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episode # 233

What’s Really Happening in the Vancouver Real Estate Market?

Are you hearing conflicting reports? Perhaps you just heard the CMHC call for 9-18% price drops in the Vancouver market, but then your neighbour Todd’s home sold in multiple offers. And Todd’s place was a dump. And Todd’s got bad taste. And, come to think of it, you don’t actually even like Todd…no one does. And he got over asking during Covid?!? So, what is really happening in the Vancouver real estate market? On today’s show, Adam & Matt offer an extended version of their recent talk at the Vancouver Real Estate Investment Summit. They break it down simply, discussing what we are hearing about the Vancouver real estate market, what we actually know about the Vancouver real estate market, and, knowing what we know, where the opportunities are currently. This is an info-packed episode that gives an up-to-the minute account of the market that goes way beyond the headlines. You may even better understand what happened with Todd’s place by the end but that doesn’t mean you have to feel good about it. Screw that guy!

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Episode Summary


 

What you’re hearing about the Vancouver real estate market:

One thing you’re hearing is that the market is set to collapse. You might be hearing this all the time and you may have been hearing it for years. Eric Bond’s talk on this show and the CMHC’s talk to parliament said we would see major declines coming. 2021 is when we’ll see the worst declines with a rebound in 2022.

You’re also hearing that Vancouver is the most indebted city in the country, which makes us vulnerable. Kennedy Stewart is saying the city is broke. Eric Bond is saying everyone who lives in the city is broke.

Another thing you’re hearing is that no one wants to live in cities anymore. People want space and cities are petri-dishes for disease. Bedroom communities and resort towns are going to boom.

 

What we know about the Vancouver real estate market:

In the past, predictions of huge market declines haven’t proven true so it’s useful to take a step back and look at what we’re seeing on the ground.

The last slowdown (mid 2018 to mid 2019) was not as bad as most people thought it would be. It was also policy induced. We saw significant declines in certain sub-markets, especially at the higher end, but not so much at the entry level. But pre-COVID, we were really coming out of that slump. Since August 2019 the market had been ramping up. In Feb 2020, inventory was down 20% compared to Feb 2019. So there were a lot of multiple offers and urgency in the market.

Of course, everything changed in mid-March. Life was over as we knew it. But what happened in the market?

The market essentially shut down. April 2020 sales were 63% below the 10 year average – the lowest average of sales since 1982. Listings were pulled from the market and everyone postponed. Listings were down 57% in April 2020.

But we have emerged. We are a lot busier than we expected we would be. In May 2020, we saw sales increase 34% from April 2020, which again was the lowest sales we’ve seen since 1982. In June we saw a dramatic uptick, 64.5% over May. June 2020 actually outperformed June 2019 by 17.6%. June 2019 was not a busy month, so this isn’t a huge deal. But considering what we came out of this spring, that is staggering.

We are still below the 10-year average for sales. There is a lot to be optimistic about and a lot that was surprising. Prices have remained stagnant in most markets; they have gone up in certain markets. Real estate pricing is not like the stock market with huge ups and downs each day. Any price declines would take more than a month or two to play out. But we would need to see some significant change in sales before anything would change on pricing.

As for the indebtedness of Vancouver, let’s look at mortgage deferrals. Quebec is deferring mortgages up to 30%, 20% in Ontario, 27% in Alberta – and these are high numbers! One third of the population can’t pay their mortgage. BC is only at 7%. The level of wealth in BC is significant.

You hear anecdotally, including from clients of ours, that people are moving out of the city to Squamish, Nanaimo, etc. This is based on the notion that vertical living is too dangerous and you don’t want to be stuck in your condo. Another factor is that people can now work from home, so no longer need to commute into the city daily. Thirdly, couples are learning they need more space to properly hide from each other. People have really gotten to know their space over the last few months and they’re finding they need more of it.

So there is some truth to the notion that people are moving out of cities. Sales activity in the Fraser Valley is up 113% since last month and 32% since June 2019. Fraser Valley is outperforming Vancouver. Squamish is on a run right now and we’ve been bullish on it for a long time. Condos are up 4.7% and detached homes are up 2.5%. 4.7% is the kind of number we were seeing in Vancouver in 2017.

