Vancouver: Not as Expensive as You Think
April 2, 2013
Illustration: Francis Tremblay
The real estate market is soft, and it's going to get softer. In the last year, average prices have dropped five percent or so, and they'll sink some more, guaranteed. Less certainly, the market will…not plunge American-style but rather drift, sometimes downward, sometimes sideways, and perhaps not for very long. Unless, that is, we fall victim to a certain rogue whale that's already circling and with a mere swing of its tail could sink our real estate dory.
That's a summary of your property report, just in time for house-fishing season. Never before, it should be noted, has the competition been hotter. Not for homes-for reports. On one hand, the bright sunshine and glistening dew of realtors and marketers. On the other, the Cassandras who have gained the upper hand lately, and looking at some of the numbers it's easy to see why. Sales running at only two-thirds the normal pace. Lots of dwelling completions due this year. Historical norms that are way out of whack. The unreasonable chunk of average income that buying a house here requires. Rents that stack up well against buying. Then again, there also exist other, less ominous numbers, some of which will be revealed here for the first time. Also to be unveiled is a magic prediction engine that can be used to peg short-term price trends with astonishing precision. And finally, there is that whale, circling ever nearer.
First, the declining market expected in the next month or few and the sorcerer's trick that predicts it with such confidence. The mystic metric is called months of inventory (MOI), which is the number of homes for sale divided by a given month's sales. When the MOI is neutral-around six or seven-average prices change little. Below six, prices rise. And an MOI in double digits results in lower prices.
The formula works so reliably, it's bizarre. For example, in January there were 13,246 MLS listings and 1,351 sales by members of the Real Estate Board of Greater Vancouver, for an MOI of 9.8-a buyers' market. And sure enough, the board's overall benchmark price fell 0.5 percent. MOI first moved north of eight during the latter half of 2012, so small price drops have been the case for several months now. In spring sales always rise, but so do listings, which means the MOI will likely remain in the high single digits and the average price will continue to ease. As the year goes on, conditions could suddenly change-whether for the better, as happened in early 2009, or for the worse, as in 2008 and 2012. Long before prices respond, anyone willing to make a simple calculation will know. Keep reading…
Around the World in Seven Homes
What does a desirable (but you know, not outrageous) house look like in cities with higher price-to-income ratios? In many cases, you're spending the same for less square footage, a lot less lawn, and a lot more history.
[Grid: 497| Around the World in Five Homes]
Affordability courtesy of Numbeo.com
See also: Where to Buy in B.C. Now
Of course, the mild price drops currently predicted by MOI look nothing like the armageddon forecast by those who believe we're in a real estate bubble. Why not a U.S.-style meltdown here? The reasons are many (shortage of land, solid financial institutions, impressive livability, fiscal health, low mortgage rates…) even if far from categorical. A major safeguard is the provincial economy. Two decades ago B.C. was the notorious home of booms and busts. But except for a brief lull around 2001 and that nasty 2008-'09 stretch-which was in fact less nasty than almost anywhere else on the continent-the provincial economy has become the definition of dull, posting growth around three percent year after year.
How can this be the case when so many sectors are in trouble? Film production, gaming, life sciences-so much for the halo industries that were going to make us a post-industrial poster child. But at the same time, a lot of industries are thriving. New home construction in the homeland of those Americans is set to rise 25 percent in 2013, just as it did in 2012, and this at a time when forestry companies have also managed to crash the Chinese market. No one seemed to notice, but the softwood lumber tax dropped to zero in January because prices have risen so much. It's just a matter of time before loggers have to fight through protesters on their way to cut down the last few stands of old-growth.
Meanwhile, the price of gold appears to have found a footing between $1,600 and $1,700 an ounce, and Vancouver is home to about a third of the world's mining exploration companies and its largest concentration of geologists. Most of their activity takes place beyond our borders, but even here in the province we're launching coal and copper mines at the rate of two or three a year. And speaking of arguably dirty industries and definitely finite natural resources, there's been talk of building a few pipelines around here, as maybe you've heard. There's that natural gas thing in the northeast. Closer to home, pending some approvals, we appear set to increase our coal port capacity by almost 50 percent. Somehow, in addition to becoming the world's greenest city, Vancouver will be the biggest coal port on the continent. We're almost a coal town!
And yet it would be wrong to imply that the city and province are muddling along so respectably just because of resource industries. TEDtalks, HootSuite, Plenty of Fish, and Lululemon sure sound like storytime selections at the daycare centre but actually mint money while helping to define the 21st century. Fortunes can be fickle out there on the cutting technical-entertainment-design edge, as a prior generation of civic champions like Angiotech, Electronic Arts, and Ballard Power Systems proves. Still, it's an indication that at least some cultural creatives can afford to live here. So the local economy is almost certainly going to be just fine, which will help keep the real estate market from crashing, regardless of all those micro-metrics.
Except for that circling whale. The monster that threatens to swamp us is declining immigration-and in Vancouver that's the worst thing that could happen to property markets. Realtors have been saying this for a long time but lacked the stats or credibility to convince us, so it's fortunate that there is academic research to back it up. A few years ago UBC geographer David Ley, author of the book Millionaire Migrants, checked historic Vancouver real estate prices against an array of economic factors. Most proved to be barely relevant, but immigrant arrivals correlated strongly: when numbers ticked up, sales volumes and prices followed. Ley's data were from the 1980s and 1990s, but there's little reason to think the situation would be much different today. Hell, let's do some proprietary analysis and find out.
