Huge changes coming to the Vancouver Real Estate market in 2018 and the devil is in the details.
Professor Tom Davidoff joins Matt & Adam to hash over the details and makes predictions from policy changes to potential price surges.
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Episode Summary
About Tom:
Tom grew up in New York (listening to Donald Trump talk about his real estate project). He worked for a shopping centre developer after college, learned about government and politics, completed a degree in economics and urban planning at MIT, and taught in the business schools of UC Berkeley and here, at Sauder. Along the way, Tom worked Obama’s Council of Economic Advisers during the US housing crash. He got involved in policy when everyone went crazy over empty homes and escalating housing prices. He helped put together a tax proposal that wouldn’t target nationalities, but would cool down elements of the market driven by foreign buying. Tom is also agitated about zoning.
On his Twitter battle with past-guest, Michael Geller:
Geller has been one of the loudest advocates of gentle densification. Realistically, it doesn’t make neighbours angry (for instance, by building laneway homes or stacked townhomes on the arterials). Amenities are important too, and Tom does not want to go to 50 stories tall—which they agree on.
City councillor Hector Bremner suggested we take the most egregiously under-zoned neighbourhood in Vancouver, Northwest Point Grey, and allow rental apartment buildings. It’s near UBC and bus lines on 4th. Council didn’t approve it and Geller thought it was ridiculous to allow rental buildings in a luxury single-family home area. He felt it was too much change, and Tom disagreed.
On whether it’s actually provocative to look at Northwest Point Grey for rentals, or if the City’s response is indicative of a larger problem with housing in Vancouver:
There’s a failure of imagination and stepping back to see what’s happening with policy. Many people would look at Northwest Point Grey and think, of course they can’t live there; they accept they will find a rental, say, on the east side rather than near UBC. This was Michael’s knee-jerk reaction, but he’s wrong. When you fly into any city, you see small buildings on bigger lots, with taller buildings closer to downtown where the land is really valuable. The better the land, the bigger the building that goes on it: Look at Chicago and all its skyscrapers. You likely won’t find any land priced higher (given certain zoning) than the west-side neighbourhoods of Vancouver. Apartments just don’t sell for as much as they do here.
If the market was left to its own devices, Northwest Point Grey would be full of high rises and the mansion owners would not be able to compete for land—high-end developers would crush single-family home owners. The government wants to discourage “regular” people from living there in apartments, and guarantee that rich people don’t need to compete with developers for lots where apartments could be built. What public purpose does this possibly achieve?! Many people need to live as far away as Langley to qualify for a mortgage—this means they’re consistently driving in and out of the city, therefore using suburban and exurban land, more than they otherwise would. So, there are environmental and re-distribution benefits to moving away from suburban-style zoning in urban neighbourhoods and letting the market run its course (maybe not with 50-story buildings, but why not six or eight stories?)
On what leads to people like Geller and city councillors to think this is so incomprehensible:
Northwest Point Grey residents are wealthy and maybe influential, but Tom doesn’t think they would choose to spend time with City Council. Regular people own single-family homes all over Vancouver—they got into the market years ago when it was more affordable, and they’re the bait. They don’t like change and their homes are already worth millions, so they don’t benefit much from a high-rise going up next door. It’s more about grumpy and active voters and community groups than it is about the rich motivating people with donations.
On the recent policy changes in Vancouver:
The City says they’re going to do something with the single-family neighbourhoods. Tom supports their plan, but they piecemeal strategies to get more rentals built and they have a strategy for tactics at a project-level. Their November proposal was bold, yet in December they shut down any rezoning in Point Grey. The language about single-family homes around the upcoming election was they would “start looking very carefully at different options for adding density”. Granted, they’ve done this by adding laneway home zoning in nearly all single-family neighbourhoods, but what they didn’t do was strike “single-family” from objectives in their planning documents. Preserve the single-family character of this neighbourhood is still in many community vision plans.
