Ponderings of a Portfolio Manager: Vancouver Area Real Estate

Robert Luft

August 21, 2018

Factors that could cause real estate market prices to fall in Vancouver

Over and above anecdotal realtor speak, hear-say or conjecture, or simply unsubstantiated opinions, let’s look at some of the hard and fast facts of why this market will continue to pull back.

At the top of the list of qualitative factors, I believe, is sentiment. We all know humans exhibit Predictably Irrational behaviors. When an asset class wins, they want more, as it declines, they recoil in fear. I believe this has started. The negative media and secondary “chatter” amongst the average individual has increased monumentally.

What about Qualitative factors, however?

Mortgages

The new B-20 stress test has taken a significant bite out of affordability.

With the rate at 5.34% and the best 5 year fixed at 3.19% that means you have to qualify at 5.34% the bank of Canada qualifying rate.

Let’s look at an example: There are 144 homes for sale in North Vancouver over 2 million dollars. If we look at the cheapest, at $2.065 million, with 20% down of $413,000, you need a $1.652 million dollar mortgage. Over 25 years on a 5-year term that is $7980 per month.

However, qualifying at 5.34% that payment jumps to a whopping $9930 per month! The effect of B-20 on this buyer, even with 20% down, is an increase in costs of 24.4% per month.

What kind of actual income do you need to qualify pre-tax for a 1.65 million dollar house with $413,000 down?

• Someone with $350,000 of pre tax income qualifies at 3.19% for a 1.9 million dollar mortgage.
• Someone with $350,000 of pre tax income qualifies at 5.34% for only a 1.466 million dollar mortgage. This is a massive 23% DROP in affordability.

Income of Vancouver Households

Who can actually afford these homes?

According to the 2016 income census from stats Canada, Vancouver has 960,890 households. The median taxable reported income of those households was $63,365 (this matters as you can’t lie and get a mortgage any more through conventional sources.)

According to the National Household survey of 2011, only:

• 10% of Canadians had incomes over $80,400 in 2010
• 5% had income over $102,300
• 1% had income over $191,000

That means there are only about 9600 households in Vancouver that could even qualify for these homes based on their income, if they require ANY mortgage to do so.

According to one US Census, the average person moves 11.7 times in their life. Therefore, if 10% of these people move in a year, that is 960 people moving out of 960,000 households that can acquire $2 million plus properties in the entire lower mainland.

Foreign Ownership

So, who could be buying these homes? Obviously, only people who don’t require mortgages. And who could that be?

• People lucky enough to have purchased real estate prior to 2001 and seeking to either leverage up or change communities, which is unlikely. The majority of these households would be late stage baby boomers ages 60 plus, and now in asset decumulation mode. This would explain increases in secondary markets like Vancouver Island and Kelowna as assets are sold and people downsize.
• Foreign capital: buying and borrowing through numbered holding corporations, or directly through relatives who are resident. When CMHC, released statistics about foreign ownership being close to 4.8% in BC, this was for non-residents only and the data was mainly on the condo market.

Of 30,000 surveys sent out by CMHC to new homebuyers for this study, only 664 people in Vancouver returned them.

Does anyone actually believe that if you are trying to hide your foreign ownership through a subsidiary in Canada (personal or corporate), that you would fill out and return a survey to a government agency like CMHC?

These CMHC surveys do not capture:

• Astronaut families: wife/children in Vancouver, husband overseas
• Inter familiar private deals: non-resident real estate owner gifts funds to a resident in Vancouver, who claims the funds are theirs, then purchases the home
• Numbered holding companies, who do not have to report their beneficial owners: The new registry from the BC Government will be addressing this.

If foreign buyers were influencing the housing market, then the Vancouver real estate market could continue to revert to the mean of current affordability. This could mean 20 percent price declines due to:

• A 20% plus drop in affordability amongst all borrowers
• Extreme changes in sentiment
• Further government intervention

Once the prices at the high end of the market falter, the attached market will not be far behind.