BC housing bubble

18 Replies

This summer the BC housing market seemed crazier then it's ever been. Since the active housing market resulted in ballooning prices should BC be prepared for a market correction in the coming months or years? 

@Conner,

Houses only go up in value, why worry? ;) I know a lot of people in the US who thought that and learned otherwise. Fortunately Canadians are smart enough not to make RICO level mortgage origination fraud legal (unlike your southern neighbors here in the US) so a collapse brought on by mortgage rates resetting on borrowers who had no business getting a mortgage in the first place is very unlikely.

On the other hand with mortgage rates below 3% and most Canadian mortgages being short term (compared to a 30 year in the US at least) if rates rose significantly a lot of folks might have a hard time affording the new payment when the loan was due to roll over. If they all try to head for the exit at once that could definitely swamp the market with inventory which would quickly create a buyers market (remember those?). 

However it looks like the odds of rates rising significantly (or at all) based on the US Fed's decision last week is extremely low (Seehttp://www.theguardian.com/business/live/2015/sep/... ). In fact I believe most central banks are trapped at the zero bound and that we're all turning Japanese (Whose 'Lost Decade' is now old enough to be graduating with a master's degree) because low interest rates distort investment and hurt savers who would normally be a big part of the spending in consumer driven economies. In the US Wall St. bankers are doing great but a poll last year showed that half of Main St. Americans thought the economy was still in recession.

Another possible cause for a correction is demand disappearing. Some have postulated that with the renminbi being devalued and the Chinese stock market 'crashing' (only back to Feb 2015 levels) that foreign investment from China would slow down but anecdotally at least we haven't heard that from our Chinese clients. My theory is that it may speed up overseas investment as investors there race to get ahead of further devaluations (and before they're swept up in 'anti-corruption' investigations which are mostly designed to weed out anti Xi Jinping factions).

There is another hit to demand that also could originate in China; the slowdown in their economy and it's effect on raw materials producers (see http://www.visualcapitalist.com/china-consumes-min... for a good look at that). Since 30% of Canada's GDP comes from exports (and more than a quarter of that is oil) any slowdown in purchasing from China plus any knock on effects from other countries tied to China could really put a dent in the Canadian economy (see http://www.worldstopexports.com/canadas-top-export... for the top 10 list). Then it's domestic buyers who would stop purchasing, a group that despite the press is much larger than all the foreign buyers put together.

So, long answer but short on conclusions; it's why US President Harry Truman wished for a one-armed economist (so they couldn't say 'on the other hand'). The reality however is that in a complex adaptive system like the world's economy for you or I to pretend we can predict the future is to deceive ourselves. The thing I'm most sure of is that if we can envision it we can plan for it and therefore reduce the risks. Unfortunately that means the thing that will get us is the 'unknown unknown', the risk we don't even know exists.

Einstein said that compound interest is the most powerful force in the world, I'd say that non-recourse loans are a very close second which is why investing in the US is so attractive to Canadians... and everyone else.

BTW I think your VRBO investment(s) up at Whistler are great.

Giovanni

Originally posted by @Giovanni Isaksen :

@Conner,

Houses only go up in value, why worry? ;) I know a lot of people in the US who thought that and learned otherwise. Fortunately Canadians are smart enough not to make RICO level mortgage origination fraud legal (unlike your southern neighbors here in the US) so a collapse brought on by mortgage rates resetting on borrowers who had no business getting a mortgage in the first place is very unlikely.

On the other hand with mortgage rates below 3% and most Canadian mortgages being short term (compared to a 30 year in the US at least) if rates rose significantly a lot of folks might have a hard time affording the new payment when the loan was due to roll over. If they all try to head for the exit at once that could definitely swamp the market with inventory which would quickly create a buyers market (remember those?). 

However it looks like the odds of rates rising significantly (or at all) based on the US Fed's decision last week is extremely low (Seehttp://www.theguardian.com/business/live/2015/sep/... ). In fact I believe most central banks are trapped at the zero bound and that we're all turning Japanese (Whose 'Lost Decade' is now old enough to be graduating with a master's degree) because low interest rates distort investment and hurt savers who would normally be a big part of the spending in consumer driven economies. In the US Wall St. bankers are doing great but a poll last year showed that half of Main St. Americans thought the economy was still in recession.

Another possible cause for a correction is demand disappearing. Some have postulated that with the renminbi being devalued and the Chinese stock market 'crashing' (only back to Feb 2015 levels) that foreign investment from China would slow down but anecdotally at least we haven't heard that from our Chinese clients. My theory is that it may speed up overseas investment as investors there race to get ahead of further devaluations (and before they're swept up in 'anti-corruption' investigations which are mostly designed to weed out anti Xi Jinping factions).

