In an age of uncertainty, one thing is certain: there hasn’t been this much pessimism surrounding housing valuations since Expo 86. But will interest rate increases crash the market or will low inventory levels guide us to a soft landing? This week, UBC Sauder School of Business Prof Tom Davidoff once again joins Adam & Matt to talk all things real estate related in this volatile moment. What are his thoughts on Sim City & what does the election mean for Vancouver real estate? How far can the Bank of Canada push interest rates & will sellers capitulate? And when, if ever, will we leave this ‘new normal’ rate environment for the glory days of 1.5% rates locked in for 5 years? There is a lot to unpack here!

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Who is Tom Davidoff? 

I’m an associate professor at the Sauder School of Business at UBC. I’m an economist and I focus mostly on housing markets. I also dabble in policy and even worked for the White House council a while ago. I try to nudge governments towards allowing more homes and selling density for cash. 

What are your thoughts on Ken Sim winning the Vancouver mayoral race and the ABC sweep? 

As a disclaimer, my wife ran for city councillor under Kennedy Stewart’s party, Better Together. She didn’t quite make it, but I was very proud of her performance. She outperformed by about 10.6%. 

But Ken Sim and ABC did a fantastic job in terms of operations and policy messaging. They ran a great ground operation. You saw lawn signs heavily leaning towards ABC and every ABC candidate won out over everyone else. They also dominated the park board and school board races. So my hat is off to them! 

Why did the Vancouver pre-election polls get their predictions so wrong? 

There were a few polls in the last week before the election that were really bad. They were way off the mark.

It’s important to note that two thirds of eligible voters did not vote. It’s likely that Kennedy Stewart did better amongst non-voters than voters. People who typically vote centre-right over centre-left, so Sim over Stewart, are usually homeowners and more affluent, and more likely to vote. 

The other issue is branding. ABC did a better job of identifying their voters and getting them to the polls than Better Together did. ABC had a great ground game. There also could be some last minute coalescing around Sim. As NPA collapsed, voters may have landed on Sim. 

Was housing the core issue in the recent Vancouver election?

No, absolutely not. Housing was not a core issue for voters. If you try to articulate where Ken Sim falls on housing affordability, he kept his cards close to the chest. He ran on law and order and not making people pay tolls. People hate disorder and they hate tolls. 

Crime statistics aren’t up overall but these more disturbing crimes do appear to be up. This perception of disorder was really what seemed to drive the ABC campaign. 

But I don’t blame Stewart. I compare it to Wall Street: when Wall Street does well, people get bonuses and when it does poorly, people don’t. No one knows which individual employees made the difference, they just know the market is down. So people who are fed up with how Vancouver is performing aren’t likely to reelect the current mayor, even if the city’s performance isn’t his fault. 

Were the Vancouver election results part of a broader movement towards right of centre politics or was it just due to Ken Sim’s impressive ground game?

We are seeing similar results in other mayoral races. The new mayor in Los Angeles seems to be more centrist than you’d think would get elected there. When there’s a rise in homelessness, drug issues and an approaching recession, incumbents are going to do badly. Right of centre seems to be a more “law and order” approach, which is what people gravitate towards in uncertain times. 

So yes, I do think the rising disorder and homelessness issues are hurting incumbents on the west coast who are left of centre. 

Where do we go from here? 

There are two broad factors contributing to homelessness. One factor is personal issues - you just can’t find a good way to live indoors with others. Another factor is not being able to afford a place to live because of housing costs. We have both factors at play in Vancouver right now. We have the fentanyl crisis and we also have rising housing costs. 

So what do we do about it? We need to make housing less expensive and give money from affluent people to poor people. But I’m not terribly optimistic that we’ll be able to make more affordable housing. It’s hard to see rents decreasing with the number of newcomers arriving in Canada and the rising interest rates.

My best guess is things get worse. The question is: How much worse? 

How does the city take action on homelessness?  

It’s going to be a challenge. There’s not a lot of low-hanging fruit. Getting shelters built is really tough. 

It would be wonderful if the city could say to everyone in a tent that they could give them shelter. But that may cause more people to come to Vancouver. Again, that would be great because it would mean providing housing for people who are unhoused in other areas. But it may also mean we don’t see the end to street homelessness. 

What does the recent Vancouver election mean for the future of the provincial NDP party?

As a disclaimer, my wife works for David Eby and I’ve worked with him on previous projects, so I do have some pro-Eby biases. 

We now have a race between David Eby and Anjali Appadurai. She ran a very effective effort to get people registered and is a strong environmentalist. I’m an environmentalist too but I also think David is a strong candidate. 

If the NDP decides to run on a farther left platform, that could be a tough environment to get elected. Especially if you see that your opponents ran one of the greatest ground games in history on an issue that isn’t going away, I don’t think you’re sitting back and chilling.  

Are you surprised that David Eby hasn’t been able to secure the NDP leadership position? A lot of people didn’t expect Anjali Appadurai to run such a strong campaign against him. She’s also faced some criticism for her “extreme” position on the environment. 

