The Vancouver real estate market has been ‘en fuego’, but the verdict is still out on the balance of 2021 with early signs of potential cooling. Past guest, Finance Professor Andrey Pavlov, sits down with Matt & Adam to parse this unique moment in our real estate market and discuss the Canadian economy at large. What does excessive government stimulus mean for inflation, interest rates, and the housing market? What are the biggest risks facing real estate prices? And where would Andrey Pavlov invest your money in this current climate? You requested more time with Professor Pavlov and who are we to turn you down. Back by popular demand – buckle up for the roaring twenties!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
The Vancouver Commercial Real Estate Podcast hosted by Cory Wright is premiering May 11, 2021! This is the place to learn everything about commercial real estate from the basics and through all product types. Cory and guests will cover the ins and outs of commercial real estate and show you commercial is not as inaccessible as you might think!
Tell us about yourself.
I’m a professor of finance at SFU’s Beedie School of Business and most of my work is on real estate, both my research and my teaching, as well as public commentary and analysis. I live in Vancouver and am quite concerned with how our market has been made unaffordable. I’d like to try and change that in whatever way possible.
What’s your take on what is happening in the market?
The Vancouver market is quite hot. There are multiple offers. The sales to listings ratio is high; a normal market is 30-50% and we’re seeing up to 70% in some markets. Prices are on the way up.
What is driving that sales volume?
It’s no secret that low interest rates help a great deal. The official inflation rate is just above 1% and interest rates are around 2%, so the true cost of borrowing is 1% or less. At that level, it’s almost free to borrow.
The Canadian savings rate has gone up tremendously. In the last year you didn’t need a car, you got a refund for your vacation and there are fewer opportunities to spend money. There is also government support. That gives you money for a down payment.
So money for a down payment and cheap borrowing makes real estate less expensive, in terms of the carrying costs. The price is still expensive, but the lower carrying costs allow more people to get into the market.
Has the post-covid real estate market surprised you?
Last time we spoke, I was more optimistic than most people. I was saying we’d get out of the virus one way or another. It has taken much longer than I thought it would, and I know a lot of people feel that way. But vaccines are coming in, however slowly. We will get over the virus. And then we’ll see economic growth from there. I think there will be a rebound for goods and services since people are fed up of being stuck at home.
The question is when. It’s taking longer than I thought but I think we’re almost there.
You’ve talked about the post-covid period being the start of the roaring 20s. What does that look like for housing?
I think the housing market could go either way. Economic growth is good for the housing market but it’s not straightforward. Either interest rates could go up or there will be other investment opportunities that compete with housing. Currently, you don’t have many other places to put your money. The stock market and crypto are sky high. But if the economy takes off, there will be more investment opportunities to compete with housing.
Were you surprised by the federal government’s budget and lack of attention to the housing market?
They’re implementing the vacancy tax but it’s limited. It makes you wonder what the point is. It won’t make any difference in the market and won’t raise any revenue. I suspect it’s done for political reasons.
Otherwise, the budget is just spending left and right. Spending continues as if we’re in a deep recession but the economy is already growing. The budget is designed to win an election, not boost a struggling economy. The issue is that money has to be repaid and there’s a risk of inflation.
Inflation is a positive force behind real estate and housing. So even though the budget has little to do with housing, all of the expanded spending will be a positive for housing because of inflation.
Thoughts on the increase to the stress test?
We’ve done this before. It’s reasonable to have a stress test. It’s a small change and hard to predict the outcome. In general I like the idea of a stress test so we can ensure borrowers don’t get into trouble. But it’s all in the details of how it’s done. I don’t think the recent change is all that important but it’s hard to tell until we see the effects.
What is driving concerns about inflation? What does the future of inflation in Canada look like?
The official inflation number is based on estimates and models. And the real number is what we actually spend. So if the official number is 1%, the actual number we experience is likely higher than that.
Add to that, supply shortages. Even if the price doesn’t go up, if you have to wait two years, that’s inflation.
In my view, we have pretty high inflation already. If you combine high inflation with low borrowing costs, it’s like inflation makes the payment on your behalf. Of course, you still have to make your payments. But the money you have to return will be with inflated dollars, which makes it easier to return. When you look back over the holding period, inflation helps you.
