“Bubble? What bubble?
That’s Vancouver condo marketing guru Bob Rennie’s take on concerns that the region’s real estate market is headed for a meltdown because of sky-high prices.
“It’s not a bubble,” said Rennie, director of Rennie Marketing Systems, in an interview following his keynote address to the Urban Development Institute Thursday.
“With the 80 per cent of the [condo] market that traded in [Metro] Vancouver last year, you only needed a household income of $52,800 to purchase. That’s not a bubble story.”
Rennie, who spoke to a full house about the state of the Vancouver property market, said aging baby boomers with billions of dollars in equity will become a much greater force in the condo market as they increasingly downsize from expensive single-detached homes, and put money aside for their children.
He also noted that the number of people between 55 and 64 will increase 38 per cent between 2009 and 2018, those between 65 and 74 will increase 56 per cent, while those between 35 and 54 will only increase by 4.6 per cent.
Because of that, he said, developers should shift their thinking into providing more larger one-bedroom condos to accommodate the downsizing boomers.
“I believe the leaner, meaner baby boomer is the game changer,” said Rennie. “Baby boomers are sitting on $88 billion in equity in Greater Vancouver and they’re looking at their retirement years. That equity will be freed up over the next 15 years [and] when they sell their home, they’ll buy down and help their kids.”
Rennie said there were about 19,000 condo sales in Metro Vancouver in 2011, and that while the average price for 80 per cent of those condos was $315,000, the overall average price was $427,000, which required an income of $66,000 to finance.”
“Meanwhile, Tsur Somerville, director, centre for urban economics and real estate, Sauder School of Business at the University of B.C., said he also doesn’t believe there’s a real estate bubble in Metro Vancouver, largely because there’s not an explosion in housing starts – typical for real estate bubbles.
Somerville said that while the affordability numbers have been skewed by the higher end parts of the market – “there were double-digit increases in Richmond, Vancouver, Burnaby and West Vancouver, with single-digit increases everywhere else” — the region is still very expensive compared to other cities in Canada.
“Compared to other cities, that income [$52,800] gets you a house. Here, it gets you a condo. That means we’re expensive, but that’s the reality of what we are.
“It’s still an expensive place to live, but it’s not unaffordable. You’ll end up smaller and further away from the core.”
– from ‘Condo king says talk of bubble just a lot of hot air’, Vancouver Sun, 17 May 2012
Rennie’s conclusion that “it’s not a bubble” does not logically follow from “you only need a $52.8K income to buy a condo”. To assess whether we are in a speculative mania, you need to analyze how the fundamental value of that property compares with the price you are paying. In Vancouver rental yields are at extreme historical lows.
Also, note that Rennie is focussed on the condo market, and he is expecting that large numbers of locals will downsize from SFHs and buy condos. But remember, downsizing means you’re partly getting out of the market, and that you are a net seller; who does he imagine is going to be doing all the net buying? Without ready buyers, that paper $88 Billion in RE equity can become $66 Billion then $55 Billion fairly rapidly, as prices plunge. Eventually we suspect it’ll represent less than $44 Billion in paper value.
Somerville, too, chooses not to talk of prices compared to measures of fundamental value, and instead makes the well known “expect to accept less for more” argument, one that can be used to argue for any price level imaginable.