Where Are We Now? – jesse’s Thoughts on the Vancouver Market

“Most years since 2005 have seen September inventory at least as high as Octobers but not by much. This year looks to be on balance a hybrid 2008-2010 scenario: inventory is off its highs but still elevated, sales are lackluster, and prices are starting to drop, but nothing as of yet that as yet looks as acute as 2008. So what can be expected for the rest of this year and next for sales and inventory?

We can first compare to 2008. 2008 saw Vancouver get hit by a freight train, most likely in part because lending was becoming difficult, with higher mortgage rates than today’s, but early 2009 saw such a dramatic decrease in price-payment ratios there was an immediate response to housing activity, in part buoyed by robust population growth. Both these shots in the arm are for the most part no longer present.

Nonetheless we are still in a mode where low interest rates are allowing some households to reduce their payments as their pre-2009 financing terms expire, and this tailwind will be mostly spent in a year or so (and as of now it’s mostly spent already). Rents are increasing and have been on the tight side in the past 2 years or so.

A slowdown in China’s investment spending has likely led to less capital flows being invested in Canadian real estate this year compared to 2009-2011. And this is not only because of so-called “HAM” but also indirectly through a recent boom in hard commodity prices that has subsided somewhat this year — look at how BC-headquartered resource company equities have been doing since 2009.

The Chinese central government has already approved a significant stimulus spend to come into place in Q4 of this year. That will lead to additional economic activity but this is unlikely to have the same impact as previous stimulus efforts as much of the spend will go into servicing existing outstanding nonperforming loans. I would expect some uptick in capital flows into Canada in 2013 but nothing like was seen in the past couple of years and will likely be short-lived.

Mortgage rate spreads have increased for a variety of reasons since 2011, which has partially offset falling interest rates seen earlier this year. Going forward we can expect further crimps on lending through increased spreads and increased loan rejections for Vancouver-area mortgages.

Population growth has continued to slow, in part due to unemployment still being elevated. This looks to be a cyclical trend that is highly dependent upon residential construction activity. It is the nature of BC’s economy that construction boom leads to population growth but as completions mount, population growth subsides, as it is doing now. This cycle looks to be on roughly a 10 year period and it looks 2012 and 2013 lie in a downdraft.

Units under construction are elevated relative to population growth and still appear to be increasing. As completions mount later on this year and into 2013 this will provide an additional headwind for the housing market.

Are there factors that could produce a renewed bout of strength? Well some navel gazing is in order — I for one did not anticipate the veracity of the stimulus from governments and how strongly they affected house prices. I am, now, trying to keep an open mind as to what could come to the rescue this time round, though any insight into what this might plausibly be would be greatly appreciated. A markedly improved US economy in 2013 would be a positive for Canada as a whole.

Aside any additional strength from factors not considered above, I see continued elevated inventory and lower sales continuing through the rest of 2012 and likely through 2013: we need only look at the early part of this century to see the effects of lower population growth. I think the months of inventory levels will be enough to put a downwards pressure on prices as measured on a year-over-year basis. This will not mean that prices are monotonically going to fall — seasonality sees prices buoyed in the spring for a variety of reasons — but any bouts of strength are likely to be muted before renewing their descent in the second half of the year. How much? I’ll say -5% by the end of 2012 and a further -10% by the end of 2013. And that is only a guess based on what I can see based on the factors above. If factors I considered above combine in some way to exacerbate effects, or if some real sh!t starts going down in, say, Asia, things could get worse.”

jesse (YVRHousingAnalyst) at VCI 17 Aug 2012

jesse’s price drop estimates are conservative but we reckon they’re sensible: they’re the high probability outcomes for the next two years.
We’d add that at any point buying could slow more rapidly, via the effect of sentiment change. If it suddenly becomes ‘common knowledge’ that prices are dropping (this is not yet the case), buyers would lose the desire to overstretch to buy, and the market could freeze up.
– vreaa

21 responses to “Where Are We Now? – jesse’s Thoughts on the Vancouver Market

  1. like it drj… would only add that canada is a small market and vcr tiny … so things can get pushed around quite easily … but fundamentals always reassert, imo, and this is effectively the perspective of vreaa and many other posters … we just have different ideas about how that will happen … aside: read an interesting comment about recent ‘strength’ in the us market on hanson’s blog … http://mhanson.com/archives/974 … a superb application of occam’s razor … ergo to get the best read on direction of vcr prices -> just check credit conditions

  2. stats might show a greater drop than 5% in 2012 and 10% in 2013.
    I see stability in quality housing and larger sized building lots with continued falling prices on the substandard detached, dicier districts, and smaller sized properties.
    In the end the stat will deceive you into thinking that 1912 Grandview arts and crafts on a 50×125 lot is getting more affordable.

