Feb 7th 2016 — an assessment of the current situation.

This is not a criticism. It’s not a statement that the system has failed. It’s just a frank assessment of whether or not this housing market makes sense for this particular author.

Background

Young professional couple with no kids. Enjoy outdoor activities (that’s why we live here,) so would like a place near the mountains for weekday evenings. Currently on the sidelines and building a down payment. Not trying to “time the market” but also trying to avoid making a 25 year commitment to a mortgage that turns into a disaster.

It’s a very frantic market right now in the entire lower mainland.

“I’d say since November we’ve seen prices going up $30,000 a month,”

The Dilemma

Apartments:

Apartments in this region have serious downsides. Many of them have strict rules (e.g. no bikes allowed in the elevator) and tiny storage units that are frequently broken into. As long as we live in an apartment, we can each only own one bike (we’d prefer to have two or three each) and can’t own things like kayaks. There are challenges with pets in an apartment. It’s also a pain if you come home covered in mud or just want a little space to do a basic project (like waxing skis, bike maintenance, etc.) You want to buy a relatively new apartment since anything older than 1980 often doesn’t have in-suite laundry/dishwasher (I’m not spending $500k and then needing to share my laundry and hand-wash my dishes!) and anything from 1980–2000ish could be a leaky condo (many are fixed but some people like to just avoid them completely.) Apartments have also been appreciating more slowly and will continue to appreciate more slowly because there are a bunch of new projects coming online and areas will continue to be re-zoned for density. All in all, rent doesn’t look too horrible when you compare to strata fees, mortgage interest, and property tax. I think apartments are great for some people but they won’t work for us. We’re happy to rent a small one while we save up money but we wouldn’t want to own one. In the future, I do think we (people of the Lower Mainland) will look back with regret at how lax building codes were during this period of incredible investment in our housing stock. I realize that granite countertops are easier to sell than large and secure storage lockers in the basement but I feel like the current buildings are not very functional for families with practical needs.

Townhouses:

Townhouses give you an independent entrance and some give you an independent parking garage which makes them a lot more practical for people like us. Unfortunately, the prices can get higher than apartments and you still have strata fees. They also appreciate more slowly than houses and you don’t have the opportunity to benefit from densification re-zoning or making side income from renting out a basement or building a lane-way house. In fact, you may even be banned by the strata from renting out your own townhouse if you wish to travel for a year or if you need to hold onto your unit while you move to a different city for work (probably more common in apartments but I think the restriction can apply to townhouses as well — correct me if I am wrong.)

Looking at listings in North Vancouver, I see a townhouse listed at $930k with strata fees of $300. Once you package the fee into the monthly costs, that’s like carrying a mortgage on a house that is worth more than $1 million and the strata fee will only increase with time. I’m having a hard time convincing myself that such a townhouse has a lot of room to become more valuable than $1 million as it gets older. $1 million is a lot of money.

Single Family Homes:

Looking through the listings, I find one of the cheapest single family homes in North Vancouver at $990k. I feel that it’s likely a technique to drive a bidding war as it is one of the only results that show up if you look for houses under $1 million. I’m willing to bet that it will sell for a lot more than asking — perhaps as much as 25% more.

Another house appears unlivable (requires renovations before you could move in) and is all the way out in Port Moody. It’s listed at $870k.

Those are bottom of the barrel listings for poorer people like myself. Average sale price in the region (not just city of Vancouver,) is now $1.82 million.

There are more “affordable” options in pockets south of the Fraser but they are still quite expensive and can put you well over an hour from downtown in the morning rush and also an hour from the mountains in light weekend traffic. It’s a good option if you land a job in Richmond and take up other hobbies but it’s not really practical for us to have a 1+ hour commute every weekday and every weekend day.

The elevated prices have spread quite far. Squamish is a town of about 17,000 people that is around an hour outside of Vancouver and separated by a winding highway (with no jobs in between). I found two listings for basic ranchers in Squamish that were about $735k and it’s easy to spend more than $1 million if you want something a little bigger/newer/nicer. This is in a town that doesn’t appear to have any significant industry after forestry declined. For the same price, you could get a house in downtown Calgary or Toronto or two houses in Victoria. If you want scenery, you could have a waterfront four bedroom house on half an acre near Campbell River (population 31,000). Some working professionals are making the move to Squamish and finding ways to make it work with their jobs in Vancouver. It can be tricky and exhausting and you might find yourself in a bad place if you ever lose your job and need to find another. To the extent that Squamish is essentially now being treated as a neighborhood on the outskirts of the Lower Mainland, I worry that losses may be highest in Squamish if prices soften.

So what is supporting these prices? Even if we managed to find a way of pulling together a $1 million offer, what are the chances that prices will remain elevated or continue to increase?

New mortgage rules, low interest rates, complacency and inter-generational wealth transfer

New CMHC rules come into play on Feb 15th 2016 that will require larger down payments on houses between $500k and $1m. This could be driving short-term activity and there might be a cooling off period post Feb 15th. It’s arguable that the impact will be negligible since most people capable of qualifying for a $900k mortgage already have access to $100k in savings for a downpayment.

Eventually, interest rates will also need to climb and when that happens, it could have a significant stabilizing or even destructive impact on prices given that most people buy a housed based on the monthly payment, not the total sticker price. For now, many young people are getting the largest mortgages they can afford. They are often getting approved while both members of the couple are employed and just before the wife gets pregnant and stops working. We’ve had an almost unprecedented real-estate rally and complacency is setting in — particularly for people who have never witnessed anything else. If the rally has gone on for 15 years or more, who is to say it won’t go on for 30? Even if the rally just continues for another two to three years, that might provide enough gains to cushion new buyers from the subsequent losses.

