Condo Prices Exploding

Just Sold: 1000-1675 Hornby Street
Assessed: $3.29M
Asking: $4.5M
Sold: $5.06M
Selling price 54% higher than assessed value.

Just Sold: 2806-583 Beach Crescent
Assessed: $994,000
Asking: $1,468,000
Sold: $1,681,800
Selling price 69% higher than assessed value. Lots of eights in those numbers, I wonder where the buyer is from…

Two “02” floor plans at 939 Homer Street
2702 – Sold January 25, 2016 for $561,000
602 – Sold May 9, 2016 for $685,000

In less than four months, the same floor plan (771 sq. ft. 2 bed/1 bath) on a much lower (no view) floor sold for 22% more than the previous unit. Assessed value on #602 is $404,000 — sales price was 69% higher.

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Investing, Vancouver Style!

Vancouver may not be a truly world-class city, but when it comes to real estate investing, it has plenty examples of world-class stupidity.

Here is one such example in Richmond. At only $2,200,000 it’s one hell of an “INVESTOR OPPORTUNITY”.

9631 Odlin Rd, Richmond

9631 Odlin Rd, Richmond

INVESTOR OPPORTUNITY, SCHOOL INTERESTED! LIVE IN AS WELL: SOLID 2×6 construction CUSTOM BUILT 7 BDRM family home. This 50 x 248 property offers RADIANT HAET, LARGE ROOMSSPACIOUS sundeck and patio. EXPANSIVE BACKYARD. Whole house rented for almost $3000 per mo. Long time tenant. Lots of car parking. Close to Sky Train. Easy access to Oak & Knight Str. bridges and to Ladner, Delta and Surrey. All measurements approximate.

Even with record-low interest rates, the carrying costs on this place are more than double the “almost $3,000” rent. With a 20% down-payment and 2.59% 25-year mortgage, the monthly payments are $7,976/month. Add to that the monthly property taxes of $345 and the monthly carrying costs are $8,321. The annual negative cash flow is almost $68,000.

Even when you consider the $50,816 of principal pay-down, this investment still loses over $17k per year — and that’s only if nothing needs repairs and there are never any vacancies or missed rent payments.

That $17k annual loss on a down payment of $440,000, gives a return on this “OPPORTUNITY” of negative 3.9%. Again, that’s the best-case scenario. But at least it comes with “lots of car parking”.

Our next example is close to UBC.

4639 W 9th Ave, Vancouver

4639 W 9th Ave, Vancouver

2 level 3 bedroom UP +3 bedroom down very functional solid Vancouver special style home in the most prestige Point Grey area. Walk distance to bank, shop, bus station, golf course and everything. Well maintained original condition offers hardwood fl throughout on the main, big size of bedrooms, 2 car attached garage plus a huge sundeck at the back. You can either do some renovation to move in or rent it out for 4000/per month to hold. Excellent School Catchment: Queen Mary Elementary, Lord Byng Secondary.

You can either “do some renovation to move in” or rent it out for $4,000. You didn’t really expect to find a move-in ready place for only $2,380,000 did you?

With the same financing assumptions as the first example, the monthly mortgage on this home is $8,628. Add in the $620 property tax and the total carrying costs are $9,248/month.

The annual cash bleed is $62,976. When you add in the $54,974 principal reduction, it gives the buyer a return of negative 1.7% on the $476,000 down payment.

Any rational investor would expect to earn a positive return on his investment, especially one as risky as residential real estate. But this is Vancouver! People buying here have no interest in making a sound financial investment. They are either looking for a safe place to park their money, speculating on never-ending appreciation or afraid of being priced-out forever.

The High Cost of the ALR

As I pointed out last month, the biggest obstacle to residential development isn’t the mountains, ocean or US border — it’s the Agricultural Land Reserve (ALR). To illustrate the point, let’s take a detailed look at the City of Richmond.

Here is an aerial shot of the city, where you can see that about 40% of the total available land has been dedicated to agricultural uses.

Richmond BC Aerial View

And even though the population of Richmond has increased by about 75,000 since 1989, the ALR within the city has actually increased slightly since then.

