Reverse Plankton Theory in Vancouver Housing

Steve Saretsky -

Famed US fund manager Bill Gross is well known for many reasons, one of them was his creation of ‘The Plankton Theory‘, or as best described by Gross as, “In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton.”

While I will stop short of saying “this time is different”, it appears the Plankton theory is actually working in reverse in the Greater Vancouver housing market. Steep price declines have made headlines, although they are largely concentrated in West Vancouver where luxury houses at the high end of the market have been slashed upwards of 50% in some extreme cases. However, deep down in the bottom of the sea where the plankton swim, entry level condo price declines have been somewhat moderate, at least for now.

When we look at Greater Vancouver condo prices by bedrooms it appears that once again the higher end of the market has taken the biggest blow. The average price per square foot for a 3 bedroom condo has tumbled 11.6% year-over-year in May. Contrast that to 10.9% for 2 bedroom condos and just 3.1% for one bedroom units.

Vancouver condo prices
Average price per square foot for condos by number of bedrooms.

This segmented activity is also reflected in the sales to actives ratio, which is a metric used to determine how many homes listed for sale are sold in a particular month. Generally anything above 20% is considered a sellers market, however that should be taken with a grain of salt as I think it’s safe to say we are in anything but a sellers market. Regardless, the sales to actives ratio for 3 bedroom units is 13%, 19% for 2 bedroom, and 27% for one bedroom units.

Sales/ actives ratio for Vancouver condos by bedroom type.

Instead it appears to gauge the health of the housing market, Vancouverites must look first at the whales. Entry level home buying has been facilitated through trickle down economics. Rising equity in existing homes has increased access to capital through home equity loans which have helped fund purchases for first time buyers, secondary homes, and pre-sale investment condos. Home equity loans are much more predominant today in Canada than in the US. On a per capita basis, HELOC balances in Canada were $4,849 in October 2018, more than quadruple the $1,080 in the U.S., according to Bloomberg calculations based on DBRS and Federal Reserve data. That would equate to ~$67 billion on the chart.

US home Equity Cashed out. Source Hedgeye

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