Despite the recent volatility in the Vancouver housing market, affordability challenges persist. There are certainly hopes that the record 45,000 units currently under construction in Metro Vancouver should provide some relief in the near future. However, the reality is, the cost of construction and government taxes remain a barrier, perhaps artificially putting a floor under new home prices in the long run- unless the cost of construction which includes labour, materials, and government taxes decline significantly. Possible, but unlikely. A new report from Altus Group suggests Vancouver construction hard costs are the highest in the country. Hard costs include expenses directly related to the physical construction of a building. As you can see in the chart below, condo construction hard costs start at $220/sqft for concrete construction. Keep in mind this doesn’t include soft costs. Soft costs include items such as architectural fees, legal fees, re-zoning costs, community contributions, Government taxes, financing costs, and more. This can range anywhere from an additional $100-$200/ sqft across Metro Vancouver. In other words, to build a low/mid rise concrete condo in Vancouver, you could be looking at all in building costs of $500/sqft. Now throw in the cost of land, currently sitting at an average price

The Bank of Canada has announced it will begin purchasing 10 year fixed rate Canada mortgage bonds. Before anyone gets confused, this is not QE (quantitative easing) but rather, it is balance sheet management, where the central bank routinely purchases assets to offset its liabilities, which consist mainly of bank notes in circulation and government deposits. However, the timing of the announcement suggests a few things. Stephen Poloz and the Bank of Canada have stressed a desire to curb interest rate renewal risks in the housing market. By purchasing 10 year bonds it seems they are attempting to influence the cost of 10 year mortgage debt and should also provide the Bank of Canada more control to mitigate the risks of rising borrowing costs in the event of liquidity issues. In a recent speech Poloz noted, longer mortgage terms would “mitigate the normal risks in the system both for lenders and for borrowers.” Adding, “More choice for borrowers and more ways for lenders to diversify risks are desirable. To be clear, the system is not broken—it has served Canadians and financial institutions well. But we should not stop looking for improvements.” While this is all very early stages, it seems there

The Coronavirus outbreak, with more than 2100 positive cases and growing, could not have been more ill-timed, given the official commencement of Lunar New Year this past weekend. The annual holiday typically results in an uptick in economic activity, when around three billion travellers crisscross China over the 15-day period that’s known as the world’s largest annual human migration. With Chinese officials taking drastic measures, including, ordering all travel agencies to suspend sales of domestic and international tours, it could send shockwaves across the globe. On Saturday, the first day of Lunar New Year, Chinese transportation dropped by 28.8% from the same day last year, while railway transportation fell by 41.5%, roads 25%, and passenger flights by 41.6%. Chinese tourists, the biggest source of outbound travellers worldwide, spent $130 billion overseas in 2018. Chinese tourists are also the world’s biggest spenders on luxury goods, snapping up everything from fancy watches and handbags to Vancouver condos on overseas trips. Indeed, the local impact on cities such as Vancouver could prove challenging, especially for some luxury condo projects hoping to cash in on a wave of buyers this time of year. Vancouver Developers have been ramping up advertising, promoting a bevy of incentives and discounts for Lunar New

I had some of my comments featured recently in a Vancouver Sun article tilted, “Vancouver’s Luxury Builders should be nervous“. I’d like to add some further context as sometimes words can be misunderstood. There’s no doubt a trend transpiring across global property markets, a surplus of new luxury homes sitting on the market. A huge reason for this is the pullback from Chinese investment. Recent weakness in the Chinese economy, combined with tighter currency controls, has left property developers across the world, scrambling to fill the void. Vancouver is just one of many cities facing the same difficulties, if you want to call it that. The housing market has basically switched back to a more local driven market, that has become increasingly price sensitive. This has left some developers with a glut of luxury homes. See case and point below for available inventory in some of Vancouver’s more expensive projects – courtesy of our friends over at Altus Group. The pre-sale market has certainly shifted from the boom years of 2015/2016 when capital flight out of China ultimately peaked. As a result, more developers are transitioning to purpose built rental development (currently at record highs) and product that caters more

The Surrey building boom is in full swing. As mentioned in Daily Hive the other day, there was a record $2.3B worth of building permits approved by the municipality of Surrey in 2019. That number includes residential, commercial, and industrial building permits. “The economic confidence in Surrey has reached new heights and breaking the $2 billion mark in building permits is uncharted territory for our city,” said Surrey mayor Doug McCallum. Residential permits were actually down slightly from 2018, but still near record highs. However, that won’t slow the number of new homes coming to market soon. As of December 2019, there are 5579 housing units under construction in Surrey. Adding to that, we should expect to see housing starts remain fairly robust, assuming several large high-rise condo towers get off the ground. There remains quite a few unsold units though, potentially delaying the construction of these projects. There are clear signs of price sensitivity above $800/sqft.  

