December 16, 2015
With sales soaring to 42% in November 2015, around 46% above the 10 year sales average for the month, November 2015 ended up ranking the second highest on record for residential sales since 1989. This Vancouver real estate market is surely an eyebrow raiser.
As you can see in certain Vancouver condo areas with high density residential areas, like downtown vancouver, coal harbour, west end and yaletown, many Vancouver condos have sprouted out like bamboo shoots and clocked in around 20-25% higher in price than last year.
The overall winner of course is single family homes with a whopping 25% increase in medium sale price for Vancouver in November 2015. With all this whopping statistics on the vancouver property market, what is the forecast for 2016? Are we staying on course? Is there a bubble forming?
Downtown 2 Bedroom Vancouver Condo Prices from Jan 2012 – November 2015
To the average trench dweller this is the key question, after all you are the one pulling the trigger and need to know your next move. In retrospect, you can see a few other soldiers on the wall of fame along the way that have indeed pulled the trigger and purchased (say 5 years ago). “They have been lucky,” you say to yourself, because the last ten years was the time to “get into the market.”
In a dining conversation you can hear yourself thinking that, “if you had been in their shoes 10 years ago, you too would have pulled the trigger!”
To illustrate how a 5/10 year hind sight is always 20/20, let’s go back 10 years ago and watch this video:
“New statistics show just how high the house prices have gone. Up 29% in the past year, and 80% in past 4 years. Average house prices in Greater Vancouver Canada now $705,000.”
Now think to yourself, how would you have felt if you were watching these headlines? They are quite similar to today’s headlines and yet people tell themselves the same old story again and again.
1) I wish I bought 5 years ago
2) The market is too expensive
This was the making of a great market with Vancouver prices rising a spectacular amount: 80% in 4 years.
You can certainly see just how much more the market has risen since then. My point here being: Hind sight is always 20/20.
Let’s go back now even further and step away from the trenches. Below is a chart of Residential Property Prices in Canada from 1970 – 2015. Also, it displays 3 other countries of interest to take note: 2 of them have had inflationary pressures, and the other, namely Japan, deflationary pressure.
For the 3 growth countries on the exhibit above, inflationary pressures have been at work for quite some time. How does a country create inflation? The answer is quite simple: By printing more money.
Milton Freedman is famous for saying “Inflation is primarily a monetary phenomena.”
Canadian Money Supply – 1970 – 2015
As you can see from the second graph, Canada has steadily been printing massive amounts of money since the 1970’s. In fact, I would argue that the world has been doing much of the same. When this happens more money is in circulation. When more money is in circulation, more money go to assets that are desirable, and in a world of uncertainty (especially with commodities crashing in 2015), the money is going to hard assets: real estate.
At this point, you may ask: how do Countries create money? Without getting too complex there 3 main ways: they can print it, they can lower interest rates, or increase Government expenditures.
Canada (and much of the Western World) has done the primary 2, lowering interest rates, and printing more money (lowering the bank reserves).
Now with Trudeau in power with a majority Government, his plans to increase Government Spending
is already unfolding. Increased Government spending means even more inflation.
If you have any doubts that Inflation is a phenomena of monetary supply, interest rates, and money easing simply consult this graph by wikipedia:
Now let’s turn to our local market, since real estate is local in nature. Vancouver has been a very interesting market to study because it has a great number of interesting local factors:
1. Vancouver does not have highways
2. Vancouver is land locked
3. Vancouver is in demand by affluent Asians
4. Vancouver is a beautiful city
5. Vancouver has a port that can export to the entire Asia/Pacific
6. Vancouver has what the world wants: oil, coal, lumber, potash, and much more resources
7. Vancouver has the rule of law (we follow the law!)
8. Vancouver has transit oriented development
So what happens when these factors are combined together? With Vancouver not having a highway and Vancouver real estate being landlocked, further price pressures build on the areas of East Vancouver, Vancouver West, North Vancouver and West Vancouver as well as other real estate areas such as Richmond and Burnaby. This is because no one, I repeat, no one wants to be stuck in traffic for 4 hours each day they go to work.
Why is Vancouver landlocked? We 1) cannot build north because of the mountains, 2) cannot build south or west because of the water, and 3) we cannot build east because of the agricultural land reserves (ALR) as they are designated to remain for agricultural use only. Further even if we did, traffic remains a huge issue as we don’t have highways big enough to sustain the demand of traffic.
In a nutshell, a rule of thumb in real estate is: Value grow where people go.
The fact that we do not have huge highways running through the arteries of these cities causes significant pressures.
To illustrate what the planners have done in Vancouver to ease such a situation, take a look at item 8 on our list above: Transit Oriented Property Development.
Next time you swing by a sky train station look at the amount of new condos in and around the sky train stations:
Nonetheless, these developments only ease the amount of inward migration Vancouver is currently taking in. Vancouver has what the world needs, and is desired by the world’s wealthy.
In the case of land, the prices have not eased as a result because Vancouver cannot build more land.
So if you are in the front lines now, it will be useful to take a look at the historical charts since the 1970s and other charts. Remind yourself of that chart and that the only thing we have consistently heard clients say in Vancouver has been:
1) I wish I bought 5 years ago
2) Prices are too expensive
I have been investing in this market myself for the past 15 years. It has been the same story told over again, the difference is which side of the story you are on. Long term, savers have been losers since the 1970s. The graphs do not lie.
On the other hand, markets are cyclical. We didn’t get here in a straight line. As such there will be ups and downs ahead. However, in the end, because of inflation and the unique Vancouver market conditions we are confident in Vancouver. As a seller its always a good time to reflect on this as well. As an investor, do you really want to sell when you look at these charts?
Last but not least here is a great infographic on the effect of the Oil prices and the Canadian dollar on our real estate market by MAC Marketing solutions.
Anyone care to pitch your thoughts? Please comment below.
Hope and wish you all a great Holiday season!