Recap & Outlook: Vancouver Housing – Part III

Christian Anthony | Portfolio Manager

We continue to address a relevant domestic issue: Vancouver housing and whether it is a good investment.  As a reminder, we are covering four topics:  1) Foreign Capital, 2) Interest Rates and Lending Standards, 3) State of the Current Market, and 4) Our Conclusions.

These topics are a follow-up to the reports we wrote in July 2015 and in August 2016.  In those reports, we characterized local real estate as undoubtedly expensive and an asset that lacks the characteristics we look for in an attractive investment.  By our definition, we concluded that owning local real estate was not an investment but a speculation on the continuation of foreign capital flow, low interest rates, and low lending standards. This week, we comment on the state of the current market.

State of the Current Vancouver Real Estate Market   

We previously concluded that local real estate was not an investment but a speculation on a continued supply of foreign capital, low interest rates, and low lending standards. In our last two Outlooks, we noted that foreign capital has become restricted, interest rates have risen, and lending standards have tightened. Therefore, if we are correct that these are the drivers of the local real estate market, we should expect a significant negative impact on the market today.

Volumes are at the lowest levels ever recorded: In July 2018, Vancouver saw 126 detached home sales. As can be seen in Figure 1, this is 50% below the 10 year average for July and the lowest amount of Vancouver detached home sales ever recorded. This record was subsequently broken in August 2018 where we saw just 116 detached home sales.

High inventories suggest a lack of buyers: The question is whether the lack of transactions stems from a lack of buyers or a lack of sellers. To that point, the inventory of Vancouver homes looking to be sold hit a six year high in July. With a record number of sellers, the problem seems rooted in a lack of buyers.

Average prices are down, but averages are not reliable: In terms of pricing local real estate, the average price in July was 16% lower vs. the July 2017 figure.  However, we caution that the mix of houses included in each month can significantly influence the average number. Regardless, with buyers scarce and inventories at a six year high, we worry that prices are not only correcting, but may also continue correcting.

This means that” the state of the current Vancouver real estate market is dry. We believe this is a direct result of the new environment of restriction in foreign capital, higher interest rates, and tighter lending standards. Where we go from here is most important. We will report on our conclusions and outlook next week.

Pathfinder Asset Management Ltd. | Equally Invested™
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Sources: Pathfinder Asset Management Limited

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*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).

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