[vc_row][vc_column width=”1/1″]Part 2

Are Vancouver Real Estate Values Sustainable?

Short Version

• Yes.
• Easily.

Long Version

No doubt that question may seem laughable to some. The thing is, depending upon one’s age, this questions has seemed laughable to many since the 80s, 90s, etc. Perhaps the question worth asking is not ‘what if insert negative thing here happens’, but ‘what if the trends of the past 30 years (increasing prices and lower) interest rates) continue for another year, three years, five years, ten years?’

What if Good ensues?

Sitting on the sidelines gets pretty painful when things keep on going swimmingly and you are not a part of it.

I have worked with one client in particular… well, ‘conversed at length’ with a potential client… who has taken the wait-and-see approach since 2009. In 2009 he could have purchased his target detached home in Vancouver East for $650,000, and today that same property is cresting $1,000,000.00.

His resolve is weakening, but it is a moot point as he has been priced geographically east by ~15KM of his preferred neighbourhood. ‘Waiting and seeing’ has cost this client not only the capital gains and the preferred locations, but also (thanks to record-setting low mortgage rates) the significant mortgage balance paydown. He has paid in excess of $120,000.00 in rent to live in a comparable home that would have cost him $60,000.00 in interest to have purchased. Today his mortgage balance would be $60,000.00+ lower, and as rates remain at record lows, he would be into a second five-year term at record low rates.

None of this was hard to see coming, at least not for those of us who ceased paying attention to the hyperbole and Chicken Little stories that tend to permeate newspapers, TV news and talk radio.

If one looks at local history, two factors have caused price corrections or stagnation in the Vancouver market: economic crisis and (exceedingly) high interest rates.

Vancouver pricing corrections are historically short-lived and are rarely of tremendous significance to most of us. The statistical fact is that 99.69% of homeowners carry on making payments and pull through the tough times to the next round of appreciation.

Here’s a very interesting point with regard to the overwhelming majority of clients I work with: contrary to media suggestions that Vancouverites are all borrowing the maximum and buying at their outer limits, easily three out of four clients I work with borrow about 80% of the maximum they qualify for, and very few are carrying any significant levels of consumer debt.

The reality is that ~$13,000.00 in consumer debt cancels out ~$100,000 of mortgage money one would otherwise qualify for. One cannot easily enter into home ownership with a mortgage of any significance while carrying any serious level of debt.  And once one owns a home, that payment becomes the priority (as arrears statistics clearly show) and significant consumer debt does not follow.

We are all as prudent as each other, yet we all fear the other is far less prudent that us, and they fear we are not as prudent as them.

Sustainable market reason #1 Many buyers/owners can afford to pay still more for homes than they are currently valued at.

Economic crisis

The last major correction, in 2008/2009, was due to a worldwide economic crisis. Blanket economic conditions like this typically reduce prospective purchasers’ power (via decreased employment) as well as hampering most potential buyers psychologically, as we humans (me too) tend to illogically buy high and sell low. Indeed few of us purchase in the declining market of 2009, yet many of us are now lining up to place subject-free offers, above asking price, in multiple-bid contests in an ever-rising market.

Yet this madness will continue. We have increasing demand, and a limited supply. Prices will be forced upward.

But what if?

OK, one key trigger of a large drop in values would be a large drop in employment and/or incomes. Assuming there is some unforeseen fundamental shift downward in unemployment, then yes, there will be an increase of supply on the market, and with that increased competition for a smaller pool of buyers (remember most buyers in this scenario are out of the market as they too presumably lost jobs) with corresponding low sales volumes — similar to what occurred in January to March of 2009.

Mind you, I would suggest that any major price reduction (i.e. 15% or more) would trigger to some extent a noticeable increase in migration from Eastern Canada as retirees suddenly notice a sale on homes in a more tenable climate (note the non-winter of 2014/2015). There is little question that we live in a highly desirable city.

In hindsight, regarding 2009 one must also consider the impact on sales activity that record-setting snowfall throughout the month of January 2009 had on a city that slides to a crashing stop functionally with not much more than a 1-cm dusting, let alone the multiple feet of snow we received that month.

Economic crisis or not, January 2009 was doomed to inactivity by weather alone.

Also prevalent into the spring of 2009 was a ‘world is ending’ psychology that had many buyers sitting on the fence waiting for deeper drops. Then, before those fence sitters knew it, prices were on the way back upward and the window of opportunity had closed.

Employment drives values. Thus far Vancouver has proven a robust and resilient employer.

Sustainable market reason #2 The economic havoc of 2008/2009 proved to be little more than a speedbump for Vancouver real estate values. If we can weather that storm, surely there is little, short of a zombie attack, that will motivate tens of thousands of us to pack and leave town.

