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episode # 90

Why this Market Makes Dollars but No Sense with Tom Davidoff

Tom Davidoff returns for another one of his famous market analyses! Matt and Adam catch up with Tom for a chat about everything from what makes a healthy market to housing politics. Have a listen and stay in the know!

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Episode Summary


On how the year went for the Vancouver real estate market, overall:

Something happened in the condo market. Everyone forecasted about a 5% overall drop in prices; nobody said the condo market would go nuts. We’re well into a double-digit increase, which is really striking.

On the gap between single-family homes and condos:

Some people point to tax policy changes; the foreign buyers’ tax. Single-family homes are beyond local incomes, and condos are catching up. Generally, it may be affordability catch-up. The presale market is so hot; it makes sense that foreign demand would shift from single-family homes to presales to defer the taxes until completion.

On the City of Vancouver’s “locals first” initiative for presales:

It probably doesn’t hurt anything. Some people ideally say forget it; I’m going to do rentals, as it’s a hassle to do condos. Many people think purpose-built rentals are healthy for the market. There won’t be a lot of impact for a few reasons:

  1. In West Vancouver, they tried this for a number of months, the locals didn’t bite, and the building was sold anyways. With interest rates as low as they are, maybe the lock-out period is OK if nothing is sold. Unless it’s a perpetual lock-out period, it likely can’t affect pricing.
  2. Developer equity funds the building; there are no presales, and they sell the units when built. Nobody would say how unfair this is; people think this makes sense. Contrast that with people who are speculators looking to flip presales; they act like an equity investor in a construction project. They’re not taking up space or occupying units, just financing a project. The problem is misplaced, as we wouldn’t have an issue if the developer did this. If the NDP moves on the proposed BC housing affordability fund (where you’re not allowed to live in a building unless you’re a local taxpayer), this makes sense. Saying you must be a local to finance construction does not make sense at all.

On the NDP being in power, so far:

Tom is taking the NDP at their word. They are going through a lengthy consultation period and don’t want to screw up. When they put policy in place, they want it to be sound policy. This makes sense; they got elected by people looking for action on housing affordability. There are steps on both the supply and demand side. They need to be careful: there is a lot of upside and downside risk in the market. With rising interest rates, most people won’t be happy if home prices decline, say 30%.

On the consultation process:

We briefed the liberals on our ideas, who didn’t go all the way towards what we suggested for taxation; the foreign buyers’ tax is partly there. The NDP is doing pretty broad consultation.

On how the by-election might impact the City of Vancouver and affordability:

No matter who wins, Vision Vancouver will implement what they want through the end of this term. The next city-wide election maybe signals voter interest. Jean Swanson is polling very well and is about “weaken the demand side more than strengthen the supply side.” Many candidates are the same. Bremner wants to speed up approvals rather than massively change zoning. Tom moderated a debate and none of the candidates thought single-family homes on the west side was the way to go. They want densification.  Everyone wants to increase taxation on empty or high-value units, except Bremner. But this lies in provincial policy, too. The impact of the election will be limited, but Tom’s interested. Vision proposed the mansion tax long ago, as did Simon Fraser. Side benefits encourage owners of valuable property to want re-zoning. Tom doesn’t know if Gregor asked the NDP for this authorization.

On what he’d like to see come out of the election:

More density on the west-side single-family neighborhoods. Someone really needs to articulate this. Tom would be happy to see someone put in tax reform.

On the focus of the west-side and more density:

Maybe it’s challenging, politically. But Tom doesn’t know how many voters would be angry about mass densification. Some of these properties are probably owned by non-voters. There’s a way to get to win-win-win (for the property developer, the property owner, and affordability for the City). Look at the Cambie area – Tom doesn’t know any homeowners who are upset to be in this rezoning. They make a fortune out of their property value. Tom doesn’t know why the City hasn’t extended the Cambie model to more of the west-side.

On where the market’s headed and frustration with understanding the market:

It’s a vindication of basic economics: there is no free lunch. If everyone knew prices were going to fall 20%, everyone would sell their property. If everyone knew prices were going to rise 20%, prices would get bid up and they wouldn’t rise. You need to think prices will be unpredictable. We have a market where it’s hard to add new supply; it takes a big increase in prices to get new supply – this is determined by what people are willing to pay. People’s inability to predict price movement is a sign of a healthy market.

On the US market, if there’s correction coming down there and, if so, how that impacts here:

If you look back in the states and even here, it’s a mystery why prices didn’t jump faster. When did people clue in the coastal cities are the places to be? Cap rates historically were always well in excess of mortgage rates. Maybe Vancouver has just caught up, but we don’t know the right return we ought to be getting on real estate as an asset class. In the states, you’re far from positive leverage: you can get net rents divided by price pretty close to the mortgage rate. As long as you can do this in a coastal market, you’re doing well in the long run. In the states, we don’t have the non-prime lending run amuck when investors and low-income buyers without great credit could buy, like in the mid-2000s. This really bumped prices. The ability to get credit very easily isn’t there yet in the states. Securitization of non-prime lending died and never came back, or it’s very moderated. This is seen in commercial real estate, too. It took time to come back after the 1980s.

On predictions for the market in the next six months:

It’s a risk. Factors include the stress-test on sub-80% and interest rates continuing to rise, the market is pretty hot and can correct on its own, policy from NDP maybe cooling things off, and buildings starting to complete into 2018-2020. As the former pre-sale buildings become resale buildings, knowing there is a premium on presales could have an adverse effect on the market. The trade-off on these things includes lots of immigration coming, and still low interest rates. Maybe prices will be the same for condos six months from now as they are today, maybe they’ll be 5-10% lower. There is lots of uncertainty. Tom would have to see a move of 15% up or down to really bat an eyelash.

To learn about Tom:
Twitter: @TomDavidoff

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