The New Yorker – Vancouver RE As A ‘Hedge’; “Zombie Neighbourhoods”; “The rest of us better get used to being tenants”

“The most expensive housing market in North America is not where you’d think. It’s not New York City or Orange County, California, but Vancouver, British Columbia. Now, Vancouver is a beautiful city—a thriving deep-water port, a popular site for TV and movie shoots. By all accounts, it is a wonderful place to live. But nothing about its economy explains why—in a city where the median income is only around seventy grand—single-family houses now sell for close to a million dollars apiece and ordinary condos go for five or six hundred thousand dollars. “If you look at per-capita incomes, we look like Reno or Nashville,” Andy Yan, an urban planner at the Vancouver-based firm Bing Thom Architects, told me. “But our housing prices easily compete with San Francisco’s.”

When price-to-income or price-to-rent ratios get out of whack, it’s often a sign of a housing bubble. But the story in Vancouver is more interesting. Almost by chance, the city has found itself at the heart of one of the biggest trends of the past two decades—the rise of a truly global market in real estate.

A recent report by Sotheby’s International Realty Canada examined more than twelve hundred luxury-home sales in Vancouver in the first half of 2013 and found that foreign buyers accounted for nearly half of sales.

Vancouver isn’t an obvious superstar. It’s not home to a major industry—as New York and London are to finance, or San Francisco to tech—and it doesn’t have the cultural cachet of Paris or Milan. Instead, Vancouver’s appeal consists of comfort and security, making it what Andy Yan calls a “hedge city.” “What hedge cities offer is social and political stability, and, in the case of Vancouver, it also offers long-term protection against climate change,” he said. “There are now rich people around the world who are looking for places where they can park some of their cash and feel safe about it.”

The globalization of real estate upends some of our basic assumptions about housing prices. We expect them to reflect local fundamentals—above all, how much people earn. In a truly global market, that may not be the case. If there are enough rich people in China who want property in Vancouver, prices can float out of reach of the people who actually live and work there. So just because prices look out of whack doesn’t necessarily mean there’s a bubble. Instead, wealthy foreigners are rationally overpaying, in order to protect themselves against risk at home. And the possibility of losing a little money if prices subside won’t deter them. Yan says, “If the choice is between losing ten to twenty per cent in Vancouver versus potentially losing a hundred per cent in Beijing or Tehran, then people are still going to be buying in Vancouver.”

The challenge for Vancouver and cities like it is that foreign investment isn’t an unalloyed good. It’s great for existing homeowners, who see the value of their homes rise, and for the city’s tax revenues. But it also makes owning a home impossible for much of the city’s population. And the tendency of foreign buyers not to inhabit investment properties raises the spectre of what Yan has called “zombie neighborhoods.” A recent study he did found that a quarter of the condos in a luxury neighborhood called Coal Harbour were vacant on census day.

One option would be to severely restrict foreign ownership, but that’s politically difficult, and not great for a city’s economy. It might make more sense if the Vancouvers of the world simply charged foreign buyers a premium for the privilege of owning there. “We’re one of the places where people seem to want to park their cash, and there aren’t that many of those places,” Yan says. “So let’s raise the parking fees.” As for the rest of us, we’d better get used to being tenants.

– heavily excerpted from ‘Real Estate Goes Global’, James Surowiecki, The New Yorker, 26 May 2014

When the New Yorker mentions Vancouver RE, that deserves a post.
– ed.

12 responses to “The New Yorker – Vancouver RE As A ‘Hedge’; “Zombie Neighbourhoods”; “The rest of us better get used to being tenants”

  1. “When the New Yorker mentions Vancouver RE, that deserves a post”

    Many seem to agree, though if I hadn’t seen the publisher, I might, perhaps would, have deprecated the story based on several omissions of fact.

  2. dian's gorilla

    locals burning down empty houses… seems to be the trend now in places where you have itinerant ‘travelers’ speculating on their holiday resorts and safe harbor strategems.. .See the story on Corsica, for instance. Other places we hear this occurring, but where good ol’ mainstream press keeps silent… lest this goes viral..

  3. “…it also offers long-term protection against climate change.”…

    Hmmm…

    [G&M] – Flood projections show dire future for Lower Mainland’s coastal areas

    …”While flooding last year in Calgary and Toronto has served as a graphic preview of a world facing more extreme weather, Vancouver faces a grimmer situation. The city is one of the world’s most exposed ports to damages from sea-level rise, with the Organisation for Economic Co-operation and Development ranking Vancouver 15th out of 136 large port cities for future risks.

    Current flooding projections show a dire future for much of the Lower Mainland. By the end of the century, Vancouver’s airport, as well as large swaths of Richmond and Surrey, could look like the Netherlands, lying below sea level and protected only by an extensive network of dikes.”…

    http://www.theglobeandmail.com/news/british-columbia/flood-projections-show-dire-future-for-lower-mainland/article18861715/

    [NoteToIllustriousEd: Just between the two of us, I’d always thought Holland was progressive – but until just now, I’d no idea that their territorial integrity was exclusively maintained by “an extensive network of dikes”.]

  4. vancouvers climate is so cold, you never have to worry about global warming

  5. It might make more sense if the Vancouvers of the world simply charged foreign buyers a premium for the privilege of owning there. “We’re one of the places where people seem to want to park their cash, and there aren’t that many of those places,” Yan says. “So let’s raise the parking fees.”

    I couldn’t agree more! And while our Gov. milks that cash cow, lower the property taxes for those of us that were born and raised here.
    Kim Wilson, Vancouver, B.C.
    AKA: Doty’n Willy
    AKA: Kim from Canada Eh
    AKA: Uncle Willy @US1
    AKA: Uncle Willy @EN1
    AKA: Uncle Willy @WWW1

  6. “We’re one of the places where people seem to want to park their cash, and there aren’t that many of those places.” – Andy Yan

    This is yet another variation on BPOE. Notice how Yan doesn’t actually mention any other places — easier to dismiss the rest of the world out of hand. It’s the kind of feel-good statement that elicits thoughtless nods from the locals.

    Fact is, there are MANY equally desirable, politically stable places around the world in which to invest. Much of the U.S., Europe, parts of Asia, the list goes on. Indeed, given the egregious overvaluation of Vancouver RE, I would argue it’s currently one of the least desirable places to “park cash”. Like parking cash in Nortel at $125.

  7. Solution is to create a homestead class. To qualify you must be Canadian Citizen and use home as a principle residence. Homestead is taxed at 50%-75% of current rates and capped for yearly increase. Non-homestead taxes follow market value and increase to offset. Florida does this quite effectively. Make the investors and foreign owners pay for the privilege of driving up real estate.

  8. One thing that puzzles me with this issue is that many folks claim that the bubble is blown up by leverage, and other factors are insignificant. Vancouver is 22nd in Canada for median income, and #1 for housing prices. If leverage is the factor, how is it that Vancouver homeowners are able to borrow so much more than people in other parts of Canada? Are there special lending policies that pertain only to this market, or are other factors at play?

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