17^th Annual CMHC Housing Outlook

– Vancouver

Summary:

The general thrust of the three main speakers was that, barring any major catastrophes, we should expect things in the BC and lower mainland real estate markets to continue more or less as they have been: stable prices, slightly increasing volume, solid fundamentals. Details and individual points follow (with comments in parentheses).

The Provincial Outlook – Carol Frketich, CMHC Regional Economist

Historical analysis of housing prices shows that prices have tended to rise in a more or less straight line, regardless of whether the market is in "balance" or not. (This is relevant because most industry watchers are predicting a shift from balance to slightly in favour of a Buyer's Market.)

Frketich forecasts a 1% drop in overall average residential prices in BC in 2012.

Housing starts in BC are still a bit lower than absorption. (So demand should not fall, nor should there be an overall glut of new homes – although individual pockets will vary.)

Mortgage rates have a dual impact on the housing market – both in affordability for Buyers, and as a potentially significant concern or inhibitor for developers. (So while rising mortgage rates have an obvious detrimental affect on affordability for Buyers leading to lower consumption and competitive prices, they also slow down new home development, which in the longer run will reduce supply.)

Mortgage rates are forecast to continue low and stable at least through next year. The main reason rates would rise is if the authorities are concerned about inflation and wish to slow the economy; this should not be a problem as inflation is forecast at only 1% in 2012, and possibly 2% in 2013. To back this up, she pointed out that overall in Canada, industry is operating at only 78% of capacity and unemployment is at a relatively high 7.3% - both of these major indicators have room to improve substantially before they would have any inflationary effects on the economy.

In addition, the US, which of course has a large influence on interest rates in Canada, is motivated to keep their rates low in an effort to stimulate job growth to address their chronic 9%+ unemployment rate.

As a result, Frketich forecasts posted mortgage rates of 3.4% to 3.8% for a 1-year term, and 5.2% to 5.7% for a 5-year term throughout next year.

Unlike most countries (including Canada), BC is expected to grow more in 2012 than in 2011. Here's a sampling:

In comparison, Alberta is expected to grow 3.5% and Ontario 1.6% next year.

The number and total size of major projects in the province is also increasing. We should see a 7.5% increase in the amount of capital expenditures in the business sector next year.

BC in general and the Vancouver Region in particular are both forecast to see about 2.3% employment growth in 2012. (These last few points are obviously good indicators for the BC economy, employment and consumer confidence – all of which are major influences on the real estate market.)

New housing starts in BC are still lower than new household formation. (Good for demand.)

There will be about 27,000 people who migrate to BC in 2012; about 10,000 will come from China to Greater Vancouver. Almost half of all immigrants to Canada come to BC.

Historically, within 6 months of arrival in BC, 17% of new immigrants were homeowners; after 4 years, more than 50%.

Frketich estimates that about 17% of resale activity in Vancouver in 2011 was directly related to new immigrant activity.

Interestingly, the Vancouver area should be less affected by the aging of our population than the rest of the province: Today about 13% of BC is over 65 years old (about 13.5% in Vancouver); in 10 years, that percentage will rise to 19% for BC as a whole, but remain at about 13% for the Vancouver region. (This is also good for real estate, as under-65's are more active in the market.)

Between immigration and young adults setting up housekeeping, about 19,000 new households will be formed in Vancouver for each of the next 5 years; about 34,000 in BC.

In closing, Frketich predicted BC existing home resales will rise 6.1% to 82,000 units in 2012, and BC new housing starts will increase 7.1% to 28,500 units (about 18,500 multi and 10,000 single detached).

Her main risks to the above forecasts:

-          significant changes to the global economy

-          buyers holding off due to uncertainty over the HST (new homes)

-          changes to historical immigration patterns

The Vancouver Outlook – Robyn Adamache, CMHC Senior Market Analyst

The average price increase in the past 5 years has been 11% annually; the median increased at 10% pa. and the Benchmark at 9% pa. (This stat does not seem to be supported by the MLS® Benchmark, which we calculate shows a 5% annual increase over the past 5 years overall and a 6.5% annual increase for detached.)

Year to Date the Vancouver region has seen about 9% of sales to new immigrants.

For some markets, in particular Richmond condos over $1m and Vancouver detached homes over $2m, 74% of title changes went to Buyers with Chinese names (not a definitive measure of new immigrants, but an indicator of sorts).

The REBGV has seen the detached market in good balance, with a 45% sales to new listings ratio.

In a balanced market, CMHC expects prices to rise at roughly the rate of inflation, and most properties should sell in 30 to 45 days at 95 to 98% of list price.