Interest rates

Bubble-logic claims that Canadian home buyers are depending more so than ever on historically low interest rates, and when rates rise, buyers will drown in debt. All hell will break loose.

Think about the irony demonstrated in the next two stats cited in a 2012 CAAMP presentation;

• 83% of Canadians are comfortable with the amount of equity in their own homes. (Half are mortgage free.)
• 77% of Canadians believe that low rates mean many Canadians own homes who should not.

Re-read that: Canadians individually believe they personally are OK, but are worried about their neighbours… and vice versa.

How very Canadian of us, always concerned about others.

Canadians put mortgage payments above all else. Current arrears rates in Canada for CMHC-insured mortgages, arguably the ‘riskiest’ of the bunch, have dropped steadily from a 2008/9 peak of 0.45% to 0.31%, now approaching historic lows. It should be noted that in 1992, and in 1997, the arrears rate peaked at .65%, more than double today’s level (still a very low number). All the while, home prices trended in an upward arc.

It would seem that Canadians are in fact having less trouble with regard to making their mortgage payments than in previous years, despite carrying larger average mortgage balances, balances incidentally which are in line with our rising incomes.

Based on a 99.69% rate of compliance with mortgage repayment by Canadian homeowners, it seems reasonable to suggest that things are perhaps more stable than the Chicken Littles would have us believe.

What if interest rates double? Rising or falling interest rates have little to no day-to-day effect on the 47% of mortgage-free Vancouver homeowners. As for the balance of homeowners, the impact is nowhere near as dramatic as one might expect. It should also be considered that over 80% of new mortgages written in 2013 were 5-year fixed below 3%. A spike in rates does not affect many homeowners until 2019.

There is little evidence of rate hikes for clients in variable-rate mortgages any time soon either. Clear statements have been made by the Bank of Canada regularly, such as ‘All we’re really doing is being honest that at this stage, we think that interest rates will stay where they are for quite some time…’

In fact for variable-rate clients, yet another drop in Prime may well happen before an increase does.

Sustainable market reason #3 Many are locked into longer-term low-rate mortgages that are driving mortgage (renewal) balances down at a record pace.

KEY POINT – Count on longer amortisations returning with higher rate.

Here’s an example. (100K increments used for simplicity)

$100,000 over 25 years at 2.64% fixed for 5 years = $454.97  per month.

After 5 years the balance is down to $84,875.21

$84,875.21 over 40 years at 5.86% fixed for 5 years = $454.61 per month.

At 5.86% we would, of course, look to shorter terms, and thus lower rates in reality. And no, taking your mortgage out to 40 years, five years later is not desirable at all. However it beats losing the home, and simply indicates the sort of options that do and will exist to keep arrears rates where they are, at less than .50%.

If interest rates spike there will be a wave of foreclosure deals… um, not likely.

The  Canadian foreclosure system is heavily biased in favour of keeping people in their homes, long after they stop making payments on them in fact. A lender can take 18 – 24 months to effectively remove people from a home once they cease making payments. It is not uncommon for a sale date on a foreclosure to be over two years beyond the date of the first missed mortgage payment. Once a judge approves said sale the lender is then obligated to track down the original homeowner and pay them out the remaining equity as well.

It is a very Socialist process, one that should make us proud to be Canadian.

What this means is that with an overwhelming majority of  Canadians in very low-rate fixed mortgages, (~80% in ~3% 5-year fixed from 2013) a rate-spike would not start to hurt many homeowners until 2018-2020. Allow for a few months of payments made before slipping behind, then add in another two years for the entire foreclosure process to get to the point of the property being sold and we are talking about my aforementioned client sitting on the sidelines for yet another six-plus years, or until 2022, all the while paying rent and living in a world of inflation rates outpacing savings rates.

His mortgage would be 50% paid off by that point, and the 650K home likely worth 1.25M in 2022.  Perhaps more.

This ‘wait and see’ has not proven a realistic plan so far. Nor is it today.

In summary, I suggest to you that Vancouver home prices — in particular detached-home prices — will continue to defy logic and trend upward for the remainder of my own life.

I will not be sitting on the sidelines.

It is often said that life is short. Lately I find myself suggesting to clients (and myself) that ‘life is long‘.  In fact, it is too long to rent, and too long to wonder ‘what-if-this-negative-thing’.

Instead I suggest living a life of ‘what if more of the same general trends ensue?’

Next post, Are we truly being objective with our use of the word ‘unaffordable‘?

Thank You

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Dustan Woodhouse[/vc_column][/vc_row]