A Counterpoint To Talk of a Vancouver Real Estate Bubble

It's hard not to notice the almost daily barrage of "Bubble speak" in the media of late.  The "Bubble Theorists" have been predicting the "end was near" since 2001. 

The current rhetoric introduces an increased level of anxiety into an already stressful decision-making process.

Typically the media quotes a senior financial executive, usually from outside the local market area who makes  Broad-brush, generalized statements about the unsustainable Vancouver real estate market.  Often US real estate or economic data is used to support a theme of doom and gloom here at home.

There has been a distinct lack of coverage for a Counterpoint to these negative views.  It is important to put all the facts on the table in order to have a balanced debate of the issues.  The public must hear both sides of the story if they are to make informed real estate decisions.

Recently, I received a very pragmatic and relevant perspective on the topic.  Originally published in a recent RealtorLink newsletter, I share these comments with you in the spirit of promoting informed decision-making.

From RealtorLink Newsletter – Volume 7 – Number 21 - October 20, 2006

Question: Is there any truth to the [prophesied] [market] collapse?

Gregory Klump, Chief Economist at the Canadian Real Estate Association (CREA):

"The fundamentals underlying housing demand in Vancouver are positive and will remain so next year.”

Andrew Ramlo, Economist at Urban Futures Institute:

Ramlo expects international immigration will accelerate, along with in-migration from other provinces as baby-boomers start to retire and head west.

"I also see job growth remaining positive, given rising investment in public infrastructure such as the RAV line, the Gateway Project and the Olympics."

Question: What would have to happen for a bubble to occur?

Helmut Pastrick, Chief Economist at Credit Union Central of BC:

"A necessary condition is a high level of speculation", he defines this as a market characterized by large numbers of investors buying homes which they hold for short time periods, typically less than six months.  To gauge speculation Pastrick uses Land Registry data.  It indicates that in Greater Vancouver, just seven percent of properties are being bought and resold in less than six months. 

In 1981 this rate was three times higher and in 1990 it was about twice as high.  The most speculative activity is the downtown Vancouver high-rise condominium market.
There 20 percent of properties are bought and resold within six months. 

For evidence of a bubble, analysts typically look for a telltale parabolic (hockey stick-shaped) increase in house prices.

Gregory Klump:

"This isn't the case right now, home price increases in Vancouver have risen significantly in the past few years because of high demand and tight supply.  In the past few months, increases in average price have slowed."

Klump concludes now that sales are returning to more normal levels and new listings are on the rise, Greater Vancouver's housing market is becoming more balanced.

While prices are at an all-time high, the majority of homebuyers can still afford a home for two reasons:

1. most first-time home buyers (about 20% of the market) typically pay less than the benchmark price, buying condominiums or town homes in suburbs; and
2. most buyers already own homes and are benefiting from rising prices as a result of increases in home equity position.

Question: With sales starting to slow, can our market hold up or should we expect a marked slowdown?

Andrew Ramlo:
 
"Most figure that a slowdown is inevitable given the run of growth we've [had] in the past few years.  But, nobody is speculating that the slowdown will be a decline, just a more moderate rate of growth."

Tsur Somerville, Professor at UBC Sauder School of Business:

"The market is slowing, but slowing is not a collapse."

Somerville is most concerned about the downturn in the US economy and its impact on us.

"The US is still one-third of the world's economy so we're sensitive to a slower US economy.  It impacts our tourism and softwood lumber

Somerville also thinks that public infrastructure projects like the Olympics and the convention centre are positive for our tourism industry.  And, overall Somerville thinks these negatives and positives add up to a soft landing.

But cautions Somerville, "Investors are still the wild card.  We don't know how they would respond to a price decline - whether they will sell or hold"

Helmut Pastrick:

"Since most home purchases are bought as principal residences and are held for a long time period, short-term price swings are less important than the longer-term trend.  In the last 45 years, home prices have doubled more than five times.  The long-term price supply outlook remains favourable owing to continuing demand growth and ever present land supply constraints."

Andrew Ramlo:

These market fundamentals would have to shift both dramatically and rapidly for us to hear a resounding pop coming from the housing market, explains Ramlo.

"In the absence of any rapid changes, the only pop to be heard should be in the [nay Sayers] assertions about a burst."

The article goes on to state  ...the strong period of growth we have seen since the late 1990s will inevitably be balanced by a period of much more tempered growth in the near future.  This more moderate growth could help address issues of affordability that have arisen over the past couple of years.

Some thoughts to consider

My own take on the current market is "Balance".  A more balanced market, where Buyers and Sellers operate in a more competitive, less frenzied environment is a good thing.

Homeowners can look forward to continued, albeit more moderate growth in the value of their homes.

Sellers may not enjoy the same level of rapid price growth experienced over the past 5 years, but they can look forward to a buoyant marketplace where properly priced properties will sell at a fair value in a reasonable period of time.

Buyers can now shop a greater variety of homes, and do so in a less frenetic and less pressured environment.

My advice as always is to avoid speculation, invest for the long-term, and buy quality. 

The real estate market Drivers are for the most part still in place.  These include:

• Historically low mortgage rates (stable and predicted to trend lower in 2007),
• Positive inter-provincial migration (retirees and job-seekers),
• Strong international immigration (predominantly Asian, increasingly from India),
• Strong provincial economy,
• Positive personal income growth,
• Shortage of housing inventory (albeit slowly improving), and
• Declining residential housing starts.

Markets Within Markets
The North Shore and Sea To Sky corridor tend to operate as "micro-markets" and do not necessarily follow a "broad-brush" trend.   They are holding their own YTD vs. last year's banner performance. For example:

West Vancouver
Detached Sales
October 2005 – 47 units
October 2006 – 53 units Up 13%

Year to date October 2005 - 661
Year to date October 2006 – 653 Off 12%

Furry Creek
Detached Sales
Year to date October 2005 – 2 units
Year to date October 2006 – 8 units Up 300%

Lions Bay
Detached Sales
Year to Date October 2005 – 25 units
Year to Date October 2006 – 14 units Off 44%

Howe Sound
Detached sales
Year to Date October 2005 – 5
Year to Date October 2006 - 4 Flat

North Vancouver
Detached Sales
October 2005 - 90 units
October 2006 - 103 units Up 14%

YTD Oct 2005 - 1,053 units
YTD Oct 2006 - 1,045 units Off 8%

Another way to look at this market is to analyse the percentage of sales to new listings.

Basic Guideline for % of Sales to New Listings
At 40% or lower = Buyer's Market, inventory builds, downward price pressure.
At 50% = Balanced Market, more selection, normalized price environment.
Over 60% = Seller's Market, inventory scarce, upward price pressure.

Take a look at these selected 2006 stats:

West Vancouver/Howe Sound
Detached - Oct = 70%, Oct YTD = 60%
Attached - Oct = 58%, Oct YTD = 57%
Apartment - Oct = 75%, OCT YTD = 71%

North Vancouver
Detached - Oct = 70%, Oct YTD = 71%
Attached - Oct = 78%, Oct YTD = 77%
Apartment - Oct = 73%, Oct YTD = 75%

Anita Schmitt, Realtor - Royal LePage Northshore

This communication is not intended to cause or induce breach of an existing agency agreement.