have a leadership team and I’m the central hub that keeps them supported. Across the province, we sold 2000 new homes last year and did half a billion dollars in real estate. So I’m very excited about 2022 because we have such strong leadership in each market. 

My theme for 2021 was “return.” We returned not only good money to our people and shareholders, but we returned to working with people who we haven’t been able to work with in years. We also had many emotional returns throughout the year. 

What will the BCreal estate market look like in 2022?

We may not have another record setting year in 2022 but I think it will be closer to that level than people think. But it will be wavier. We’re seeing a quick start to the year and I think we’ll see a flurry of activity before the first interest rate hike. And then it should settle down a bit. I think 2022 will be a good year for the BC real estate market, but it will be wavy. We have to be careful not to lose our minds when things slow down for a second. 

Who is Fifth Avenue becoming? How has business changed for Fifth Avenue?

Fifth Avenue is becoming what it was meant to be. We’re backed financially by an organization out of Ontario who is supporting our growth strategy. Our strength is our uniqueness and the fact that we live and breathe our Fraser Valley markets every day. But there’s a different culture downtown. We’ve been able to create a strong local focus with a common core by investing in our partners in downtown Vancouver, Kelowna and the Island. 

We all share ideas and we all get along. We pull best practices from one office and apply it to the others. I get to be the keeper of this wonderful collaborative. It’s exciting and says a lot about BC’s growth. BC real estate is fascinating. 

What happened to real estate in the Fraser Valley in 2021? How have real estate prices changed in Surrey?  

For some time I’ve been saying that Surrey City Centre and Guilford will be over $1000/square foot. I’ve also been tracking the share of the market. A larger percentage of transactions are now happening east of Coquitlam; the centre of the market is shifting away from downtown Vancouver. 

We used to pin everything to downtown Vancouver but that’s not the case anymore. Now, Metrotown is the centre and everything has shifted over a few neighbourhoods. 

Covid did drive a shift out to these areas and there may be a bit of an influx back. But a lot of people are now realizing they can live in these areas and don’t have to travel into downtown Vancouver for fun. The lifestyle of Surrey is changing.

Surrey City Centre was the highest absorbing market for concrete construction for one of the quarters in 2021. It was outselling Burnaby at times. It’s not the butt of the joke or your father’s Surrey anymore. 

Metrotown became the darling of the ball in 2011/2012 and that’s what is happening in Surrey City Centre now. Guilford will become like Brentwood, coming up just after Surrey City Centre but offering something different than Metrotown. 

How expensive will Surrey get? What is the max price for real estate in Surrey?

Surrey has some price appreciation ahead of it still but I think it has more long term sustainability. I don’t think Surrey will be a $1500-2000/square foot market. But $1350/square foot in a few years is not out of the question. 

What real estate markets in BC are you most excited about?

Abbotsford was the last market to recover, price-wise, so I think it has legs. Abbotsford is behaving like Langley did a few years ago. A market that came out of nowhere and where you can still find affordability is Mission. Developers are chasing land in Mission because it’s affordable and attractive to people.

Maple Ridge has been hot. And anywhere along the skytrain is promising. You used to be able to buy a townhouse in Langley for $300/square foot and now it’s $500 because of the skytrain coming in. The skytrain is having a huge effect. 

Should we still be comparing real estate markets to Vancouver?

It is still useful to look at the narrowing price gap between other markets and Vancouver but you have to reprogram your brain to consider the new normal. The Vancouver market is still important. If you’re looking at townhouses, the Cambie Corridor is the new US dollar. If you’re doing something in South Surrey, it has to compare to a townhouse the buyer might be considering closer to the city.

You also need to know when you’re looking at an outlier. We had a project in Cloverdale that filled up quickly but it was an outlier based on its comparison to single family homes.

In 2017, people were chasing 1750-1900 square foot townhouses that you could buy for $700,000. The buyer was happy and the developer was happy with that number. Then the stress test came along and wiped that buyer out. 

Now, that same townhouse is $1 million in Langley and it’s being sold to a single family buyer who has given up on single family. It’s no longer an upgrade for a townhouse buyer but an alternative for a single family home buyer. That’s the biggest shift across the whole industry. It’s made me have to reset what I think is normal. 

These townhouse prices aren’t just in Vancouver or Surrey. We’re seeing these prices in Kelowna and on the Island in Greater Victoria. It is BC wide. 

What are your thoughts on the federal property tax initiative? 

We’ve heard about a federal property tax that could be implemented on homes over $1 million. In principle, I don’t have a problem with it. But in BC, a person with a million dollar home is not filthy rich. They pay a high price to live where they live. So you’d be punishing almost everyone in BC with a house if they put that tax in place. It’s a good principle but it’s way out of touch with reality. 

How do interest rates affect presales? Is it a good time to buy real estate in BC?