    • Any property that was thought to be exclusive in the run-up will fall by that much more in the descent.
      The real test of price change for “1912 Grandview arts and crafts on a 50×125 lot” will be the past sale price vs future sale prices of “1912 Grandview arts and crafts on a 50×125 lot”.
      Let’s monitor how that kind of SFH does in coming years.

    • 4SlicesofCheese

      This has as much logic as my friend who says New West has room to go up in price and will reach Vancouver prices, because Vancouver has already peaked and no room to increase anymore it will stay flat.

      Coincidentally, she just bought in New West.

  3. A few people were debating the strength of the SF RE market a few weeks back. Thought you might be interested.

    This home is in the Inner Mission, one of the San Francisco neighborhoods popular with programmers, developers, and other young professionals. It was listed in April as a fixer-upper. The property received 32 offers after nine days on the market. The sale closed in early June at 96% above asking, inspiring the following haiku:

    Fugly from the front
    But location can’t be beat
    A feeding frenzy.


  4. Good analysis Jesse, appreciate it.

    “2008 saw Vancouver get hit by a freight train, most likely in part because lending was becoming difficult…”

    Yes, the Vancouver market mirrors liquidity.

  5. Agree on the sentiment factor, vreaa, alas not horribly quantifiable for a quick executive summary. One could pose another question that evades the “sentiment” factor entirely: what are the conditions that need to be present for one to consider a purchase?

    • Thanks for the piece.
      Trust you’re okay with the wholesale re-post.
      Agree that sentiment is unquantifiable… the whole idea of hitting the steep part of the sigmoid curve (or ‘the wall’, or experiencing a freeze up, or the idea of the market going ‘no bid’) makes sudden precipitous drops possible. Surprises are almost 100% likely to be to the downside.

  6. sorry, let’s face it too much RE is borsville … need some ballast … can >1M hits/day be wrong? … http://www.youtube.com/watch?v=9bZkp7q19f0

    • It’s not often ‘Nem’ is GobSmacked… But between Dr. J’s FortuneTelling and that MusicVideo I’m hard put to decide which is more suave… If there be DeepFried BlackSwans… They will likely manifest between LabourDay and mid October… In that regard… An historical retrospective… Let’s all jump into the WayBackMachine, shall we?….

      [NoteToEd: History sure is fun. Plus ça change, plus c’est la même chose. Hope our Rabbit’sFoot is still workin’!! 50/50 at best, ‘we’ reckon – I’d be more precise but somebody’s rationing ClockCycles… not, in itself, a terribly good indicator.]…

  7. The Chinese investment this year has slowed as the government of Canada has closed many of the business streams of immigration since last year such as investors, entrepreneurs which have attracted a lot of Asian applicants. Federal Skilled Worker was due to open on 1st July but has been put on hold until January 2013 as the program changes. Hence the number of Chinese coming to Canada fell by almost 50% this year. All three immigration streams are due to restart early next year but with different criteria than the current/old regime so we will see what transpires.

    • the HAM pipeline has dried up because of the end of Quantitative Easing II. Now we see a new type of QE, which is being done by stealth, but indicators are a-plenty, especially in the bond market. The stealth QE is probably the reason why pundits are calling for a slow step down in RE, and not an outright crash.

      • This HAM story driving Van’s market is a fallacy and will be proven one day soon. Lax and predatory lending (fraud) is what drove sales beyond fundamentals. Wondering why sales slowed? Because lenders can’t securitize MBS to offload their risk, nor can they insure in bulk as CMHC’s cap is nearing its limit. This is why lender’s uninsured mortgages are increasing.

        When buyers don’t have money to put down, lenders control demand. What you’re seeing is essentially the banks pulling the plug on themselves before they make a run on CMHC claims, and probably profit by shorting when the market goes down. It’s the same banking scheme all over the world that must be repeated in order for banks to survive.

        Vancouver, Toronto and the rest of Canada will eventually go down. How long is another story because policy changes and government intervention matter.

        And this is not 2008, rather the 1940s.

      • Renters Revenge

        Canadian Watchdog…
        Bingo, good comments.

  8. Where Freddie and Fannie are now…

    http://stockcharts.com/h-sc/ui?s=FMCC&p=D&b=5&g=0&id=p34641986152 classic bull trap

    “Under the changes proposed by the Treasury Department, Fannie and Freddie will be required to turn over all the profits they generate every quarter to the Treasury. Under the new terms, the two companies are also required to reduce their mortgage holdings to hit a cap of $250 billion by 2018. Previously, the two companies were required to reduce their mortgage holdings to hit a cap of $250 billion by 2022. In addition, the two companies will have to ensure that their portfolios are not larger than $650 billion each at the end of 2012. “

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