I would challenge the idea that what Anjali Appadurai is saying about the environment is extreme. I’m looking out the window and seeing smoke in October - that is extreme. But it’s easy to be perfect when you don’t have a political record. 

I think there’s a tortoise and hare thing going on here. It looked like a runaway for David Eby, so he wasn’t rushing to sign up members. But his team didn’t see the rush to register NDP members from Anjali. 

There’s some controversy around whether this non-profit should have been encouraging people to register and so some of those registrants may get dismissed on procedural grounds. But if not, it’s going to be tough. 

We may have a situation where we see Premier Eby and Party Leader Appadurai. Hopefully this sorts itself out from the NDP perspective. But if you’re the BC Liberals, how psyched are you? 

What’s driving Vancouver real estate right now?

It looks like prices are down 10-15% across Vancouver markets from the peak but that data might be a bit stale. We certainly haven’t seen a collapse. The risk factor is interest rates; there’s a ginormous difference in the cost of ownership now from a year ago.

So why haven’t we collapsed? I think it’s because there are so many buyers on the sidelines. If you didn’t want to sell your home 15% ago, why would you sell it today? So we have very few listings in Vancouver. There’s an army of frustrated buyers who are reluctant to buy due to rates but still looking for those opportunities. 

I’d be surprised if there are a lot of investors buying in Vancouver right now. Given where rent and interest rates are, it’d be hard to make a purchase that works. 

Could investors buy today at a discounted price and then refinance when rates go down?

If I was an investor, I think I would wait. If rates stay where they are for the next year, it's going to be a tough year. So you’d want to be picky if you’re buying today. When the market is suffering, you want to find those opportunities to buy low. But the question is: Can you tough it out through the high interest rates? 

I think you will see opportunistic buyers in the current climate but they will have to have a lot of liquidity. Another big unknown is the Ukraine situation. That is hard to read. 

With the pandemic, war in Ukraine, and rising inflation and interest rates, does this remind you of any moment in your economic history? 

This does remind me of stag-flation in the 70’s, but we have a different labour situation today. We have a tight labour market. 

We haven’t hit a recession yet, but we could. It seems the message from the central bank is, “We’re going to crush inflation. If that causes a recession, too bad, so sad!” But we’re not there yet. Otherwise, it’s hard to think of a comparable time. 

Will we continue to see low housing inventory in Vancouver?

Yes, my best guess is that low housing inventory in Vancouver will continue. But not all sellers can’t hold out forever. People die, get divorced or change jobs and will have to sell. But other types of sellers could hold out for longer, so I think we’re in for a few more months or even years of low inventory. 

Another issue is that Canadian homeowners have to renew their rates. If someone bought at a pretty high price and low interest rate, but has to renew at a higher interest rate, that may cause them to stretch too thin. That renewal may cause people to not be able to hold out on selling. 

No one seemed to be talking about inflation last year. How did we miss the risk of inflation?

I don’t forecast inflation but I do look at bond yields. And the bond markets didn’t predict inflation. But we did have economists who warned about inflation due to a tight labour market and rising wages. 

Inflation has a lot to do with expectations. If you think prices are going to inflate, you may raise your prices to keep up. So you can see some self-perpetuated inflation. 

The other challenge is with production. We had a huge production issue in China and other industries where inventories got tight and costs went up. And again, the war in Ukraine is affecting production and energy costs.

A combination of tight supply and low inventories, the impact of Russia and China, and self-perpetuated expectations can lead to inflation. Basically, there were a bunch of bad breaks that no one knew about a year ago. 

Are you concerned about the Canadian economy and housing market?

I am worried. If we see a bunch of defaults and foreclosures, that’s a concern. If we’re in a recession, the central bank can’t get a hold of inflation, mortgage rates are 6-7% and people are losing their jobs, that could cause rents to flatten or fall. 

But I think the more likely scenario is we won’t see a bunch of defaults and foreclosures, we’ll just see a lack of building. Wages will go up for some, but not all, and rents will get worse and worse. The situation where rates stabilize, construction kicks up and housing prices stay manageable doesn’t seem realistic right now. 

I think we’ll see continued price declines until we get out of inflation, but not a huge catastrophe. And I think we’ll see slow construction. As more people can’t buy due to costs or lack of supply, they will have to compete for the same rentals, which causes rent prices to go up. 

So are you predicting that 2023 is going to be a tough year for the Vancouver real estate market? 

I want to be careful about predicting doom and gloom for Vancouver real estate in 2023. The situation in Ukraine could change tomorrow and production issues could be resolved. I don’t know when inflation will end so I’m reluctant to write off 2023. We could be back at 3.5% interest rates next summer but we could also be up to 7.5%.

Is this the most difficult time to forecast the Vancouver real estate market?

I’ve been consistently wrong; I get the forecast wrong every year. There’s always a tremendous amount of uncertainty in Vancouver’s market. Of course, there is a general positive trend to pricing and rents. 

We’ve also had this insane interest rate environment, which is actually more normal compared to the low interest rates we did have for the last 10-20 years. I don’t know that we’ll ever go back to those negative real interest rates that led to a crazy pricing environment. 

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