Jan 2010 5

Supply, demand, and a real estate rebound

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house by Kama Guezalova House by Kama Guezalova

To understand recent industry gains, it's important to look at often misunderstood real estate dynamics, notes developer.

By James Schouw, James Schouw & Associates

A little over a year ago Greater Vancouver's real estate market threatened to grind to a halt, gripped by panic and confusion. After a seven-year boom, many believed the global economic and credit crises were enough to kill our market and that recovery from them was years away. Even after interest rates dropped dramatically, many chose to sidestep the market and wait to ''see what happens.''

Many did not contemplate the rate at which our population grows, and the resulting pressure on real estate. They may not have realized it, but people who wait out the market typically find themselves competing against almost 1,000 more people every week in need of a home in Greater Vancouver.

In early 2009 I advised prospective buyers to beware the peril of waiting for news of the market bottom before buying a home because such statistical feedback tends to materialize too late to be useful.

Fast forward through 2009. The Real Estate Board of Greater Vancouver reports that the almost 3,100 transactions in November were an increase of 253 per cent, from the November, 2008 number. Selling prices have been climbing and many buyers have found themselves chasing the market upward. Remarkably, during the eight months from April through November, Greater Vancouver detached, attached and apartment benchmark prices increased by 16.6 per cent, 11.7 per cent and 13.3 per cent respectively. Most values are back in the ballpark of their previous peaks of about two years ago.

How did the market rebound so quickly, and what lies ahead?

To answer, let's focus on some often misunderstood dynamics that drive our real estate market. For starters, homes listed for resale are often referenced as inventory, which can be a misleading over simplification because it doesn't recognize that prospective ''sellers'' in a stable or growing population are typically also prospective ''buyers.'' When thousands of homes change hands, keeping spirits high and realtors busy, neither the stock of usable homes nor the number of people needing those homes necessarily changes. Some sellers may choose to become tenants, but each such decision creates a market for one more landlord-owned home, and inventory remains fundamentally unchanged.

The effective inventory in Greater Vancouver, the number of vacant homes seeking residents, was probably highest in mid 2008. When global indicators turned gloomy, developers and speculative investors owned thousands of vacant units. Understandably, developers and their lenders reacted by slowing new residential development to a trickle, diminishing new supply of finished homes.

But what happened to demand? The answer lies behind another often misunderstood market dynamic. Contrary to some conventional wisdom, an individual or family doesn't have to be thrilled about the economy or the Olympics to participate in the housing market. They just have to be living. People need homes, and they can't just walk away en masse as they can with other investment vehicles.

Quantitatively, local housing demand, a function of population change, has continued to grow as it has done for years, along with most of Canada.

Recent Statistics Canada data indicates that during the 15 months to July 1,2009, BC's population alone grew by 92,593, requiring almost 40,000 additional homes.

That's a normal rate of population growth for BC, representing the number of births and new arrivals minus deaths and people leaving, and isn't likely to slow.

But since the middle of 2008 the development industry has fallen well short of meeting demand, and continues to fall short, causing effective inventory to shrink. In Greater Vancouver, certain developers were sitting on hundreds of vacant homes a year ago, but now have none. New housing starts will eventually increase, but major projects can take years to complete, and a restored plentiful inventory is still far off.

Due to a low birth rate and robust immigration, Greater Vancouver's demographic and ethnic character constantly evolves. To appreciate the city's growing international appeal, I talk to visitors and immigrants. Understanding Vancouver through their eyes can reveal how many layers of this remarkable city might otherwise be taken for granted.

Population explosion by Bill Burris Population explosion by Bill Burris

As the city continues to mature into its world-class role, increasingly desirable to prospective residents from all continents, home ownership and rental will become less affordable, especially in the urban core. Local real estate will likely be increasingly wealth driven, as opposed to income driven. Income sufficient to finance a home is of little concern to wealthy families that don't need financing. Already, average mortgage leverage is a fraction

of that in more perilous markets, notably overbuilt 'bubble' markets to the south.

Along with Greater Vancouver, which not insignificantly is the closest major North American commercial centre to Asia, global population is growing too, by the better part of 100 million every year.

With the growth of commercialization, industrialization and wealth strongest in Asia, it's difficult to ignore the emerging importance of Canada's immense resources, especially on a per capita basis, including fossil fuels, water, minerals and agriculture (I do care about the environment-I'm just calling a spade a spade).

Net migration between B.C. and other Canadian provinces is currently low, playing only a small part in our population equation, and will likely remain so for some time.

Economically, there will be days of good news and bad, but only if our local economy suffers compared to other population centers, as it did in the 1990s relative to Eastern Canada, are we likely to see our growth curve flatten. I'm often asked where we find jobs for all our new residents. When population grows, so does local demand for goods and services. Most Vancouverites, including grocers, plumbers, doctors and so on, make a living serving other Vancouverites. Exports and tourism are only pieces of our diversifying economy.

What's in store for local real estate in 2010? Greater Vancouver's growing population will continue to absorb about 300 additional units of housing every week. Shrinking inventory will make real estate increasingly difficult to buy, with excess demand from the tightest localized markets overflowing into others. More would-be sellers may decide to stay put for fear of getting left out of the market. Accordingly, resale volume may shrink but prices will rise. New properties won't last for long. Because of tightening inventory, any foreseeable interest rate increases are more likely to dampen real estate sale volume than to dampen value.

What about the Olympics? We've already enjoyed the economic stimulus afforded by years of federally and provincially funded infrastructure, and Olympic exposure will indeed help to fuel demand in the long term.

Greater Vancouver's real estate market will continue to be driven by the growing number of people that simply need homes. Speculation, the catalyst of a 'bubble', is largely absent from the market due to lingering fear from the lessons of 2008. A bubble will only materialize if overconfident developers and speculators manage to oversupply demand. For now, if you own Greater Vancouver Real Estate, relax and have a happy new year.

This property was featured in The Vancouver Sun.

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