There is another hit to demand that also could originate in China; the slowdown in their economy and it's effect on raw materials producers (see http://www.visualcapitalist.com/china-consumes-min... for a good look at that). Since 30% of Canada's GDP comes from exports (and more than a quarter of that is oil) any slowdown in purchasing from China plus any knock on effects from other countries tied to China could really put a dent in the Canadian economy (see http://www.worldstopexports.com/canadas-top-export... for the top 10 list). Then it's domestic buyers who would stop purchasing, a group that despite the press is much larger than all the foreign buyers put together.

So, long answer but short on conclusions; it's why US President Harry Truman wished for a one-armed economist (so they couldn't say 'on the other hand'). The reality however is that in a complex adaptive system like the world's economy for you or I to pretend we can predict the future is to deceive ourselves. The thing I'm most sure of is that if we can envision it we can plan for it and therefore reduce the risks. Unfortunately that means the thing that will get us is the 'unknown unknown', the risk we don't even know exists.

Einstein said that compound interest is the most powerful force in the world, I'd say that non-recourse loans are a very close second which is why investing in the US is so attractive to Canadians... and everyone else.

BTW I think your VRBO investment(s) up at Whistler are great.

Giovanni

 This is one of the single most impressive response posts I've ever seen. I've read it over a few times to really grasp it all. How are you so organised with info and links to match? what is your current stance on the housing markets in BC? with NPD taking leadership, do you have any opinions on how this will effect our markets?

@Kaden Prete @Giovanni Isaksen

Giovannis posts are what led me to BP.  I cant remember which one it was, but i must have read it a few times over myself.  The man knows his stuff.

As you may have noticed, the lower mainland, especially Richmond, Burnaby, the Vancouvers and Surrey have seen a drastic reduction in their prices.  They continue to try and hide it, but it is clear as day.  I watch my properties religiously (just sold my DT condo, 1000 sq, 3rd floor, 16 showings, one offer, sold at asking, 1 mil, two weeks) and the price drop has been drastic on single detached. 

In my area of Burnaby (Capital Hill) tear downs on a 33 x 120 were going for 1.4 in may of 2016, but now are asking 1.2 and getting no action.  Builders (and we know there are lots) are still trying to sell their completed projects at their original planned price to meet their margins, but they are simply sitting.  I have two new builds within a few blocks of my home and they are still sitting vacant from summer 2016 and haven't had a price reduction.  The carrying cost must be killing the investors.  Another tell tale sign IMO is the amount of realtor switches, this always shows the owner wanted a specific price, couldn't get it, blames realtor and now uses a new one who does in fact list it slightly lower, but the result doesn't change.  When these new builds do lower their price, the 20 year old homes, then push down their price.  This means these sellers will have less equity and less buying power when they relocate to the Fraser valley or Vancouver island.  When they notice they cant, or it isn't attractive anymore, they will stay put!  This will then hurt the speculators and others who were relying on those in the golden triangle to cash out and invest in their market.  Think about the guy in Surrey who bought for 900k with 10% down.  With two rate hikes and a drop in equity he/she should be getting worried.  Not to mention how closely tied they are to the construction business.  If their hand is forced to sell, they'll be a$$ backwards like our U.S. neighbors were.

The media has turned every happy renter into a buy now or never person and they drive up lower end condo pricing, which we saw after the foreign buyer tax was implemented and the home partnership program was started (although most don't use, it drove up demand and interest).  As you may have saw, very low end Surrey condos were seeing a 20% + increase in price after the foreign tax was implemented in June 2016.  Why? because all those "need to buy", were rushing out to get whatever they could.  While this is going on, mom and pop wannabe investors are refing so they can purchase a second property.  will this be an income property, flip, hold for equity growth? they never have a plan, they simply assume it is the right thing to do.  Now we see two rate increases, China creating policies, Vancouverites acting like the Chinese investors are the devil (read the message boards), new government being forced to do something, cancel of short term housing, no aribnb ( almost all dt condos have signs stating they're against it), implementing a empty home tax, and now the new mortgage stress test for uninsured mortgages.  All of this points to a cooling, which is already in full effect in BC, but the condo and townhouse sector is hiding the demise and inflating the dismal numbers, but only for a short time.  

As Condo and Townhouses were the last to see the big increases, they will also be the last to fall.  A sure sign is the availability of pre sale units still available.  a year or so ago, there were line ups around the block to buy a pre sale and now we have units that are almost complete without a purchaser in place for some remaining units.  Very telling.  I have clients who bought pre sale, 20% down, but now can't qualify for the mortgage as completion approaches (they came to me after buying and we will make it happen, but they were close to assigning) and with the uncertainty, private investors aren't as willing to lend, even with solid equity in the home, not to mention the private lenders are drying up as they did a lot of lending on the private builds that were booming.  Those who used private, with the intention to refi once complete, now have issues with a lower valuation on their build and more stringent mortgage rules, so they are holding private funds longer than expected.

