In the past, we have written about Vancouver residential real estate and whether we thought it was a good investment. There were two main conclusions from those reports:

2. Vancouver real estate prices were not being driven by traditional fundamentals. Instead, they were being driven by foreign capital, potential money-laundering, ultra low interest rates, and psychological excess. We concluded that further price appreciation would be a speculation on the continuation of these factors.

Since the time of those reports, we have seen a significant change in those factors:

1. Foreign Capital: There have been significant restrictions put on foreign capital. These include a 20% additional property transfer tax on foreign entities buying in metro B.C., significant vacant and speculation taxes targeted at foreign owners, and an all out foreign buyer ban in effect until 2027. Further, China has significantly clamped down on capital that was leaving its country illegally. Remember, China has a quota that a resident can only move US$50k/year out of the country.
2. Interest Rates: The era of ultra-low interest rates ended after an inflation scare caused by the pandemic. Canadian mortgages are particularly vulnerable since you can only fix the interest rate for a maxium five years. When you factor 25-30 year amortizations, every Canadian mortgage is ultimately variable.
3. Psychological Excess: Perhaps the biggest change has been in psychology. Vancouverites have seen that real estate prices can go down and can go down meaningfully. In addition, China has gone through a significant real estate correction and we have ground knowledge that Chinese residents have done a 180 in their psychologically towards owning real estate.
4. Title Ambiguity: A factor we did not identify but perhaps the most significant is property title. Simply, the federal government recently granted the the Musquem band aboriginal title to unknown areas of metro B.C.. Further, the B.C. Supreme Court recently ruled that aboriginal title is senior to fee-simple title in a title dispute covering 1,846 acres of Richmond. In other words, there are actual risks that real estate in B.C. could be seized.

With the changes that has occurred in these factors, we are in the midst of a meaningful correction in Vancouver real estate prices.  Below we list some examples:

• According to MLS, certain luxury downtown condo units have been sold at a 30-40% discount to what they were most recently purchased for. Note, certain new luxury condos have been listed at prices >40% below what they were purchased for and did not sell. When you factor unsold developer inventory and the amount of developer bankruptcies that are occuring, condos are the hardest hit. Note, this is where we saw the greatest psychological excess with presales in 2021-2022 hitting extreme valuations.
• For single-family westside homes, prices peaked in 2017 (peak of foreign capital) and have seen a meaningful correction since then. In some areas that were re-zoned for increased density, we know that developer bids are down ~50% from the peak.
• We have heard that properties on the east-side, especially duplexes, have had prices hang in better due to demand from families.

So with this correction, the obvious question is “is now a time to buy”. There are a lot of emotional, life, and financial variables to this decsion. We will answer this from a strictly financial perspective:

• Vancouver real estate is still not a good investment by traditional fundamental analysis; in fact, it might have gotten worse. When you factor the current 30-year high in vacancies, the inflation in insurance, strata, and repair costs, and all the new property focused taxes, (which comes with incremental accounting and potential legal costs) we believe this asset (in cases) produces more expenses than revenue. That’s a negative net rental yield before you factor mortgage costs. Add the new risk in title rights and we don’t believe this is a good traditional fundamental investment.
• There is likely increasing net selling pressure. Foreclosures and distressed sales are steadily increasing and will only accelerate with developer bankruptcies. While the foreign buyer ban ends in 2027, the prior foreign buyer (from China) no longer likes real estate and we expect they will be net sellers even after the ban. The change in local psychological will likely cause investor units to be put on the market. Net provincial migration into B.C is negative.
• Who is the incremental buyer? Most Vancouverites that could own, did own, and many owned multiple units. Net migration to B.C is negative and the prior foreign buyer is likely a net seller. If the remaining incremental buyer is the traditional fundamental investor, that bid is much lower than current.

“This means that” Vancouver real estate was one of the great wealth creators from ~2000 to ~2017. This created psychological excesses that were levered by an era of ultra-low interest rates and an influx of foreign capital. We’ve hit a perfect storm where these factors have all reversed. While prices are correcting, we continue to advocate owning other assets for a strictly financial store and growth of wealth.