Finally of course, all this new wealth from increasing prices has not disappeared. If you are lucky enough to have parents who lived in Vancouver you may be on the receiving end of that windfall through a number of possible arrangements. Millennials who came from other towns in BC and the rest of Canada to go to university here and then enter the professional workforce are finding that they are in a worse position than their locally raised peers who are gifted downpayments or passed on the family home. That’s not a sustainable model for continued price appreciation and it’s also not a great way to build a community.

“Recently announced changes to mortgage regulations will likely boost sales activity in the short term, as buyers jump off the fence to beat the changes before they take effect next year,” said Pauline Aunger, president of CREA.”

“ 40 per cent of first-time home buyers are turning to the “Bank of Mom and Dad” for their down payment.”

Foreign money and possibly fraud

Lots of people are writing about foreign money and trying to paint a picture of fraud and sketchy business deals. I have no doubt that foreign money is driving some sectors of the market and some of the deals are questionable but I think a lot of it is completely above-board and I can’t hold any ill feelings against people that choose to buy a house here — it is a wonderful place to live and we are very open to foreign investment. That said, it does create a level of volatility. A single change in policy (abroad of domestically) or a shift in the global economy could have a big impact. There could also be a change in sentiment. If the Vancouver market is beginning to feel like it’s reached a top or if foreign purchasers begin to become uneasy with the increased scrutiny, it’s very easy for them to sell their houses (especially if they have limited family/community ties here) or to buy in Calgary instead. It’s still Canada and it’s close to the world-famous national parks in the Rocky Mountains. The air is clean and they get a lot of sunshine. Two days ago, a direct flight from Calgary to China was announced which I think may turn out to be more significant than many people would assume.

Relative prices

For a long time, it felt like prices were rising everywhere. With lax mortgage rules (including the 40 year mortgage) and decreasing interest rates, many markets were doing well. In that kind of environment, it’s easier to justify increasing prices in your local market. Vancouver and Toronto are now unique markets in Canada as many other markets are slowing down. Years of low interest rates have exhausted any pent-up demand and our economy is struggling (the country was in a technical recession for half of last year.) Canadians are free to move about the country and there is no doubt that people are starting to look to other areas that are more affordable. As an example, Vancouver Island has a very moderate climate, an amazing national park, a number of medium sized cities and very reasonable real estate prices. The Okanagan is also very nice. When prices go down in one city, it causes people in other cities to exercise more caution as there is fear of it spreading. For how long will prices be able to sky-rocket in Vancouver if they are dropping in Calgary? We’re just beginning to feel the pain of the drop in the price of oil. Many companies tried waiting it out. When they did need to lay people off, many of those employees received severance and had some level of savings to draw from. By the end of 2016, the pain will be much more visible than it is today and it’s going to be hard to continue to tell ourselves that it could never happen here.

Jobs and the economy

We have a few long-term solid industries in Vancouver that are growing slowly but don’t create the income required for a $1.5 million house (airport and port, government jobs, electric utility, etc.) The movie and tourism industry comes and goes with the dollar and the weather and they are having a good year. However, they can flip-flop fairly quickly and don’t pay huge wages. We have very few jobs in finance. People widely acknowledge that mining/commodities/wood generated wealth in the past but is almost a non-factor these days and skepticism of the LNG proposals it at an all-time high. Just two days ago, Shell announced it was delaying its investment decision for the Kitimat project. Our technology industry is not actually that interesting. Wages are well below what is paid in other cities and most of the profits flow out of the city to owners in the US. As people return from Alberta to BC, local unemployment will increase and downward pressure will be applied to wages. Economic challenges will also cause national companies (banks, etc.) to apply job cuts across the country. Overall, we don’t have the types of major industries that exist in Seattle, San Francisco, Hong Kong, Paris, London, or New York to support these types of exuberant house prices. As an example. the Seattle area has headquarters for Starbucks, Microsoft, Costco, Amazon and Boeing! You can’t name a single employer of that caliber in Vancouver. Cities like San Francisco, New York and LA mint new millionaires on a regular basis through start-ups, finance and entertainment that bring in money from outside of the city. A lot of the new millionaires in Vancouver are people who sell their house and that can not continue unabated for practical reasons.

One sector that has been doing well for years is construction and everything related to real estate. The people buying houses are the people building and selling houses. It’s a dangerous cycle but it can only go on for so long. When either side of that equation is eventually upset, the whole thing falls apart.

So we sit on the sidelines and wait… Based on all of the above, we find ourselves anxious about continuing to wait because some further price increases are inevitable but also very uneasy about diving in at this point in time. To avoid a major sacrifice (such as a 1+ hour commute or living in a space that does not support our lifestyle,) we’d need to fully extend ourselves financially. Of all the cities where we could invest in real estate, this seems like a particularly risky market for us to do that.

But what if we are wrong?

What if the prices don’t drop or even stabilize and we’ve missed out on our last chance to grab a rung on the property ladder before we are forever priced out of this town?

I think it was put well in this recent article.

“This lack of affordable housing has reached a crisis point. Vancouver risks becoming an economic ghost town: a city with no viable economy, other than a service industry catering to wealthy residents and tourists.”

If that were to happen, Vancouver would no longer be an interesting place for us to be and so we wouldn’t mind if we missed out on a chance to be a part of it. We do not have any fear of “missing out.” Our down payment will continue to grow and will allow us to find a place that supports a good life in most other cities. We will make the most of all of our time here for as long as we choose to stay and we have no regrets about not placing a huge financial gamble to reserve a seat at this table.