I know I can't articulate it as beautifully as Giovanni does, but from what I'm seeing, BC is in trouble!  If you haven't already, sell any condo or townhouse you have (in lower mainland area, while it is still hot) and ride out your single family with hopefully decent buy and hold income.

Jason

@Jason D. Lewis; thank you, I think you covered it very well. A lot of Chinese buyers have gone to Seattle but Trump makes them nervous (me as well) so I don't think they're as attached to US markets as they are Vancouver and if Seattle implements the same anti-foreign measures as Vancouver I think they would choose Vancouver over Seattle.

The capital controls are mainly focused on corporate purchasers and the smaller time players but I'm assured that the really wealthy/connected can still move money out yet flows are lower. Maybe I'll get that buying opportunity that I missed 10 years ago when I thought a 7 cap was too low for Vancouver?

@Kaden Prete A bit of a confession; two years ago when this thread started I was in the middle of a research project for an Asian RE fund whose NA HQ was in Vancouver so I had recently looked quite closely at the market to contrast conditions there with the markets we were targeting, thus I had most of that data in hand already. Other than for my own interest (would like to own multifamily in Van) I haven't been tracking things as closely compared to those days... In fact the latest report from CMHC has been sitting in my inbox for a few days already. However research and underwriting is what I do...

RCA has a report out that says cross border CRE investment in the US by Chinese investors have fallen behind Canadian and Singaporean investors this year after being the largest last year, dropping 55% YoY. Investments from Singapore are 2x last year through Q3 however... which could include Chinese money moved to Singapore on the DL

https://www.rcanalytics.com/cross-border-us-q3/

Unfortunately beyond mentioning 15B of Canadian investment into the US, it doesn't mention about Asian money going into Canada. 

I won't say that prices aren't exorbitant in Vancouver but I think there are fundamental forces driving these price gains. The rental vacancy in the city is insanely low at under 1%. Generally Vancouver is a held in high regard and has been one of the main sources for job growth in the nation.

The province has added around 70,000 jobs in the past year, probably around 50,000 of those would be in the metro area, and this is a city that builds around 20,000 units a year.

This means that anything that is for sale that people can afford (like condos) is still getting bought.

And there is a construction boom in the city with near record level numbers of units under construction but the rate that we complete new units has been fairly stagnant.

If this was Denver and house prices were going crazy you wouldn't say oh it must be foreign buyers, you'd say the economy is booming and prices are rising. 


That being said Jason D. Lewis is probably on the right page. He might be a little doom and gloom but look at the benchmark house price in Vancouver. The single detached price has seen large fluctuations which could mean it's run out of steam or is overpriced.

So if you were hoping to speculate and buy something you might not have too much luck. If you want to invest, then depreciation might hit you in the next 5 years but I don't think it'll be like 2008. If you can get the zoning and own a construction company then there still are development opportunities. I'd just suggest being conservative with your expectations. 

also disclaimer these are just my thoughts on the subject, I'm not saying you should do anything with your money.

I'd like to rejuvenate this thread as I find Vancouver RE super interesting and it's a market I would like to get into one day so I follow it very closely. It looks like 7 months has past since the last post on this thread - Has anything changed in anyones point of views?

I'd like to chime in - Last I read, sales in Vancouver were down 29% in May 17 compared to May 2016 this is the biggest drop since 2008 which was a 31% drop in sales. Like I said I follow Vancouver closely and I didn't see the prices bottom until 2011-2012 (down ~30% from their highs). I think it's very likely to see a significant price drop in the next 2-3 year much like from 2008 to 2011. 

Here's why: We have a bit of a sub-prime mortgage affect in Canada because our rates are mostly 5 year terms and from 2015 till present we've seen a buying frenzy at extremely low interest rates when these mortgage terms come to maturity there's a few things that will happen that will leave a lot of people in a bad place. 

1. interest rates will surely be higher and some people stretch them self just to get their foot in the RE door in the fear of missing out  

2. New mortgage rules will limit a lot of people from shopping a new mortgage because they will be unable to qualify under the new rules. Being forced to take whatever rate their banks offer them 

3. The foreign capital will be all gone thanks to the new taxes implemented by the NDP gov.

4. A lot of the new builds will be completed and supply will be high. 

What are your thoughts? 

How correlated is the local market to higher rates. Isn’t it more dependent on overseas cash buyers?

Sam, The BC government put a 20% tax on foreign buyers plus a speculation tax on non BC residences. I think this will deter cash from overseas. 