ALR HectaresSince the early 1970s when the ALR was created, the population of Metro Vancouver has more than doubled, and the average detached home has increased more than ten-fold! What started out as a good idea, is now creating more problems than it solves.

Inefficient Land Use

There are approximately 211 farms operating on 3,072 hectares in Richmond. As of 2011, they were producing $48.6 million annually.

Considering that fifteen standard single family homes can be built per hectare, each standard single family lot in the ALR is currently generating about $1,055 worth of crops per year — which probably translates into $200 of profit.  When you further consider that the standard lot in Richmond is currently assessed in the neighbourhood of $800k, the effective yield on ALR land is only about 0.025%. Not a very efficient use of a precious resource!

Lost Property Tax Revenue

Property taxes on agricultural land vary considerably depending on parcel size and use. Here is a sample of seven randomly chosen parcels within the ALR:

RK TAXES

Property taxes for agricultural land are significantly lower than they are for residential properties. Taxes generated from this (admittedly small) sample average $398/ha.

The average residential property is taxed at about $50,000/ha. Building houses on this land instead of growing crops could potentially generate an additional $150 million per year in tax revenue for the city.

Inflated House Prices

Of course, the biggest drawback of reserving so much land in the middle of the third biggest metropolitan area in Canada is inflated house prices. The median priced detached home in Richmond has now reached $1,155,500. More than $800k of that cost is just for the land. If the ALR wasn’t restricting development so much, a Richmond lot would cost several hundred thousand dollars less.

In 2014, there were 1,692 detached home sales. Opening up just half of the ALR in Richmond to residential development would be enough to build over 30,000 detached homes — almost 18 years worth at current sales rates.

And to anyone concerned that the loss of 2,500 hectares of ALR will damage our ability to feed ourselves, don’t worry. This is only 0.053% of the 4,700,000 hectares currently in BC’s ALR.

Time To Re-evaluate

The housing crisis in the Lower Mainland has reached a point where serious changes will need to be made. Since we are unable to affect interest rates — and the government seems unwilling to address foreign capital flooding into the region — it just might be time to re-evaluate the Agricultural Land Reserve.

Forcing families to fork out several hundred thousand dollars more for a home so we can grow $1,055 worth of blueberries instead doesn’t seem like the wisest course of action. And it certainly doesn’t put families first.

Is Supply The Problem?

Now that it’s been shown high-end properties are appreciating more than lower priced homes, many are convinced that this is proof foreign capital is affecting Vancouver housing prices significantly. Others are downplaying the influence of foreign money and are claiming that lack of detached housing supply is responsible.

At last month’s speech to the Urban Development Institute, Bob Rennie told the audience, “If we don’t change things from today’s climate of ‘I want a detached home in a city that can’t provide it,’ we could run the risk of our worst fear ever: a Vancouver city ending up as a resort city”.

And here is what Vaughn Palmer said last week:

…prices for detached single-family homes are being driven upward by two factors that have little to do with real estate speculation and/or foreign ownership. Rather, it is because they aren’t building them any more in Vancouver and the existing stock is shrinking, owing to the trend toward densification, when detached homes are torn down and replaced with multiple dwellings.

The supply is shrinking and everyone wants one? Of course prices are soaring.

The problem with these statements from Palmer and Rennie is that they are only looking at the City of Vancouver, where single family homes are indeed decreasing in number. But this is true in older areas of just about every city — newer single family homes are built in the suburbs. When you look at all of Metro Vancouver, thousands of single family homes are still being built each year.

VancouverSFHStarts

As far as the “trend toward densification” is concerned, it’s been going on for decades. Why have detached homes only recently appreciated more than condominiums? The recent rise in foreign capital flight correlates much more closely to these recent gains than the long-term trend of densification.

As mentioned in a previous post, the initial stage of the bubble (which I refer to as ‘Phase 1’) saw relatively equal rates of appreciation among all property types.

Phase1However, in the second phase of the bubble, price movements have been diverging. Properties popular with foreign buyers have been appreciating much more than prices where locals are buying.

Phase2Since 2009, single family homes in Richmond have appreciated 79% more than homes in New Westminster, while detached homes on the west side of Vancouver have appreciated a whopping 178% more. Why did this happen during in this second phase of the bubble, but not the first?

