Morning Buzz: Don't Look For Real Estate in Vancouver to Fall

Although much has been written about high property prices in Vancouver, seldom is a broad perspective offered. A popular quote from the year 1911:

Land prices are high, it is said, higher than anything would warrant. ‘Why, the workingmen cannot afford to pay at the rate demanded for these tiny outside lots’, asserted one man recently. The same thing was said here twenty years ago, answer the pioneers; others of us know that it was repeated ten years ago and five years ago, and our children and our children’s children will hear the same tale of woe decades hence.

– RJ McDougal, BC Real Estate, 1911.

Fast forward to today, and I’ve heard Vancouver’s most knowledgeable and well informed developers say that Vancouver is and always has been one giant real estate play.

Looking back at interest rates in Canada over the last 100 years, they have been low or moderate for almost the entire time, and high for less than 10 years. Rates spiked up sharply from 1979 to 1983, falling back a bit only to be followed again by another modest spike from 1986 to 1991. To baby boomers – a large demographic of home buyers – memories of early 80’s interest rate hikes are firmly entrenched, just as their parents who lived through the 1930’s never shook those depression-era memories, causing that generation to save every dime ever earned.

I suggest that we will never see a repeat of anything remotely close to the interest rate regime of the early 80’s. Why? One very simple answer: If you could put your money into a normal savings account and earn 10% interest, why would anyone ever buy stocks, bonds, RSP’s, mutual funds, or commodities? The financial services industry has exploded in size, complexity and breadth since 1980, becoming entrenched in the Canadian economy, but who needs any of it if you can make 10% by just putting your money in the bank? Canadian banks are well positioned in the financial services industry and the same banks also control mortgage lending for real property in Canada. I suggest that high interest rates in the range of 10% would be detrimental to the financial services business units owned by banks and on the financial services industry in general; why buy any of the complicated managed money products if a simple savings account will do the trick? My feeling is the financial services industry is not particularly interested in reinventing itself in order to deal with significant interest rate increases. A sharp rise in interest rates would also dampen the real estate industry, but people always need a home in which to live. Combined with the fact that immigration to Canada is now so significant that demand for homes is increasing at incredible rates, these factors could mitigate the impact of higher interest rates on real estate pricing to some extent.

Turning back to Vancouver today, we are a city with a finite supply of land and a growing population. But is our supply of land merely finite, or is it shrinking? The condo boom continues, and over the next 20 years the City of Vancouver will approve the construction of many thousands of condos and townhomes in an effort to provide housing for our growing population, as well as to make homes more affordable. In the course of doing so, countless single family homes will be demolished and many condo buildings will be built in their place. The Cambie corridor alone will see the destruction of numerous homes to make way for condos, townhomes and ½ duplexes. So, 20 years from today we’ll have far fewer single family home residences in our market. Assuming that immigration remains as important to Canada as it has been since 1867, I think it’s safe to say that single family home prices in Vancouver have nowhere to go but up in the long term. Less supply + increasing demand = higher prices! Not that there won’t be mini market adjustments or corrections, just as Vancouver’s West Side has done for the last 6 months, but I’m still banking on real estate. Looking at Vancouver through foreign eyes seems to be the appropriate perspective. Investing in that single family home today may seem daunting, but it’s still going to be a solid investment, just as Vancouver has always been.

– Robert Moore, Dexter Associates Realty.

Editor’s Note: The following was a guest post by Robert Moore. No compensation was received for publishing this article.