 

What real estate market indicators are we watching for:

1 – Inventory levels: Inventory levels are rising. We still have 23.7% fewer listings today than a year ago at this time. If inventory starts growing and it’s not being absorbed, that’s when we see prices decline. But we’re not there yet.

2 – Unemployment: What happens when CERB, deferrals and other benefits run out? Unemployment levels are directly linked to housing.

3 – Migration levels: Will we get back to pre-COVID levels and how long will it take? International migration and international students impact Vancouver significantly.

 

What we like:

We like cities. We like global cities, like Vancouver.

If you look to history, the 14th Century bubonic plague hit Italy and 50% of the population of Florence was wiped out. People were saying to move to the country and the city is dead. Almost immediately after, Florence became the epicentre of the renaissance.

In 1793, Philadelphia was hit by yellow fever and 10% of the city died. It was one of the largest cities in the US at the time. Thomas Jefferson said people won’t want to be in cities and they will never grow in the US. Of course, cities did boom.

The 1918 flu pandemic hit and what came next? The roaring 20s.

A critique we’ve heard is that during all these periods of history, there was no technology. But the point isn’t that they didn’t have technology. The point is that people like to mingle. People want to be out. Zoom isn’t replacing human interaction. Part of human nature is to socialize.

Gil Kelley, General Manager of Planning, Urban Design, and Sustainability for the City of Vancouver, reminds us that cities are more important than they’ve ever been because of technology and innovation. He says, “We are a global structure, made up of cities.”

 

What we like in Vancouver right now:

Detached homes:

This market is on a run. It’s the perfect middle ground for people who need more space but want to be close to the city’s infrastructure. Detached homes are a diminishing supply; they decrease year over year. The townhouse or half-duplex are set to become the new single family home in Vancouver. The city has indicated that density is important to their affordability mandate so there’s latent value in the land of a detached home and the value is increasing.

On the podcast episode with Eric Bond, he said that the detached market is detached from market conditions. The price points are detached and it’s detached from larger economic conditions.

Another bonus of detached homes is not having a strata. It has become riskier to own a strata property, especially after the rising insurance premiums, which went up 50-300% recently. Depreciation reports show us that buildings in BC, especially older ones, are underfunded.

The detached home market in Vancouver is up 7.9% since last year and up 4% over the last few months. It’s a great market for sellers but is challenging for buyers. It has never been easy for buyers but is particularly challenging now. On the west side, it’s a seller’s market under $4 million, up 4% over the last six months. The west side is dramatically different than it was a year ago.

Studios and One Bedrooms:

We talk about these units as investments. They are very easy to rent; they get the highest rent per square foot. There are fewer operating headaches, despite the issue with stratas. It’s a lot easier to rent out a one bedroom condo than multiple units in a house. It’s a fairly turn-key market.

In the 2018-2019 slump, this market actually performed the best with prices remaining stable. In June 2020, this market was busy. It was a seller’s market downtown, from $400-800K. On the west side, we saw $400-600K units with 60% sales ratio. The east side was not as busy as the west side but was still a seller’s market with a 30% sales ratio.

We have always liked the studio and one bed market in Vancouver but we particularly like it right now because this is a submarket that could be vulnerable in the coming months. Right now, it is busy and prices aren’t declining but that could change. COVID has hit people who are making less money harder. So entry level markets may be impacted as employment changes. This could also be affected by the end of CERB and mortgage deferrals. What happens when those run out?

For people who own one beds or studios as investment properties, they may be impacted by rent deferrals. That program also won’t last forever. If an investor is already having trouble collecting rent or kicking tenants out, they may be ready to leave this market.

Of course, rising maintenance costs and insurance costs also make this submarket vulnerable in the coming months.

Over the next 6-12 months, we may see a lot of people wanting to sell and a lot fewer buyers. The market is not suggesting that right now; this is speculative.

One exception to the seller’s market: In northeast False Creek (Crosstown and Chinatown), sales for studios and one bedrooms from June 1 to July 9 were at an 11% sales ratio, making it a buyer’s market. This area is not performing as well as the market overall. It’s an area of the city we really like so this might be a great opportunity for buyers. The viaducts have to come down as they aren’t structurally sound. Amazon, and a huge group of employees, are also coming to town. St. Paul’s Hospital will be moving to the area, creating more jobs. Transit is also key. The Broadway subway line will make the area more walkable and accessible. It connects the areas and will bring a ton of jobs to Vancouver.

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