Is it a good time to buy? It depends. It’s a good time to buy if you need to buy something, if it meets your goals, and if you can afford to only buy and sell when you want to. If you’re forced to buy or sell, you tend to get hurt. 

I think a long term buy and hold in BC is a good strategy. This market has had very little completion failure. With previous interest rate increases and the stress test, buyers lost 20% of their buying power. This time, the interest rate increases will not have the same effect. There are fewer people stretching to own and more people resetting their expectations.

I don’t think interest rates will put downward pressure on townhome absorption or pricing. I also think we’re undersupplied. So I don’t expect an erosion of buying power in 2022. If interest rates go up significantly, that means there’s something else going on. 

How will covid affect demand for real estate? 

People have had enough and there is a pent up demand for travel and socialization. If you’re a developer who is scared to add amenities because you think no one will want to be together in one space, that’s going to be over. Just look at history and the Roaring Twenties. 

How does inflation affect real estate? 

What worries me more than interest rates is inflation. You can’t keep passing costs onto the customer. At some point, the customer will be out and then no new stock comes up. That then causes prices to inflate on the rent side. I do think the townhome demand and the demand for larger condos is super sustainable because people are changing how they are willing to live. 

What does the inventory of new projects look like in 2022?

Our forecast at Fifth Avenue for 2022 is over 3000 sales across BC. We do expect more supply, but still not enough supply for the market. I think the resale market will still be very tight with listings in 2022. That will accelerate presale markets, especially in places like Kelowna and Victoria. 

What is driving low inventory in the resale market? 

On an average year, let’s say 10-20% of people reassess their housing satisfaction and take action to buy something new. What covid did was cause almost 90% of the population to do that all at the same time. That created a huge balloon of demand that hasn’t popped. It drove a lot of the resale activity. If everyone is staying home during covid, they’ll realize they don’t like their home and want to change it. 

We haven’t talked about the foreign buyers during covid. The record setting market we’ve had in BC has had no mention of foreign buyers at all. We also have immigration incoming. Just as we think local demand might die down, a wave of immigration will come in. 

We bounced back fast in BC. The basic demand fundamentals of people wanting to live here are all firing. That’s why the resale market is going to continue struggling with supply and the presale market will look more attractive. 

How does climate change impact real estate?

During the bad heatwave in Vancouver this past summer, we realized that going forward, homes will need air conditioning. That isn’t something we’ve always had in Vancouver so you have to look at how that affects pricing and the environment. 

People have always been excited about going green, but they didn’t want to pay more for it. Nowadays, I think people are willing to pay for it. I think we’ll see more initiatives that allow people to consume more without guilt. 

Another thing that troubles me about our society is the increasing gap between the haves and the have nots. We have to create an inclusive society that is aware of climate change but still builds housing in a way that people can afford to buy it. 

Let’s get innovative and figure out how to go green in an accessible and affordable way. 

How will home prices appreciate in BC in 2022?

I think home prices in BC will appreciate by 5-10% in the first half of 2022 and then level off. I think absorption will be similar to last year’s levels; it will probably be our second or third best year. 

I believe 2022 will see more normal growth than 2021. It won’t be as newsworthy, but it shouldn’t give people false fear or false hope. I think it will be a wavy year, but steady overall. At Fifth, we’re planning for growth.

Because I think building costs will continue to go up, my price estimate of 5-10% may be based more on rising costs and inflation than pure market appreciation. 

What are the risks for presale developers? 

We talk about risks with our clients a lot more than some of our competitors do. We’ve been telling our clients not to sell everything. If they’re pre-selling right now, they don’t know what their actual costs will be upon completion. What happens if your costs go up and you’re fully sold? 

We want to make sure our clients can price some homes appropriately closer to completion so they’re protected. We also don’t want them to have to hand money back if they can’t complete on a building due to rising costs. Construction costs are a real wild card. 

Is Kelowna overhyped? 

Kelowna is not overhyped. There is long term sustained demand there. We had 20% of our sales at one project in Kelowna from Ontario. There are both younger, entrepreneurial clients and older, more retired clients flocking to Kelowna. 

Where are the best real estate opportunities in BC in 2022?

The real estate markets in BC to watch next are Summerland and Penticton. I think Penticton is totally undervalued. Downtown Penticton feels like Kelowna did 4-5 years ago. Vernon is more of a regional hub, but may be an option. Kamloops has some legs but doesn’t have the pixie dust that the Okanagan seems to have. But there is some growth in Kamloops.

On the Island, Langford is the darling in terms of wood frame housing. There are very few development sites left in Greater Victoria, which is causing people to move up island. Cowichan and Nanaimo will become more suburban markets, like Abbotsford and Langley.

I’m pretty bullish on the demand for Downtown Vancouver, Burnaby, Richmond and North Vancouver. Port Moody is one to watch, especially as they introduce more product near the skytrain. 

Find out more: scott@fifthave.com and https://fifthave.ca/

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