This post is from the Monday Morning weekly Newsletter. You can join Here. The Bank of Canada is set to make its first interest rate decision of the year this Wednesday. While market odds expect the central bank to remain on hold, the outlook is anything but set in stone. The Bank of Canada remains one of the only major central banks that hasn’t aggressively eased monetary policy over the past year, and with economic data beginning to sour, the pressure is certainly mounting on Governor Poloz. On one hand, the economy is slowing, on the other, all signs point to further inflation in the housing market. National sales were up 22.7% year-over-year in December, a big jump from a disastrous 2018. The reality is, home sales continue to hover above the ten year averages, and in most major markets, prices continue to rise. This pushed the national home price index higher once again, up 3.5% from last year and clearly trending higher. However, the real story here is what appears to be the unintended consequences of prolonged real negative interest rates. Canadians are hoarding houses, opting not to sell. In a world where safe assets yield next to nothing,

The national housing market continued to elicit signs of a recovery with actual sales up 22.7% from a disastrous 2018. Sales continue to hover above the ten year averages. This pushed the home price index higher once again, up 3.5% from last year and clearly trending higher. However, what’s more important is to understand the phenomenon that is driving the recent resurgence. Homeowners are not listing their homes for sale. New listings are plummeting, and this is causing another decline in inventory. Here we can see the sales to new listings ratio hit 67% in December, the highest level since October 2009. Generally speaking, a ratio between 40-60% in considered balanced, anything above that tends to put pressure on prices to rise. Meanwhile, if we take a deeper look at new listings, we can see that on a 12 month rolling average, new listings haven’t been this low since February 2010. So why aren’t Canadians listing their homes for sale? In most parts of the country, prices have never been higher, certainly an opportune time to cash out, no? I think this has a lot to do with belief systems and interest rates. Let me explain. First, Canadian housing is

Just a few days ago I wrote a piece noting that Vancouver housing starts hit a record high in 2019. Per CMHC, there was a whopping 28,141 new housing starts across Metro Vancouver, surpassing the previous record set in 2016. In fact, housing starts could’ve been much higher had it not been for single family housing starts, which fell to a seven year low. To be honest, i’m surprised they haven’t fallen further. The single family market has been hit hard, taking the brunt of the recent market decline. Single family house sales have plunged to multi-decade lows over the past couple of years. Here’s a chart of annual house sales across Greater Vancouver & the Fraser Valley. Are we witnessing the death of the single family house in Metro Vancouver? Despite the decline in house prices, falling as much as 30-40% in some segments, the median house price still sits at $1,154,500. With affordability remaining stretched, it’s hard to envision where the next wave of buyers will come from. Instead, it seems more likely single family housing starts will remain lackluster.

What if negative interest rates weren’t such an unconscionable idea after all? A new report from Yale professor Paul Schmelzing went back in time and studied real interest rates in developed markets over the past 600 years. His findings, were rather remarkable. Dating back to the 1300’s (don’t ask how he got that data), there is a clear historical downtrend, with rates falling about 1% every 60 years to near zero today. The report includes a literature review that reveals that much prior work on long-term interest rate history was slipshod, little more than anecdotal and that the reliable works are often miscited. Schmelzing compiles copious primary and secondary sources. Rather than concentrating on a single European area, he manages to cover 78% of all developed economies across the globe; and rather than looking only at government debt, he includes private debt and investment in real assets. A common assumption is that negative real rates are temporary aberrations. But the chart shows they have always been around. In fact, the only extended period in history without them is 1983–2008. Schmelzing argues, drawing a straight line to data does not prove anything about the future, but it does shift the burden of proof. You often hear claims that the

There are a couple of ways to lower home prices, one of them is through flooding the market with supply. That’s certainly what they’ve done in New York. The borough has 7050 unsold, newly built units, according to a report. It would take 74 months — more than 6 years, to clear all of Manhattan’s unsold units at the current pace of sales. The glut is a product of a post-recession construction boom aimed at globe-trotting investors, who now show little interest in collecting lavish Manhattan homes. Unsurprisingly, this has resulted in sellers being forced to slash prices. “The entire year was a struggle,” Olshan Realty President Donna Olshan said. “You had to lower your price by 10% before you can even find a buyer.” It’s believed prices will need to fall even further to get the market back on firm footing. Now let’s turn our attention to Vancouver, where new data from CMHC shows annual housing starts just hit a record high in 2019. There were 28,141 new housing starts for the year, surpassing a previous record set back in 2016. This is certainly encouraging news for those aspiring towards improved housing affordability. The pipeline of new supply, despite recent

This is an excerpt from The Saretsky Report. You can subscribe here. Condo sales nearly doubled from last December, jumping 96% year-over-year. The increase resulted in sales hovering 22% above the ten year average as local buyers snatch up anything that resembles affordability. Again, what we are seeing is a market that has become increasingly more local focused, and the reality is this condos are mostly all anyone can afford. As a result of the uptick in sales, we are seeing inventory levels fall again. As of today, there is just 2.8 months of condo inventory for sale. This is a really low number, one which suggests upwards price pressure, not downwards price pressure.  Given there is just 2.8 months of supply for sale, and a sales to actives ratio moving upwards to 35%, there are increasing probabilities that prices could begin rising again. As of right now, it appears prices have basically flatlined after falling by more than double digits. Here we can see the annual change in the MLS benchmark price is accelerating upwards, although still officially 2.7% lower than it was this time last year.  However, our belief is that the recent surge in activity could stabilize,

Greater Vancouver detached sales jumped an impressive 72% from last year. That’s head turning stuff, but sellers shouldn’t get too excited. Detached sales were still stuck below their long term ten year average. In other words, despite a fairly significant decline in prices and mortgage rates, activity in the detached housing market is still languishing. Again, this is ultimately an affordability problem which becomes difficult to overcome with a stress test capping borrowing capacity and wages not growing quick enough.  Perhaps one of the better ways to illustrate this is via a 12 month moving average of detached sales.  Sure, this is a lagging indicator, but what it ultimately suggests is that we have a long ways to go before declaring a full recovery, or for that matter, a new bull market.  What we are seeing is that sales have picked up recently, and new listings have failed to keep pace, still dropping on a 12 month average.  Why people aren’t selling is somewhat of a mystery. It could very well be a function of low interest rates, allowing people to stay in their homes for longer, or perhaps secular behavioural changes, particularly amongst an aging demographic who prefers to