On Gregor Robertson not running for re-election:
Gregor has invited Tom to talk many times and has listened to what he’s had to say about single-family homes. The empty homes tax is good, as it does not target specific groups. Tom feels he’s well-intentioned and has mostly got it right. However, you can’t achieve the objective of eliminating homelessness by doing so many nice things for the homeless, as more will keep coming. He does not know much about Gregor’s so-called “cozy” relationships with developers. Affordability issues really snuck up on us in the past three years, but you can’t blame it all on Gregor. Everyone thinks they’re right, and there is no “one” answer to affordability. All in all, much worse things happen in many other governments.
On the NDP budget (due in February) and predictions on housing announcements:
They’ve played their cards close to their vest. Nobody he’s talked to knows. They don’t want to cause a crash in real estate prices, but they can’t do nothing. Maybe they will phase in an additional surcharge at a low rate for people who aren’t income tax payers. They’re asking about ex-residents of BC on the property transfer tax form and the contract, so maybe they will do what was proposed and apply a different rate for non-tax payers.
On changes to Real Estate Development Marketing Act and new construction (assignments, flipping—changes targeting the presale market):
It’s the worst idea! Perhaps it’s politically attractive, but we have a ton of condos coming online. If they don’t yet, they will likely have an impact on rent prices. If someone pays $200 more per square foot for presale construction than its worth two years later when built, then they’re a sucker and really, all they’re doing is funding development and creating more supply. This drives prices down, so who cares?
On assignment fees increasing:
Would higher developer fees prevent people from flipping? This depends; it’s very circumstantial. For a typical person holding a condo for one year, a 5% fee is huge. Assignments are tough to sell, though most developers will approve at the suggested contract rate. The assignments over the past couple of years took everyone by surprise.
Going forward, the extent of pre-completion assignments is a big issue. Nothing will be finished that wasn’t pre-sold, so the units finishing up won’t have a big impact on the market in that way. However, if say 50% of the units flip before or when the building finishes, it will impact affective supply. What’s your read on how much is flipped when buildings finish up?
Usually people think about assigning the contract within the six months before or right at completion. Who pays the GST is negotiable, but the standard MLS agreement states the original purchaser pays. However, some of the developer consent forms say the assignee must pay—so there’s often conflict.
As a direct result of the empty homes tax and Airbnb policy changes, many rental units on the market are furnished. Tom has looked at high-level rental data, and his impression is after the summer, the rental market slowed. Yes, especially in the over $3,000-4,000 range. Rents in suburban areas have crept up close to Vancouver rents. We didn’t see the rental and price growth for a long time, but when rental acceleration happens you need to see rental appreciation. Interest rates going up shouldn’t affect renters, but there are likely a fair number of landlords who set their rent based on what they need to cover their costs, including rate increases.
On his market predictions for 2018:
Today’s price is the best predictor you have of tomorrow’s price. This is an economist’s answer, but Tom says it with a lot of uncertainty. Immigration isn’t stopping; there are still lots of bottlenecks with contractors and permitting, along with the stress tests, high rates, and high prices. For Tom to even be surprised, prices would have to move up or down by at least 25%.
On the US market, this year:
There was a burst of condos and rentals in places like New York and Seattle. The litigation risk with condos is horrible—builders are up against a lot of liability for small things. Construction can impact rents. With the low interest rate environment, crazy price growth may not happen like it did in California and New York. The US has a huge deficit and the economy is very strong. As well, the write-off rules have changed: Income and property taxes, along with mortgage interest (to a degree), cannot be written off under the new laws.
On if Vancouver’s housing problem is what attracted him here and if he foresaw himself as a central voice in this situation:
No. He bought a place and thought there would be a correction. You know there will be action in any desirable coastal market that’s hard to build in. What’s been great is the amount of respect for analysis in BC. Plus, there aren’t that many high-end academic or research institutions here, so the opportunity to learn from and interact with policy makers and businesspeople has been a real privilege for Tom. It’s sad that people are struggling with affordability, but Tom feels it’s been great to be here.
To get in touch with or learn more about Tom:
- @TomDavidoff on Twitter
- ubc.ca/Davidoff (check out his current piece on auctioning redevelopment rights)
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