Everything you mentioned Matt, it true. Everything is effecting prices, 20% speculation tax, foreign buyers tax, increasing interest rates, the 2% "stress test". Sales are down on detached homes, and prices have started to follow. Condos and townhouses are still stable, as they represent the only "affordable" market for most people, but they too are cooling off quickly.

The housing cost in Vancouver has now hit 88% of the average persons income. That is not sustainable. The entire market has been propped up on foreign money constantly entering the market. Once that slows, or stops, the market stops. How big the adjustment in the market is will be hard to calculate, and is dependant on whether any foreign money gets taken out of the market, which could cause a much bigger collapse.

I remember hearing an investor, on one of the BP podcasts, talk about a conversation he had with a police officer in California, right before the crash in 2008. The officer explained how he had just bought a house for almost a million dollars, and only made about $60K a year. The investor knew, that's not sustainable. The only reason that was possible, was the banks were lending far too easily, and back heavy. The numbers didn't work. When I see that it takes someone 88% of their income to afford a home in Vancouver, with our very low interest rates, that to me says, not sustainable. Sometimes you can look at stats all day, but common sense still needs to play a factor. 

I would not be investing in the lower mainland, if I was basing the investment on speculation.

I guess if the market stays depressed or shows signs of breaking down the ball will be back in the government’s court to reconsider the foreign buyer tax and if that is repealed or reduced, it is likely to prop up the market again maybe?

Overall I am hearing signs of market slowdowns in some hot beds like London, NYC (condos), Sydney and Toronto. Not sure if this is the beginning of the unwinding or just a blip.

I agree with Matt and Jason.

Even in Sea to Sky district where no foreign buyers tax apply, sales are down on detached homes and it's now buyer's market. Condos and townhouses are still stable but I guess they are going slow after this summer.

Not sure how it affect to rent price but I think these areas are now not good for speculation in property or flipping.

Wow, I feel like a first year university student that walked into an upper level course.  The information in this thread is awesome (but also way over my head)!  I am looking forward to reaching your upper levels of political and market awareness.

I recently read the book "The Simple Path to Wealth" and the idea that I got out of that was to invest always and to stay strong (and in a strong financial position) to be able to weather the drops in the market that inevitably occur.  However, the thinking is that the market will also inevitably recover.  So in response to all this talk about whether the market will drop or rise, I feel like it doesn't really matter if you plan to invest wisely and hold on to your rental properties no matter if the market goes up or down.  I feel like if you don't over-leverage yourself in buying the properties, live frugally, save heavily, and always expect/prepare for the market drops then changes in the market will not stress you out that much.  In fact, you'll look forward to the drops so that you can buy rental properties at a discount.

I will look at my investments again to see if I'm in a safe position to survive a market crash, but I do plan to keep investing in local real estate.  

Simple Path to Wealth. Great book! Also sound advice. Market crash = fire sale on cheap houses!

Hi all, new to BG.  Been watching Vancouver real estate pretty closely.  Here's July's numbers. Median SFH $ dropped a whopping 1 mil (~30%) YOY!!! Crazy.

Rental numbers are here.  It's a bummer that the REBGV doesn't provide rental data.

Been holding off from investing there cuz I'll most likely lose cash if I invest and rent out there.  Interesting to see what will happen.

Agree with @Marie Tai @Cory Graham

Simple Path to Wealth - a book to read and add to your financial library.

Also note the original post that was worried about the bubble was 3 years ago. Anything bought back then would have made a killing if sold today. The markets are being slowed right now by mainly the interest rate rise & stress tests to be honest.

@James Ma you're absolutely right! Anything bought 3 years ago is up hundreds of thousands of dollars. The stress test, interest rates and foreign buyers tax all slowed down the market but will never make it *pop*. If anyone thinks that a bubble will burst here and it'll bring back the days of $500,000 or even $1,000,000 single family houses then they are delusional. 

Some markets like ours cannot be explained or properly predicted by analysts. In-migration is the key to property values increasing and that will never stop here because we have:

  1. In-migration from Canada. Vancouver will always have the most mild temperature in Canada. Remember that the rest of Canada is completely frozen and covered in snow 70% of the time. I dare you to tell me someone who likes going outside at -20 below!
  2. In-migration from Asia. Geographically we will always be the gateway to Asia. This applies to people as well as merchandise.
  3. In-migration from around the world. We are an extremely multicultural city and everyone wants to bring their families to live with them (myself included)
  4. People follow jobs and BC has the second highest GDP growth in Canada.
  5. Canada is one of the best countries and Vancouver is always close to the top of the most liveable cities in the world. When the rest of the world looks at Canada, Vancouver stands out as the most beautiful and best choice to live. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here