The Spring has sprung but should buyers necessarily throw caution to the wind? Associate Professor and fan favourite, Tom Davidoff, is back and sits down with Adam and Matt to discuss market bottoms, 2020 market predictions, and potential storm clouds ahead. Grab your umbrella, but we wouldn’t open it just yet! Where’s the market heading in 2020? What poses the biggest risk to Vancouver real estate? And what would a leading real estate economist buy right now? You want to talk FOMO, you won’t want to miss this!
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Can you tell us a little bit about yourself?
I’ve been a housing economist and associate professor at Sauder School of Business UBC since 2009 and have had an interest in property taxes, aging, reverse mortgage, life annuities, and long term care insurance. As the housing crisis took hold in the US, I worked a summer in the Obama administration trying to think through their responses to that. Since being at UBC, the housing crisis has taken a lot of my time here. I’ve always believed that Vancouver should be a high property tax, low income and sales tax jurisdiction. BC’s speculation tax is a small move toward that, that I helped to work on.
Are you surprised at the current level of sales activity?
Yes. I thought the condo market was going to be in trouble due to a number of factors, with too much supply for the demand. The market keeps rising though. The resale market for condos is very strong.
Looking back and thinking of failed predictions, what are some reasons for the surprise?
Interest rates matter, and they’ve stayed low for a long time. With some of the factors driving growth such as immigration and millennials household formation, I think you’re going to keep seeing Vancouver being a great place for businesses to relocate. We’ve got a lot of smart young talent that can be put to use, which is going to increase rental prices for everyone in the market.
Any thoughts as to why inventory for homes has been so low?
In the case of the single family home, inventory hasn’t piled up despite a weak market. The logic there is that if you didn’t want to sell in 2017 when prices were 15-20% higher, why would you want to sell today? But condos didn’t have the same dip at all. We’ve also had a lot of completions coming, which suggests that when the units are completed, people aren’t struggling to pay for it.
Going back to the Speculation Tax, Empty Homes Tax, and Foreign Buyers Tax, have these policies been successful?
Foreign buyers is likely my least favourite, but that’s more of a personal preference. The other two have had a pretty good impact though. Empty Homes is a big deal when you get to the super-luxury homes, but new buildings don’t tend to be empty, partially due to the taxes. I think their impact has been bigger at the higher end of the spectrum. But that isn’t solving the problem for the entry level and single family homes.
What does it look like if the entry level stays high, but the high end properties continue to decline?
There is the demographic bulge of household formation that may slow. Will there be a cultural shift as the millennials age? It’s hard to say. But from an economics perspective, you can easily build more condos, but that’s harder with single family homes. It’s possible that condos have gotten too close to single family prices, and I think you’ll see land becoming more valuable again. However the problem is liquidity.
If the building costs are what they are, I can’t imagine the prices going down. How does that play out?
Construction costs are very high nowadays. Getting to true affordability is a challenge. But if the economy weakens, you could have a downturn in demand for building and replacement costs would fall.
Do you think we’ve bottomed out here in Vancouver?
I think we’ve had measures that should’ve been short term downward pressure on the market. The stress test has locked people out of the market as well. They’ve largely done their work to lower the market. Unless something drastic happens, we probably have hit the bottom. The only challenge I see is that we have a lot of condo completions to be absorbed.
We’ve heard that more government intervention is the biggest risk to the market. Do you agree?
No. I think rent control was excessive. I think CPI+2% was not crazy. I’d be very surprised if the NDP started putting more regulations in. The reason Vancouver is very expensive is because people want to live here, as well as zoning issues.
Are there any large threats to the market for the next 6-12 months?
In terms of demand, there’s a few things. Nothing’s going to happen to immigration. Though if money stops coming from Asia because of the coronavirus affecting their economy, that could be an issue – that’s grasping at straws though. A recession could be a problem or if interest rates rise, but that’s very difficult to predict. Insurance rates for condos can also affect the market. Though I don’t think it’ll destroy anything – just more of an annoyance.
If you were to make a guess about the insurance issues right now, what would you say?
I’d want to be careful; the global warming stuff is scary. Sea levels are rising, which will cause issues for the Lower Mainland. I don’t want to write off the insurance stuff as a non-issue, but as a matter of economics, the risk hasn’t changed in Vancouver as a whole. I’d be surprised to see prices change dramatically.
Where are we at with the liberalization of zoning in the city? Is it changing quick enough?
I think we are seeing dramatic changes in the zoning environment. City council doesn’t seem to care much about the neighbours’ complaints and inconveniences when we’re in the midst of an affordability crisis. I think that’s the right attitude. North and West Vancouver are still quite conservative. But with 70% of Vancouver being zoned for unaffordable homes, it’s ripe for change. In the long run though, it’s a risk for condo pricing.
And what about pre-sales?
I don’t understand how there’s not a problem with the inventory being absorbed. Are people turning around and selling at their pre-sale price upon completion? They’re often selling at cost, but overall the verdict’s not in. It’s very product-specific. If it’s the right type of product for investors or end-users, it can be very successful. You just need to create the right product for the market. With the luxury condo market, there’s a lot of uncertainty because there’s just not a lot of comparisons right now.
I think in the future, we’re going to look back at single family homes with absurdity. That kind of density locks so many people out of the metropolitan area. But if you can invest in a single-family home and invest in Vancouver land now, it’s probably a really great investment. There’s still money to be made, especially on the east-side of the city.
Who’s the most non-progressive on the city council right now?
There’s two. Surprisingly, one is Gene Swanson, who has voted the most against new projects because the view is that if it’s not social housing, it doesn’t perform a function. Which is great to have that voice for the lower class and speaking for the homeless, so long as that one vote isn’t defeating the other left-wing policies. The other is Colleen Hardwick, who makes a lot of statements in favour of low density and inviting the NIMBY-types to come and complain. I wish she would, and believe that she can, see the light as I think she’s a very educated person and has been in politics for a long time.
Find out more about Tom Davidoff.