Central 1 Credit Union is a leading voice when it comes to the BC economy and housing market and it just released its housing forecast for the next three years. Chief Economist Helmut Pastrick joins Adam & Matt for a data-driven discussion on all things Vancouver, offering thoughts on everything from the city’s potential addiction to real estate to the health of the overall economy to the near-, mid-, and long-term prospects for our housing market. You want predictions? We got predictions!
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Helmut Pastrick is the Chief Economist at Central 1 Credit Union. Central 1 is a preferred partner for financial, digital banking and payment products and services – fuelling the success of businesses across Canada. With $16.9 billion in assets, they leverage their scale, strength and expertise to power progress for more than 250 credit unions and other financial institutions, enhancing the financial well-being of more than five million customers from coast to coast.
Sales ratios have been down; prices have been slipping this spring and in the past year. Can we now look back and say that Vancouver was in a classic “bubble”?
It depends on how you define bubble. Prices have risen 40-100% depending on the market you’re looking at. Condo prices went up 100%. On this basis, you can classify Vancouver is in a bubble. However, it means more than rapid price increases; it depends on the cause or nature of the price increases. There were many fundamentals behind this—as housing cycles and price expectations increase, more speculation occurs.
Helmut defines a bubble as being a significant amount of speculation activity. This is hard to measure and gauge. Central 1 has some evidence on the extent of speculation; for instance, data allows them to measure the amount of time between sales (i.e. flipping). During this cycle, flipping increased and, as a result, so did speculation. This is normal in an upswing in any market, but whether it was excessive and the main cause of price increases is debatable. In Helmut’s view, it was not the main cause.
We need to look at fundamental supply and demand factors at play: we came from low interest rates, which are still relatively low; our economy, employment, and income continues to grow and expand; and population growth contributed to higher demand. Housing supply typically responds with a time lag, so there will always be a mismatch between a pickup in housing sales and a pickup in housing supply. Helmut feels this accounts for most of the price increase, though speculation and foreign buyer activity contributed to some of the increase (however, it’s debatable whether some foreign transactions are speculation or legitimate demand). When he looks at this housing cycle upswing and compares it to prior cycles in the Vancouver market, Helmut found this one has had less speculation than, say, cycles of 1979-1981 or 1989.
So, the fundamentals were there for the market of the past five years or so?
Yes, for the most part. It’s difficult to quantify and estimate how much to attribute to each fundamental factor vs. speculation activity, but Helmut would assign about 80% to fundamentals.
On if he foresaw the slowdown in the market:
A slowdown was becoming evident. We began to see interest rates rise. The run-up in housing prices does squeeze demand out, such as first-time buyer activity. Looking at past cycles, we know an end will occur; it’s just a matter of when and under what circumstances. Then we had policy changes, particularly on the availability of mortgage credit which began to change (or tighten) in 2016. That October, the federal government’s financial services regulator imposed the first stress test on insured mortgages. This was followed in January 2018 by another stress test, extending to uninsured mortgages. These measures effectively raised interest rates by 2%, which was significant and abrupt.
On if the stress test is the number one factor of the slowdown:
It’s a big factor. When it comes to policies such as the foreign buyers’ tax, the speculation and vacancy tax, and Vancouver’s empty homes tax and their impact on the housing market, Helmut would rank the stress test at the top, then the foreign buyers’ tax, and then the speculation and empty homes taxes. It’s a combination of factors, but the higher interest rates from the stress test combined with the run-up in prices had a negative impact on sales.
On whether Vancouver’s policies implemented over the past couple of years are good:
This is tricky. It depends on political philosophy, among other factors, and where you sit in the housing market: are you an owner, renter, or first-time buyer? Certainly, the objective of having a more affordable housing market is laudable and necessary, in order to ensure and facilitate a growing economy. High housing prices in Vancouver, particularly, but in other parts of BC too, does discourage people from living here and businesses from locating here. It also encourages people and businesses to move out of the region.
Having affordable housing stock is desirable and necessary on many fronts – not just for social objectives of enabling more residents to obtain housing within their budget, but for economic growth as well. The policies to achieve this will be many and varied; it’s not only about provincial taxation policy, but also local government policy and federal government involvement, particularly in affordable social housing.
Given that this region is a popular destination and population growth will continue in the coming decades, as it has been doing, and given our land constraints (mountains to the north, water to the west, the US border to the south), our development path is only eastward. We’re very constrained, as are other markets in BC such as Victoria and Kelowna. These constraints along with demand means land prices will only continue to go up, as they have over the decades. There are market cycles within that upward trend, and in 25-35 years from now Helmut expects housing prices to be considerably higher than they are today.
So, part of the market slowdown is natural but it’s a good time to be buying real estate?
As prices have come down and will likely continue to do so over the next six to 12 months and maybe beyond, Helmut expects potential buyers that have been waiting for a better opportunity will make their move. Lower prices will bring in more buyers and help to stabilize the market.
On when the bottom actually happens:
In terms of housing prices, we’re at minimum six months away but probably 12-18 months. It will occur. Normal market dynamics are at play and new housing supply is being reduced. Though housing starts are growing at high levels, this will change in the coming months and will remain low for a period of time.