If lack of single family home supply really is the problem, why haven’t detached homes in places like New Westminster and Maple Ridge appreciated more than the benchmark condo? What explains this recent divergence?

As I concluded in my post from last month, all the evidence points to foreign capital driving the single family home market on the west side of Metro Vancouver — not lack of supply.

Voodoo Housing Economics

There was an interesting exchange yesterday in the BC Legislature between John Horgan and Christy Clark regarding the Vancouver housing market.

Mr. Horgan asked Clark several times to give her thoughts about, and plans to deal with the severe affordability problem. After several rounds of “we’re working on it, stay tuned”, Clark finally gave the following response.

The member asks: what about others, particularly Vancouverites, who are faced with this? I’ve given him my answer to that, but I will also say that affordability in the city of Vancouver is a major issue that we need to address. We need to attack it from a number of different fronts. We do need to be careful as we attack the issue, though, that we don’t go about reducing the equity that people have in their homes already. We need to make sure that the solutions we find for affordability across the board, particularly in Vancouver, aren’t ones that have unintended consequences that end up robbing people of equity that they’ve built up over the years.

This is not the first time Christy Clark has expressed a desire to see improved affordability in Vancouver — but without the “unintended consequences” of lower prices. I’m not sure why it’s so hard for her to understand that lower prices are the only real solution to the current problem.

On the other hand, if she somehow comes up with a way to lower housing prices without lowering housing prices, the Nobel Prize committee would probably be very interested in hearing about it.

Why The Liberals Like Unaffordable Housing

Yesterday, BC Finance Minister Mike de Jong added his voice to the chorus of BC Liberals who are afraid that stopping the influx of foreign capital or taxing speculators could have the undesirable effect of making homes more affordable.

“You have to be careful about having the state intervene to try to regulate pricing, or depress pricing. Those who are expressing a concern, if you really assess what they are seeking, it is a reduction in the value of homes in Vancouver and that will have consequences for a lot of families”

It’s interesting that the Liberals don’t seem too concerned about the “consequences for a lot of families” caused by the incredible decrease in affordability over the last 10-15 years.

Is he really worried about families? Or is there something else the Provincial Finance Minister — who’s had a hard time balancing the books lately — might be more concerned about?

BC Property Transfer Tax History

Property Transfer Tax revenue has tripled over the last decade. Affordable housing could create a big hole in the budget that Mr de Jong would have a hard time filling. But I’m sure he’s really concerned about families…

Is Speculation Really The Problem Now?

Yesterday, Gregor Robertson called for a speculation tax to help bring down housing prices.

We definitely need taxation tools that discourage speculation on real estate,” a statement from Robertson says. “It’s clear that rampant speculation on real estate is driving up prices in Vancouver. Vancouver needs the B.C. Government to take action on creating a speculation tax and recognize that we need a fair and level playing field to make housing more affordable for residents in Vancouver, and throughout the province.”

However, later in the day the BC Liberals repeated their apparent desire to keep housing prices from falling.

The ministry of finance responded with a statement late Friday, saying that “governments need to be careful that any tax would have the desired effect, without undermining the equity that people may have built up in their homes.”

As pointed out in Mystery Solved?, price increases over the last five or six years are being driven by the high-end. This is not indicative of a speculative market since very few people have the means to flip multimillion dollar homes. Tsur Somerville of UBC’s Centre for Urban Economics agrees.

“Think back to 2006 when people would line up overnight to buy a pre-sale condo then flip it within 30 days. That’s the sort of thing one would be looking for as proof of rampant speculation. There is very little evidence that is happening in the market right now.”

Instead, recent price gains are most likely coming from a massive inflow of offshore wealth into the region. And unlike the condo flipping of several years ago, these recent high-end buyers are looking for a safe place to park their wealth for the long term. They don’t appear to be speculating.

The effect this flood of offshore wealth is having on the Vancouver real estate market is undeniable. The frustration of Vancouverites seems to be reaching a tipping point, and they are finally starting to demand action by their elected officials.

But since speculation doesn’t appear to be the driving force in recent price gains, why is Robertson proposing this speculation tax now? Could it be just a diversion to take the heat off foreign capital inflows? A way to appear proactive, without actually solving the affordability problem?