The old Mark Twain line goes, buy land because they’re not making it anymore. Of course some land purchases are always going to cost you more than others. Simply because there are always going to be lots of people who all want to live in the same small selection of postal codes. And Vancouver is just such a place. A very limited amount of dry, and relatively flat, land surrounded by vast amounts of water and a huge demand to live here.
Over the last couple of decades the prices here have been steadily increasing, which has led some to speculate that Vancouver may on the cusp of a real estate bubble about to burst.
However, a careful look reveals that this city has more than a few things going for it in terms of creating a strong and resilient real estate market. And while there will always be worrying signs, it seems more likely that Vancouver will endure regular market pressures that will continue to ebb and flow as demand fluctuates. Like Mark Twain’s death, the report of the market’s impending collapse, it seems, is an exaggeration.
Let’s unpack some of the many factors driving real estate demand here in Vancouver.
Vancouver had a population of 603,502 as of the 2011 census, a number that has no doubt grown substantially, especially given it’s always in the top section of the list for most livable cities on the planet. Not only that, it’s one of Canada’s top destinations for immigration and seemingly the top choice for Canadians looking to relocate. All of this has put tremendous pressure on Vancouver’s roughly 115 square kilometers of land. And while we continue to find new ways to make use of that land, going higher and higher, being blocked by the Pacific ocean and the coastal mountains means we can only spread out so far. Of course, those beautiful obstructions may be just why so many people want to be here!
While the mountains and the ocean are a pretty good draw, there is also something of a worldwide movement towards cities happening. It’s been going on, really, since the agricultural revolution, but in the last 10 years we have been seeing a massive desire to be close to culture, transit, employment, and entertainment. The sprawling suburban trend that really kicked into high-gear in the 1970s seems to be slowing and in some cases starting to reverse. This is especially true among baby-boomers, who once sought out large backyards and kid friendly streets. Now they are wanting to move back to denser communities with easier access to culture and proximity to quality healthcare.
Building Up the Suburbs Differently
Of course, because the cost of homes in the city centre have been rising considerably, there are still people moving to the suburbs to find a lower cost option. The major difference now is that people are demanding that the suburbs think more like major cities. Young families moving out to the surrounding GVRD are insisting on regular transit, a higher level of density, as well as cultural and entertainment activities. These families are no longer looking for seclusion and massive lawns to maintain, but rather the equivalent of downtown – except with a smaller mortgage and less traffic. As such the density in Burnaby, Richmond, and even POCO is on the rise and providing additional investment opportunities. In some ways, the high saturation in the Vancouver market is helping to build up the surrounding area and creating alternate channels for some the demand to flow. If these communities plan and develop with density in mind they may take a bit of pressure off the downtown market and provide greater opportunity for young families to purchase their first home.
Mortgage Rates and Price to Income Ratio
No matter where you look the rate trend has been steadily on the slide. Pulling data from posted rates of Canadian banks, for 5-year-fixed-rate mortgages, we can see that in 1996 we hit a high of 8.9%, in 2006 we had come down to a high of 6.95%, and then to today where we sit at around 4.6%. Of course, when looking at shorter-term or variable rate mortgages we start to get much closer to 2%. All of this has made it progressively less expensive to finance a mortgage which you could argue makes it possible for more young families get into the market. Although, the flip side to this is the price to income ratio which, in Vancouver, is the highest in the country at 11.2. This means that the average resale price of a home here is approximately 11.2 times the median family income. So while the mortgage will be more affordable to carry than at any point in recent history, the time it takes to pay it off will be significantly increased. Where this pays off for the owner is in the long-term investment possibilities of being in a market with steady growth potential.
Debt to Income Levels
The rising debt to income ratio has been an area of some concern for a while now and some see the continued low mortgage rates as only adding to the problem. A recent report by Statscan found mortgage debt rose 1.6%, while consumer credit (credit cards, car loans, lines of credit and other personal loans) rose only a modest 0.3% for the fourth quarter of 2015. Mortgage debt now makes up about two-thirds of total household debt. However, when measured against total assets and total net worth, the household debt ratio of Canadians’ actually went down slightly, while their financial assets grew by a modest 5.4%. The good news for the real estate market is that Canadians’ seem to be taking their debt ratio seriously and putting themselves in a position to better absorb any potential shifts in the market.
The Greater Vancouver Economy
Another piece good financial news is that Vancouver is expecting to outpace the rest of the country economically again in the year to come. The current outlook for our city has an estimated GDP growth of 3.3%, much higher than the 1.8% the Canadian economy is projected to increase overall, this according to the Conference Board of Canada. With the positive economic outlook, it’s not hard to assume that more people are going to have money in their pockets and are going to want to make an investment in real estate if they haven’t already.
For a long time the thought of foreign money purchasing property, driving up prices, and leaving a swath of empty homes across major cities has been a fear throughout most of the western world. What we’re finding out is that the fear seems to have been overblown. Sure, foreign investors have been buying homes in Vancouver and we know, anecdotally, they have been buying quite a bit. And while neither the City nor the Province track such information to provide actual statistics, what we do have to go on is a recent study commissioned by the City of Vancouver on vacancy. The consultant, Ecotagious, found that between 2002 and 2014 Vancouver had around 5% of homes sit empty for one year or more. A number that has hardly moved as the real estate prices have climbed and is actually quite comparable to other large cities in Canada. The findings, while not completely exonerating foreign buyers from their part in heating up the already hot market, have confirmed what many already suspected, that there are many factors at work in Vancouver real estate. Highlighting one factor as a problem seems more a case of scapegoating than reality and also seems to pour water on the idea that property speculation is out of hand.
Despite not tracking foreign ownership, there have been many suggestions that the government should be getting involved to cool the housing markets in Vancouver. Most of the suggestions have been around a vacancy or foreign ownership tax. However, other than the Federal Government tinkering with mortgage down payment rules, there has been little political will to wade into regulating the market. The bigger fear may be that an attempt by government to artificially adjust real estate prices could inadvertently cause a drop in demand and create a ripple effect throughout the economy. At this point, with this government, and with the continued rise in GDP, it seems it seems unlikely the government is going to find a need to get involved. The one area where the government is looking into regulations is with regard to the recent allegations of shadow flipping, which could artificially inflate housing prices in the agents favor. Currently, the Real Estate Council of B.C. is conducting an investigation and will provide recommendations to the government on how to proceed. For the moment, the Government seems prepared to wait for their advice.
Having witnessed the rise in the Vancouver real estate market over the past couple of decades it’s understandable that people have concerns. Our city has turned into a hot commodity both at home and internationally. It’s only prudent that we should continually review the market conditions and pay attention to any warning signs. However, to conclude on an annual basis that the sky is falling seems to be more than a little unwise.
The market in Vancouver has become much more saturated, and young families are having to look for new options and strategies to get their start. The simplicity of the past generation doesn’t exist any more, but to come back to Mr. Twain: The secret of getting ahead is getting started. This seems very ápropo for Vancouver!