Recap & Outlook: Vancouver Housing – Part III
We continue addressing 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 present our conclusions and outlook.
Our Conclusions and Outlook
There are no changes to our 2015 and 2016 conclusions:
- Local real estate is not an investment: specifically, local real estate lacks the characteristics we look for in an attractive investment. Domestic real estate does not generate sufficient net rent to justify its price.
- It’s a speculation: specifically, we believe that owning local real estate is a speculation on the continuation of foreign capital flow, low interest rates, and low lending standards.
After observing the last two years, we have two incremental conclusions:
- Tailwinds are now headwinds: specifically, foreign capital has become restricted, interest rates have risen, and lending standards have tightened. This is a stark contrast to the prior environment.
- Key variables verified: specifically, we previously highlighted foreign capital, interest rates, and lending standards as the key drivers to the local real estate market. With the changing environment in these variables resulting in the drastic negative impact on the volumes and prices of local real estate, we have increased conviction verifying that these are the key drivers to Vancouver’s real estate market.
We do not know for certain where Vancouver’s real estate market goes from here. For some time, we have been warning that the asset class has more risk than reward:
Restriction on Chinese capital seems permanent: The length and level of sophistication China has gone through to restrict capital leaving their country makes us believe it is permanent.
Potential for much higher interest rates: Interest rates have just begun to rise. Previously, interest rates were in a downtrend for 38 years and some economists believe we have reversed that trend. Inflation has accelerated and looming trade wars would accelerate that further. Central banks can only combat inflation with higher interest rates.
Prices are too high! Local real estate prices deviated from a fundamental value many years ago. Like the US market in 2007, it would be a long fall back to a fundamental price.
Psychology is prone for a change: The psychology that accompany asset bubbles have been present in the real estate market. We’ve all heard the sayings: “it’s better to own then rent”; “real estate only goes up in price”; “if I don’t own I’ll miss the market”. There was similar rhetoric in the cryptocurrency asset bubble last year.
However, foreigners still want our real estate: There is still demand for Vancouver’s real estate. The question is whether these buyers can access the foreign capital required.
Group of locals looking to buy: There are many locals currently renting but would be buying if prices were reasonable. However, this buyer is typically reliant on mortgages, interest rates, lending standards, and lower prices!
“This means that” at a minimum, we believe the great bull market in Vancouver’s real estate is over. We wanted to highlight our thoughts so that clients know our opinion on an asset class that is typically important to them. The majority of our team rents and invests our savings in assets that meet the characteristics we look for in an investment. This includes real estate, just not in metro Vancouver.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
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