A surprising number of houses have sold above list price in the past few years: 15% in '09, 16% in '10 and 22% in '11 YTD. In 2011 on the Westside of Vancouver the number was even higher, at 36% selling over asking. Adamache ascribes at least some of this to the common strategy of pricing a property "sharp" to encourage competition and multiple offers.

In the Vancouver CMA (Census Metropolitan Area, basically the Lower Mainland but not exactly the same area as the REBGV) there are about 248,861 rental suites in total. Of these, 43% are primary (purpose-built) rental buildings and 57% are secondary rentals (owned by individual investors). Only about 2-3% of new housing is for purpose-built rentals.

About 1/3 of households in the Vancouver CMA rent their homes. Because it costs significantly more to buy than to rent, and rental supply continues to be so limited, vacancy rates in the region will continue to be low.

Investor rental units tend to be higher-end and command rents about 45-60% higher than rents on purpose-built apartments; about 3% of sales go to investor buyers.

.At today's prices and mortgage rates, it takes an average of 50% down payment to have rental income carry the mortgage costs of an investment property.

Condo inventory is trending lower for the last year or so even though absorption is down about 25%, because completions are lower by about 50% (to about 4000 units per year); condo completions are expected to stay at that level, 4,000 per year, for the next year or two.

She presented some interesting statistics on the things that Buyers value when making their purchase. For example, for detached homes: new homes (under 10 years old) saw a premium of 26% over older homes; buyers paid an extra 8% for a view; an extra 6% for proximity to a "good" school (as measured by the Fraser Institute's controversial school ranking); and an extra 4% for extra size (i.e. larger size earned the proportional square footage increase, plus an additional 4%).

In the condo market, Buyers valued different things: Age was still important (a 24% premium for condos under 5 years old), but size did not earn a particular premium (additional value was directly proportional to additional size). However, a second bathroom earned an 8% premium, pets allowed was a 6% premium, and rentals allowed got a 5% premium.

In smaller units, a feeling of spaciousness is more important than the number of rooms: for a 650 sq ft condo, a 1 bed / 1 bath unit sells for 10% more than a 2 bed / 1 bath unit.

In all cases, of course, location was the biggest differentiator for price. For example, for a comparable home to one in Coquitlam, buyers will pay the following premiums (note that these premiums do not appear to be supported by the MLS® stats for detached benchmark prices, which we have included in the rightmost column):

            Burnaby          32%                 27%

            Van. East        58%                 21%

            Richmond       62%                 52%

            West Van        89%                 139%

            Van West        300%               183%

On the renovation side of the market, activity has been very steady. In BC the last 3 years ('09, '10 and '11) have seen a total of $7.8B, $7.5B and $7.6B spent on renos. In Vancouver, the numbers have been $3.8B, $3.6B and $3.7B.

As far as the return on renovation dollars spent, Adamache had these numbers:

            Add new bathroom on the main floor:                 80-100%

            Reno a bathroom                                             75-100%

            Reno the kitchen                                              75-100%

Adamache forecast modest growth in the Vancouver region for 2011 and 2012, of about 2% increase in prices and 9% increase in the number of units sold.

So Who's Really Buying?

Greater Vancouver Housing Markets in2012 – Mark Belling, Fifth Ave. Real Estate Marketing

"We don't have a land availability issue, we have a zoning problem." Increased density can solve any land availability problems we have.

There are 871,000 homes in the region ("region" is always somewhat loosely defined when talking about the Vancouver area) and about 255,000 of them are rentals.

The number of millionaires in China = the population of Canada.

In Surrey, 1/3 of the population has an average age of 19 years – indicating a strong first-time buyers market coming there. Today's first time buyer is older than she/he was 20 years ago: 42 years old today, compared to 20 years old 20 years ago.

"Townhomes are the new detached homes."

In Q3 of 2011 there were 279 actively selling projects in the region, divided almost equally between high rise, low rise and townhouses.

Fully 1/3 of standing inventory of project units is in 3 developments: Olympic Village, Pinnacle in North Vancouver and one large development in Surrey.

Concerning affordability of housing (projects) a full 20% of the costs are taxes; government charges on average are up 150% in 10 years. (Interestingly, the Greater Vancouver Benchmark price is up 159% over the same 10 years – although certainly the cost of living is not up that much.)

For multi-family housing in Vancouver costs run about $685-$850 sq ft; in Coquitlam, about $481 sq ft.

Belling had recommendations to improve the affordability of housing in the region:

1. Increase the supply of higher density land
2. Review policies that restrict land supplies
3. Reduce government levies
4. Reduce overly onerous building requirements
5. Expedite project approval turnaround
6. Zone land before transit moves in (set zoning first, then service it with appropriate transit, rather than have the transit authority define density requirements by their positioning of stations)

Thanks for reading and do not hesitate to ask any questions, I love to help my clients achieve their goals.

Have an amazing day!