It's no secret that Vancouver's real estate market thrived between 2005 and 2007, then in 2009 and 2010 recovered strongly from the recession before sputtering through 2011 and hitting the brakes in 2012. Well, immigrant landings also rose rapidly beginning in 2005, dropped during 2007's financial crisis, then rose strongly again through 2010 before plunging in 2011 and falling further last year. Incidentally, other indicators did not follow the same pattern, instead displaying the almost wrinkle-free character that has been the recent economic norm.
There's more. Over the past five years, that infamous real estate market hasn't really boomed at all, except for detached houses in Richmond and Vancouver, with a bit of knock-on effect caused when people who would have liked to buy a house in Richmond or Vancouver settled for somewhere nearby or opted for a condo instead. The Greater Vancouver Real Estate Board's benchmark price index illustrates this well, with five-year increases approaching 30 percent for detached houses in Vancouver, Richmond, and Burnaby, but decreases or negligible increases for virtually every other housing type.
Why the boom in Vancouver and Richmond? Because from 2008 to 2010 the gates opened wide for investor immigrants from China, with arrivals approaching 10,000 per year. (Precise figures are impossible to divine because an unknown number qualify through Quebec or other provinces but land in Vancouver instead.) Then, in 2011, the numbers began a steep decline, not because of a drop in demand-tens of thousands of applicants remain on the waiting list-but because the federal government began to slow its approval process, then increased eligibility requirements, then finally, in 2012, froze applications. Speculation now is that the program will be axed, though immigration minister has Jason Kenney denied this.
So no, it's not surprising that the benchmarks for houses in Richmond and on the West Side have dropped almost 10 percent in the past year. And it shouldn't be a surprise when they sink some more, if the flow of wealthy immigrants continues to decline.
Note to readers: the originally printed version of this story pegged 2004 as the beginning of the immigration surge and real estate boom. This was an error. The correct year is 2005.
But why, one might reasonably ask, are immigrants to Vancouver so fixated on buying real estate? Isn't it foolish to dive into such a pricey market? Reasons have to do with everything from cultural predilections to the perceived riskiness of other investments; from the apparent solidity and performance of our property market to the essential nature of being adrift in a foreign land. But beyond all that, the fundamental explanation is straightforward: especially to immigrants from Asia, real estate in Vancouver doesn't seem expensive at all. In fact, it's pretty cheap.
Some will be perplexed. If they've heard once, they've heard a hundred times that it takes about 10 years of average household income to buy an average home, and that this renders us the second least affordable city in the entire world, or at least the English-speaking world. The primary force lurking behind the affordability story is an annual survey by a "think tank" called Demographia that upon further investigation proves to be an arm of the Belleville, Illinois-based Wendell Cox Consultancy; Cox, it turns out, is a right-wing pundit and transportation consultant whose stated mission is to fight ideas and initiatives that attempt to moderate automobile use.
There are a couple of problems with the Demographia analysis. One is the contention that too much planning and too few freeways created the conditions for homes in Vancouver to cost more than in a Flint, Michigan, or Thunder Bay, Ontario. The other is the selective nature of the survey, which does not examine the world at all but a mere seven countries. No Africa, no South America, no continental Europe, almost no Asia-it's the Sarah Palin view of the world. (Well, except that there's no Russia.) And yet, despite restricting the survey to roughly seven percent of the world's population, Cox has somehow convinced pretty much everyone that the vast majority of global cities are a lot cheaper than Vancouver.
In fact there are more thorough analyses out there. One, by the Serbia-based crowd-sourced website Numbeo.com, comes up with house-to-income ratios very similar to Demographia's but analyzes 362 of the world's largest cities in more than 100 countries. On Numbeo, Vancouver sits not second or even 25th, but as the 125th least affordable city in the world. Our price-to-income ratio is about one-third that of Chinese cities such as Beijing, Shanghai, and Shenzhen and comparable to or cheaper than most other places where Chinese emigrants might reasonably expect to land. Potboiler settings like Moscow, London, Paris, and Tokyo are up to twice as expensive, while secondary but still global cities such as Sydney, Melbourne, Amsterdam, Stockholm, and Barcelona-the kind that join us on livability surveys-are tightly bunched around us in terms of affordability as well. Comparable American spots like Seattle, San Francisco, and San Diego are a little to a lot more affordable, but prices in the U.S. recently experienced a catastrophic plunge and are now bouncing back strongly, even as ours soften. It's clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.
None of this means that housing affordability isn't a problem in Vancouver. We know that mortgage payments are taking up too much of our income, that young people discouraged by the high cost of entry are leaving town, and that the situation isn't sustainable. We also know that prices are currently falling and that the MOI formula says they will drop some more. But unless we lose status as a global magnet or immigration is otherwise reined in, a real estate environment akin to that of other Canadian cities or currently depressed American ones is not a realizable dream. More likely we'll shift toward the kind of domestic arrangements prevalent in our European analogues. The so-called smart growth deplored by Cox will continue leading to ever increasing densities but also, in the European mode, concordant growth in urban texture and even livablility. Necessarily, the cost of property and the structures that are built in it will remain high-there isn't enough of the former to go around, and the quality of the latter will cause its prices to be bid up. The affordability matrix will continue to be an issue, but we will deal with that using new coping strategies à la Europe: more of us will opt to rent rather than buy, to co-own, and to learn to love smaller spaces. Perhaps that's something to keep in mind this year when house fishing-or deciding not to.