What does the future look like for interest rate increases?
In the last couple of statements, the Bank of Canada has made it sound like they might increase rates in the next two years. Before that, they made it sound like they wouldn’t change for a number of years, so they’ve shortened that period. But they don’t even have to change rates. Just making a statement like that moves long term interest rates immediately, which affects mortgage rates.
And we’ve already seen that. Six months ago we saw mortgage rates at 1.5% and now they’re closer to 2%. We could see more of an increase but they’re still very low overall. I don’t see them going up by more than another 0.5% because Canada is very indebted, combined public and private debt.
So we might see small increases over the next 12-18 months but I don’t think we’ll see a big increase in interest rates anytime soon.
What is most alarming to you about the current state of the Vancouver housing market?
It’s not the current state. This is a relatively healthy market. It’s going up but we understand why. But I do have a longstanding concern that we’re just not building enough in Vancouver.
Our housing supply is inefficient, which makes prices go up. We also have governments that make it harder to build more by trying to introduce all kinds of taxes to solve the problem. The taxes don’t help – they make housing investments worse. They don’t help people get into the market. Unless you’re building more, you can’t find housing for people.
So we have two problems: 1) a lot of roadblocks to development and 2) a government that will intervene in the market but in the wrong way. Instead of helping to increase supply, they try to change demand. That can work temporarily but it can’t put more people into homes.
Is now a good time to be building if you’re a developer?
In theory, yes. But you’re still facing delays at City Hall and unnecessary interventions in your project. We have all of these additional requirements because our politicians want to appear like they’re doing something. But these measures are ineffective and they make it harder to build. And when you do build, you’re taking a huge risk to deal with delays and City Hall.
I’ve been hearing about material costs going up – lumber quotes are only good for a day. Clearly we have wood in BC and there’s no shortage; it’s a renewable resource. The only reason we have shortages is because of government intervention. Another problem is we cut the wood here but we process it elsewhere. There’s too many regulations and restrictions to do the processing here.
So we can’t access a renewable resource we have in abundance, and then we have to process it elsewhere and ship it back, which causes a delay. All of that leads to an increase in lumber costs.
What are the biggest risks to the economy?
Interest rates going up is a big risk. Another risk is that all of the government programs that are offering free money will have to stop at some point, or else we’ll go completely bankrupt. How will people react when those disappear?
The worst thing we can do is increase taxes. That makes it harder to do business in BC and Canada. It will kill the economy, which will make it even harder to balance the budget. And that will require more interventions and support.
When we look back in 10 years, what do you think the lasting economic impact of covid will be?
I don’t think you’ll see consequences a decade from now. Hopefully covid is going away so we’ll see little impact. This is not like 2008 where the problems were systemic. The system did not generate the problem this time. Covid is external, so there’s no particular need to change the systems.
What does concern me is that covid has given governments around the world an excuse to intervene in all aspects of the economy. If that intervention is scaled back quickly, that’s all good. But if the support continues, that will create a problem. The support is expensive and will create distortions that are hard to overcome.
If governments use the current rebound to scale back and stay in their lane, I think we’ll recover quite quickly. If not, these impacts could stay with us for a long time.
Where is the best and safest place for Canadians to put their money right now?
That’s a tough question. Stocks offer very little yield, even though companies are doing well. You have to pay a lot. And that’s the same for real estate. Real estate has room to grow; I’m not predicting a crash or slow down. But you are entering at a high level right now. It’s very difficult to figure out where you should invest.
The Canadian saving rate has gone up a lot but only because there are few opportunities to spend money and the government is offering assistance. But once those two things stop, we’ll return to spending. I criticize that but I understand it. The incentive to save is low unless you take risk. Saving in capital doesn’t even keep up with the rate of inflation. So you have to invest and take risks.
If I had to choose something, it would probably be investing in private equity, start ups. You want to have a diversified portfolio.
You once said to buy as much land as you can as far west in Vancouver as you can.
I stand by that. If you are getting into real estate, make sure the land is in a good location. It’s difficult to buy a single family home in Vancouver and one on a large lot of land. But if you can, you should. At the end of the day, land appreciates. It’s a better investment to put your money into land rather than fancy structures.