On how low we’ll see the drop in the Metro Vancouver area:
This particular downturn is not driven by an economic recession, which makes it less severe than it otherwise would be. So far, prices in the Lower Mainland have dropped about 8-10%, particularly for single-family homes. Further, high-end single-family homes (i.e. valued at $2-3 million or more) have come down 15-20%, and you could look at the foreign buyers’ tax impact here. Condo and townhome prices have not declined as much as single-family, but prices will decrease further in this sector. When all is said and done, price decline from the peak, which was just over a year ago, will probably be 15-20%. In more severe circumstances like an economic recession driving a housing correction, prices have come off 30-35% in previous cycles.
On if this time reminds Helmut of times in our past, or if it’s unique:
This is pretty unique because of the policy measures discussed and because of the measures financial institutions regulators have imposed on lenders (banks and credit unions). Mortgage credit is less available and more expensive. A fair amount of this cycle is policy-induced, more so than by the run-up in prices and mortgage rates. Policy measures were the tipping point.
So, based on that, do we have an artificial stifling of demand?
The policy measures were intended to cool the housing market and help control the run-up in household debt. These goals were generally met. Some evidence suggests there is probably less speculation in the market. Foreign buyer activity has been reduced (though it was never that high outside of special market sectors). The results of the policy measures were generally successful; some Ministers have expressed satisfaction with them.
On if Vancouver is overpriced, within the Canadian context and given the fact it’s a west coast city within the Pacific rim:
Helmut does not believe Vancouver is overpriced. For the most part, fundamentals have determined land prices, which it’s really all about. Vancouver is not the most expensive market, by any means, when you look internationally. Our unique situation in terms of geography comes into play and it’s a popular destination for migrants. We are certainly high priced and it’s unaffordable for many. We’ll see relatively more renters than owners, over time. Right now, the owner-renter split is roughly 65 to 35%; in 25-30 years, that could easily shift to 60/40. There are many cities, such as in Europe, where renting is the norm.
On the impact of the current slowdown on the larger economy:
The housing market correction will result in less activity in new construction, particularly. This is the real impetus to the economy. Declining housing starts mean a slowdown in economic activity and overall growth. Employment will also come down, especially in the residential sector (non-residential still has a good outlook).
On if BC has a healthy relationship with real estate:
It’s a top-of-mind topic, especially during up-cycles. Generally, yes, we do. Home ownership is still a preferred housing option for many. There are speculators and flippers that take advantage, and Helmut is glad the Province has implemented measures like tracking beneficial ownership and sales assignments. This should cool the flipping component of the market. If the only reason you buy property is to flip and benefit from higher prices later, it can be negative for the market. However, good speculation involving a longer-term horizon is useful in market activity.
There’s a fine line between making housing affordable and taking down the larger economy with that project.
Yes. Market forces are too strong to turn back. The proper role of government, across all levels, is to come up with better solutions to increase affordable housing. If you look back at housing history, you’ll see at the federal and provincial levels, housing gets used as a temporary political gain. It’s not viewed as a long-term, necessary budget item. Federal government programs are often on and off again, but we really need to see an ongoing, steady supply of funding for affordable housing – just like we need to see a steady supply of land and sites available for redevelopment, adequate planning, and rezoning activity. We need to see better information given to the public about the negative impacts of “NIMBYism”. There are some legitimate concerns about development; we don’t necessarily want to see high-rises on every street corner, but more needs to be done to inform the public about the benefits of densification and the benefits of improved transit to service higher density populations.
On the biggest risks to BC’s economy in the next three to five years:
The risks are typically external. BC is a relatively small economy; we’re a price-taker, similar to Canada at the global level. It’s mostly external events that determine our economic fortunes. They result in faster or slower growth, or even economic recession.
Helmut worries about the external trade disputes occurring, and US relations with China and other countries such as those in the EU. He doesn’t expect significant imbalances (or an economic recession) as a result of this over the next few years and believes saner heads will prevail. However, it means negative business sentiment, slower growth than we would have without the trade disputes, and low interest rates for at least a couple of years. When you look at economic and business cycle history, there are occasions where geopolitical events have materialized and precipitated recessions, which is a concern.
On money laundering in real estate and the larger BC economy:
The recent report has an estimate; there are no hard numbers. So, the extent of money laundering in real estate is difficult to know. Helmut puts it as a minor factor, not a significant one. It would benefit not just real estate, but also the broader economy, if we got a better handle on and eliminated money laundering. The problem is getting actual evidence. Housing supply and demand fundamentals are far more important.
- Favourite neighbourhood in Vancouver: The neighbourhood he lives in, South Richmond
- Favourite bar or restaurant: Ichiro, a Japanese restaurant in Steveston
- First place he brings someone from out of town: Steveston
- Real estate or economic advice to his 18-year-old self: Buy housing sooner!
- Recent purchase under $500 that’s majorly impacted his life: A golfing putter
To find out more about Helmut and Central 1: