Opinions & Rants

Opinion: Why Vancouver Real Estate is Not Going To Crash

By Vancity Buzz Staff | 10 months ago | Speak Up

It’s Vancouver’s greatest economic export: telling everyone outside of Vancouver how great it is to live here. It’s even on our license plate (“the greatest place on earth”). No – we’re not arrogant, we just live in a delusional rainy day reality.

The Economics

The definition of a real estate bubble is when the price of an asset rises above what local incomes can afford. It’s that simple. If the locals can’t afford it – then an asset is over priced. How do we gauge if something is too expensive?

Easy – we have historical real estate valuations that are based on the incomes of local residents. The historical national average over a very long period of time is approximately three times income to one. What does this mean in English and not finance talk? It means that if you and your partner make a combined income of $100,000 per year, then the house you should be buying is about $300,000.

This isn’t an exact science – but that sounds about right for affordability doesn’t it? This way you can pay your mortgage, save for your kids college, perhaps take a vacation every year or two, and save for a rainy day.

So here’s the magic question – if the rest of Canadian families are making $100,000 per year and buying $300,000 houses, how much do pay at the greatest place on earth?

Well, let me assure you we’re not making any more money: Vancouver is not a great place for young couples to get ahead (think Calgary, Fort Mac, or Toronto if you want to live somewhere and make good coin). So if a Vancouver couple is making $100,000, the average home they are purchasing is $900,000. These aren’t exact numbers, but give or take $100,000 in either direction and you’re probably about bang on. So what are the implications to this?

If you believe in putting down a 25 per cent down payment you’d have to first save about $225,000 to just for your down payment. That’s nearly the cost of a $300,000 house that everyone else in the country is paying. Comparatively speaking, your mortgage is $450,000 higher with living in Vancouver than somewhere else in the country.

That, ladies and gentlemen, is pure insanity.

Never mind the increased mortgage cost, the real cost is what you pay in interest for borrowing that insane amount of money.

I whipped out my trusty mortgage rate calculator (never leave home without it) and believe with a historical 5% interest rate (with a 25 year mortgage), the amount of interest a Vancouver resident will pay in real dollars is $508,794 (http://www.calcmymortgage.com/#mortgage;900000-25-5-25-1250-0-0).

I hope you love living in the greatest place on earth is worth giving your retirement, college kids savings, and your first born child to the bank, because that’s basically what it’s costing. The average Vancouver family could literally own three homes if they lived somewhere else.

So now that we’ve already figured out that its completely unaffordable to live in this city, let’s try to determine why.

The Limited Land Argument

From a geographic perspective, Vancouver is unlike most American (and Canadian) cities in the sense that we are surrounded by mountains, water and the international border with the United states. This creates a limited space for the region to build housing for its residents.

It’s simple, Vancouver is not a city that can just perpetually build out in every direction (like Calgary), which means we all get stuffed in next to each other as prices continue to escalate. Despite the limited land argument, this is not the main reason why the average Vancouver home is more than twice the national average.

The Foreign Money Argument

Metro Vancouver is touted as one of the most “ethnically diverse” places to live in the world. There’s no argument there, this must be one of the only places in North America where you can live a comfortable lifestyle and never have to speak a word of English.

This has caused Vancouver to be a hot bed of foreign ownership and investment in our real estate, and this is the key reason why Vancouver real estate prices are so high. How you say? Let’s dissect further.

I never really understood why foreigners want to live in Vancouver so much. I mean, why Vancouver over any other city. You would think they would want to live somewhere else like Seattle, Toronto or Montreal. What makes us so special?

There are already well established immigrant communities in Vancouver. Don’t believe me? I would challenge you to hang out in Richmond for the day and take a poll of how many people speak English versus a foreign language. It makes perfect sense – if you wanted to buy real estate outside your own country, you’d buy the next best thing and that’s exactly what Vancouver offers this wealthy foreign contingent.

You need a lot of money to buy real estate in Vancouver, right? The people that can afford to still buy in Vancouver are not exactly middle class, they’re business owners, professionals, and basically already very wealthy in their own country. To these people it doesn’t matter if a Vancouver home costs $500,000, $600,000 or a million dollars.

They’re recession proof, this is the key argument that every real estate analyst (that’s calling for a Vancouver housing crash) is missing. The local residents are simply completely priced out of the market, they’re not buying locally or at all. Ask any realtor (selling houses and not condos) how many of his/her sales are to foreign versus local money. I did a poll in of three realtors in Burnaby and each told me greater then 90 per cent are offshore or only live for a portion of the year.

If you are a wealthy Hong Kong or Mainland Chinese businessman worth millions of dollars, do you think it matters if the Vancouver real estate market crashes? Of course not, they’re investing in Vancouver real estate with cash. They don’t need Canadian mortgages and they wouldn’t qualify anyways, they don’t have any Canadian income.

Their money is made somewhere else – so they just pay cash. If you’re worth millions of dollars, do you think you will care if your $1 million dollar house declined in value by 20%? No – of course you don’t. That’s precisely why the Vancouver market is not in for a housing crash.

Could we see some sort of “correction” of 10 – 20 percent? Sure we could – I wouldn’t say a 1 million dollar box in the sky condo that declined to $800,000 a “huge real estate crash.”

It certainly would be a decline in price – but it’s not exactly going to change the game and make real estate affordable in this city.

How We’re Different then the American Real Estate Crash

  • Wealthy offshore investors purchase homes in cash (not credit). Therefore less leverage making the market more stable.
  • Local residents mortgage themselves up with real estate they can’t afford, but they’ll get by through renting out the basement, spare upstairs bedroom, and eating canned soup.
  • There’s no real trigger for a crash as “thousands of owners flood the market with listings” because the majority of Vancouver real estate are all long term holders and not flippers.
  • American mortgages are different than Canadian mortgages with respect to the fact that in the United States, you can literally just mail the bank the keys to your place and move out. In Canada, when you default on your mortgage they come after the mortgage owner’s personal assets.

How the Government Can Actually Be Useful Here

Living in a place where foreign investors and non-residents are buying up all the affordable real estate is nothing new. There are similar situations all around the world where this is happening.

Think about it – if you were worth millions of dollars and lived in a developing or politically oppressed country, wouldn’t you want to store your cash in a delightfully, economically and politically stable jurisdiction? You have no idea what the government will do next month never mind the next 50 years. This is what the Government can do:

  • Start collecting statistics on local real estate. I know it’s crazy – for all of the unnecessary stuff that government does, they haven’t even mandated that proper statistics start being collected for who buys and owns real estate (arguably our most precious asset as a country).
  • Consider implementing foreign ownership rules in a phased approach over time. Why is it that whenever a foreign government wants to buy a big natural resource or technology company, it becomes mainstream news and it’s subject to a “net benefit test.” But when the same thing happends to individual residents (i.e. real estate being purchased en masse, severely disrupting the equilibrium of a local market), it’s ok and no one does anything. I personally do not care if BHP wants to purchase Potash – where do politician’s think the natural resources are going to go? England? I won’t babble too much about this because that’s a separate opinion article.

The Canadian Government needs to get serious about this foreign ownership of our real estate. Residents need to start standing up and protesting our land being sold to the highest bidder in another country who doesn’t truly plan to live here.

Other countries have implemented foreign ownership rules successfully, most notably Sydney, Australia. Our real estate and home prices are not an investment, they are a home.

It is not good for our society to live in a place where homes are expected to increase $30,000 per year.

Image: Volodymyr Kyrylyuk / Shutterstock

Speak Up

  • Andrew yvR

    American mortgages are different then Canadian mortgages with respect to the fact that in America, you can literally just mail the bank the keys to your place and move out. In Canada when you default on your mortgage they come after the mortgage owner’s personal assets.
    FALSE

  • Anonymous

    “Wealthy offshore investors purchase homes in cash (not credit). Therefore less leverage making the market more stable.”

    Part of the issue here is that in Canada (at least in Vancouver), there is no control over cash payments. The CRA does not do a good enough jobs to screen where these money is coming from. I have heard stories, where overseas Asians literally wire transfer quarter million in cash from the casino and pay as down payment. What does the real estate agent do? Fill out a declaration form and say his job is done. If the actual money laundering check ever does go through is even unknown.

    I truly believe Vancouver real estate is bought by a lot of laundered money. Most realtors just profit off this knowing the fact.

  • Jordan

    A few policy regulations would effectively tax speculative property investment:

    - If a property is held and not developed/used, then, after 12 months of neglect, it is forfeited to social housing
    - Any purchase by a resident without a Canadian Passport should be taxed at 20% upon purchase and sale (to discourage the conception of property as an investment)
    - The purchase of a second home by a resident should be taxed at 20% upon purchase and sale (to discourage the conception of property as an investment, except for long-term rental income)

  • Ryder

    This article is not well written. Sorry, will there be a crash in vancouver? I don’t know. But, I can guarantee once interests rates go up; parts of the region will start to see price declines maybe as much as 15%. Vancouver has a small economy (no real big business here) there has been in the past 2 housing downturns where prices have collapsed. . Economists and government have warned about low interest rates and high debt levels can and will affect real estate. When I hear about “its different here” “buy now while you can” “its Vancouver. The most amazing place on earth” I laugh, it gets old.

  • Guest

    My biggest problem is the social stigma attached to renting in this city; it’s like you’re a second class citizen if you’re a renter instead of an owner. This line of thinking is prevalent in most social circles; even this beloved website. This is a great city with much to offer but some people just don’t want to pay an arm and a leg for a shoebox in the sky.

  • Confused

    Who wrote this article?? There is no author named.

  • robjob

    What do you mean by ‘taxed 20%’. Do you mean the entire value of the home. Any profit on 2nd properties bought by residents is taxed as income when they sell it.

  • robjob

    This article is pretty abysmal. It incorrectly defines what a real estate bubble is and goes on to make a bunch of wild assumptions about foreign money. Chinese money is not ‘recession proof’ China could have it’s own recession. Many Canadian and American economists have identified that as a major point of weakness in the Vancouver housing market.

  • Si

    ah yes more racist garbage regarding real estate and foreign money. Sorry not buying it.

  • PHANYXX

    The author was too embarrassed to take credit for this masterpiece. A Kenneth Chan piece this is not.

  • Mark

    nothing racist about facts there big buddy.

  • Gerald Sit

    ***How We’re Different THAN the American Real Estate Crash***
    excuse my inner grammar freak

  • Jordan

    Taxed 20% of the purchase price at sale paid by the PURCHASER. Also, upon reselling the property, the sale should continue to be taxed as income, but an additional tax of 20% of the sale price should be levied again the SELLER if the home is not the primary residence or if it being sold by someone without a Canadian citizenship.

    This would only be for any additional homes in the Metro Vancouver region or for homes not being purchased by Canadian citizens. These policies would not affect Canadian citizens purchasing their own homes to live in.

    Furthermore, these policies would disincentivize “flipping” homes, or otherwise speculatively purchasing homes for resale. Homes should be bought to be lived in, not traded back and forth to boost their value. Property speculation hinders affordability.

  • Jwo Lu

    Agreed, a very hard article to read. Someone needs to explain to the
    editors that this is supposed to be an article and not a 2000 word
    essay. There was a lot of unnecessary info given here. The whole top
    part of the article could have been broken down into 2 or 3 sentences.
    Also it should have started from ‘How we are different then American
    Market’ and thrown away the subtitle.

    Interest rates won’t go up for a long time people need to stop considering this as a variable. If the interest rates
    were to climb even 1% it would crash Canadian housing market faster
    then you could say interest rates. And the properties on fire sale would
    be only residents of Canada not the investors. The government is to
    scared to change it cause they see the tell-tail signs of how close the Canadian market is to what
    happened in America. This is why they looked loans so closely.

    Yes there should be many changes in our housing policies. Agreed that foreign investors and non residents are a big part of the problem, but there are Canadian
    investment companies also involved in this climb to provide expensive
    housing. A clear line needs to be drawn of what is a home and what is an investment. If
    you are Canadian (born, landed or immigrated) live in Canada 50% of the year plus a day then this one property is allowed as a resident claim. If one of the above does not apply then the place is
    considered an investment and the taxes and insurance must be heavier on those properties
    to subsidize property taxes and insurance on resident property owners or reasonable
    housing rentals. I also feel that tearing down a building and allowing it to sit
    furlow should not substantially lower the property taxes. Investors bought properties as home or a commercial building they should have
    to pay the same taxes on that property till they have erected something
    else. To help prevent land grabs with no intent to build on immediately (1-3 years being immediate).

    But
    unfortunately you won’t see this cause too many of our government
    officials are involved in investing in these buildings so they can
    provide unpaid jobs to an extremely struggling economy that is quickly losing
    its middle class workers and next generation cause of it’s affordability
    to get ahead here and leaving only those almost ready for retirement
    and investors.

    Am I bitter? Yes

    Am I angry about this situation? Yes

    Do I believe that the Government will make changes? No

    Do I believe the Government cares enough to make these? No, they care more about Rob Ford

  • Jordan

    Agreed.

    While interest rate policy is a federal power, and I agree with you that it likely won’t change until retirees complain that a low interest rate and inflation are deflating their savings, much of the property/planning issues could be addressed at a municipal/regional level.

    Issues in regards to leaving buildings empty were brought up after the Woodwards Squat of the early 2000s, but unfortunately they weren’t acted up.

    In my opinion, a carefully crafted housing policy to protect Canadians from foreign property speculation, without inciting xenophobia, is needed. If such a policy can unite all Canadians against foreign speculation by investors with no interest in being Canadian, and not immigrants (because immigrants are a source of our economic strength), then the policy would be popular with voters.

    Regardless, a brave, progressive regional politician needs to propose this policy.

  • Todd Smith

    Ouch, thanks moderator! My comment was deleted for posting facts? Is it a coincidence that there are real estate listings at the bottom of this page?

  • Jwo Lu

    Yes we do need a good housing policy.

    But with a housing policy the appropriate definition of resident and non-resident housing and commercial building needs to be firmly established. Without this base all other housing policies and commercial land use won’t be very strong cause they will find loop holes.

    The governments biggest concern is scaring away investments that are building in our soft economy cause without them we would be in the big R. By changing small policies one at a time by adding clear definitions of resident and non-resident housing and commercial building usage would be the best spot to start. After that we can add post regulations. One of the most useful regulations that I’ve heard of is the amount of time that an investment property must be owned for before reselling it or suffer any huge penalties. This way it’s locked in money more like an RRSP for the government and banks. Cause lets face it many of the rich have been playing property tag and I’m not just pointing out Asians, Russians, Indians or Germans I’m also point out our very own Canadians that have realized that property is a stock worth investing in at the moment cause we have so very few regulations to stop property from being a stock option.

  • LM

    If I worked for my hard earned money, I’d like to buy what I want with it whether it be a car, dish washer, or a house.

  • Jwo Lu

    Your terms seem to really go to the extreme. I’m all for social housing but I don’t think we can forfeit properties. That seems unfair, illegal and just plain dictatorship like. If people want to do nothing with a piece of property that is their choice. If they want to turn it into social housing for the tax benefits cool. If they would rather just pay the extreme taxes on investment property that’s their choice too. This is a democracy what you are suggesting is very Communistic.

    As for the Canadian Passport idea I get where you are coming from but also a bit extreme. Not every Canadian has a passport. Some people really don’t care to travel. To ding them for this is going too far. Let’s just stick to Canadian citizenship or landed immigrant. It’s hard enough already for Canadians to make it into the market.

    Property will always be an investment. That is just exactly what it is. If I buy a house for myself it’s an investment cause I make financial gains on it every time I pay my mortgage. I have invested in myself. We don’t want to make Canada so un-liveable that you don’t have the right to choose to invest in property even if it’s just a cabin in the woods as a vacation property. We had no issues with housing previously when families bought extra investment properties for their children or vacation homes. We just need to stabilize the investments by having a time limit of when you can sell a property. One of the major problems that I see is that previously when property was bought it was bought with a loan. When you forfeited early on the loan you paid large amounts on the penalties. But as stated by our government “most investment properties are not dependent on loans so our banks have less to fear.” But we were ignoring the real problem which was that this made foreign invested houses in Canada tradeable like cash with no penalties and very little fees. Houses in Canada became an over sized stock to the filthy rich. It was a good bait and switch tactic. Look at this, don’t think about that over there. The bottom line is we need to make property investment a long-term deal overall whether it’s rental or not.

  • Jwo Lu

    Unfortunately that was ingrained since we were kids as Canadians. That’s why so many of my friends have moved on to cheaper pastures… :’(

  • Jordan

    Definitions are key, and a slow policy implementation would be prudent, but perhaps politically difficult because the limited term politicians usually favour quick, bold action and results that they can point to as deliverables.

    Your idea of regulating housing as an investment is interesting. While I would prefer to tax it enough that it could only be justified by homeowners to purchase as shelter, your regulation may be more accepted in this globalized economy.

  • robjob

    If there is social stigma against renting, I haven’t experienced it. I know 2 people who own places in richmond and rent in Vancouver and the renting doesn’t seem to bother them. I rent in a place there is no way I would be able to afford to buy. It allows me to save a significant amount of income and have far more mobility than if I owned a property.

  • robjob

    I have no problem with the restriction suggestions for foreign investors but the other suggestions are completely absurd. It would decimate the rental market and is just simply absurd. This isn’t soviet era Russia. People do have a right to a profit and they do take a risk by buying a property. They could just as easily lose money on a property.

  • Jwo Lu

    It would also be easier for a premier to implement these small regulations since they are becoming the standard around the world. You also don’t want to scare away investors too quickly so they crash market and tank the economy. But you don’t want to fall behind world standards.

  • Vancityguy

    I guess the author missed the local Fitch report. You know. Fitch. Along with S&P and Moody’s, the largest ratings agency in the world. They’re not as sanguine. Vancitybuzz should stick to hockey and restaurants.

  • SGrey

    I guess the author missed the recent Fitch report. You know. Fitch. Along with S&P and Moody’s, the largest ratings agency in the world. They’re not as sanguine. Vancitybuzz should stick to hockey and restaurants.

  • Teddy

    What head offices does Vancouver have? Yeah not many, and the most prevalent is a yoga pants manufacturer. Basic economics guys, if the young workers in town can’t afford real-estate they will move elsewear. Vancity buzz wrote an article this EXACT TIME last year showing that between Jan and March 2500 youths age 22-30 left for other provinces which was the highest ever and it was increasing. GOOD LUCK supporting a market where foreign ownership drives up the price to unattainable levels even for the most highly skilled workers with advanced degrees. Even Calgary pays the same worker on average 20% more in a country that is already pretty expensive. NOT A SUSTAINABLE REAL ESTATE MARKET.

  • Jwo Lu

    Was totally wondering about that. I wanted to post a comment agreeing with you on some very valid points then when I hit send it told me moderator deleted the comment. You had no swear words it had no advertising and it was mostly all points on the subject minus the little bit about how poorly this article was written but still not a reason to delete a comment.

  • CJ Watson

    I remember a couple of days ago Vancity Buzz profiled a nice apartment in the Olympic Village for 2.95 million with 2,000 sq ft. I am sorry but having lived in new york and Vancouver this puts it’s price per square foot around 1400 which is the equivalent of high class neighborhoods in NYC like SOHO and West Village. Vancouver is great but it isn’t no NYC.

  • James

    Got to love this quote
    “Wealthy offshore investors purchase homes in cash (not credit). Therefore less leverage making the market more stable.”
    hahahaha I am sorry but how does that make it stable??? This is basic economics, this creates less rental properties which is a “deficit” as buildings sit empty, which in turn drives up rental property prices because of less “supply”. Consumers are therefore spending more money on rent and less on saving for a purchase. This in turn makes consumers leave for more affordable choices.
    There is ALWAYS a cause and effect and this is not even remotely close to being stable.

  • bob a job

    Stop picking on government. There will be no round door knobs on any of those houses. You can thank your government for that.

  • BMWMang

    Another idiot drinking the greedy bankers kool-aid, similar to what happen in the US in 2008. There is no evidence whatsoever that we’re NOT riding a bubble. Prices for homes in the GVRD are grossly overpriced and Vancouver is not a “world class city” like how some people will make you believe. Most of the people living in the city are rich because they equity in their homes, they don’t have liquid wealth. Most are living in massive debt. Now lets look at the city itself; we don’t have high paying jobs, we don’t have large corporate head offices and our transportation system including our road ways are beyond awful. Most ultra wealth people are parking their money in Canada because it’s a “safe” market, once crap hits the fence watch them pull out. No ultra wealth person would ever move to this city, it’s a nice city but some of you act like it’s the best place to live. Bottom line is we’re living in a city which is overpriced by almost 30%, there will be a correction at some point, maybe when interest rates go up and than we’ll start seeing massive foreclosures because people can’t afford to live in their homes anymore.

  • Albert ross

    Lol the author knows shit all about the real estate market. Just a pretender who probably doesn’t even own any property.

  • Albert Ross

    Facts? show me some evidence Mark. Not a single person to this date has produced any. This article is garbage in the sense that buying homes is not a right. Go rent if you can’t afford it. Funny how the author is too embarrassed to even claim ownership of his trash piece.

  • Albert Ross

    Can’t afford Vancouver? move the fuck away. We don’t want you here. Neither does NY.

  • Albert Ross

    Why do you care so much about what others think?

  • Albert Ross

    And you can have it, provided you pay the asking price. Nobody’s turning you down so what was the point of this post? you haven’t made yourself clear.

  • Albert ross

    “forfeited to social housing”. Get out of her you socialist hippie. Nobody cares about people like you who want things for free because their not smart enough to make it on their own.

  • Albert Ross

    there is no right to purchase. Buying a home is a privilege.

  • Albert ross

    Another nobody will no evidence to back up his assertions. Just a bunch of hearsay to fit his own biased world view because housing affordability hinders his own dream of owning a place.

  • Kemo Sabe

    Not exactly sure if the Vancouver Housing Market will crash or not, but to say that folks don’t care if their investments drop by 20% because they pay in cash is kind of ludicrous. It doesn’t matter if you borrowed the million or you just have it sitting there in your sock drawer you will care if it drops by 20%.

    We may or may not have an “American style” meltdown due the fact that mortgages are secured differently and that most of the new buyers are foreigners and buying with cash. You may or may not have the kind of bank failures they do in the US but we are still affected if the housing market deflates in Vancouver or Toronto or wherever else. Foreigners in the Vancouver market – from mostly China are borrowing cheap dollars from their home country. Chinese government saw what happen in the US with housing bubbles so they instituted domestic ownership restrictions. Being savvy investors and savers – our friends from China went overseas to safer and less onerous countries to park their dollars. True a banking crash like the US may not happen here per se but can happen in other economies that are less regulated that even the US – when that happens – banks will call their loans – which so happens to finance all the cash these folks used to buy condos/houses in Vancouver – by the law of supply and demand – prices will drop in lockstep in all markets. Vancouver will not be Detroit. But in Vancouver, despite what politicians are selling is still very much a real estate driven market place and BC a resource based economy – everyone will be worst off including our banks which are interconnected with each other at the International level. It may become more affordable if you have enough saved up for a down payment and a high paying job to go back to – but if you don’t it will still be unaffordable regardless. Even if that million dollar condo drops by 20%, most probably wouldn’t be able to afford it at 800K. You may not like the sky high real estate prices but you cannot argue that it is providing a lot of jobs for folks. The government is getting their fair share through increase property values and tax revenue (payroll) – so the notion of introducing foreign ownership requirements is a “no go” particularly when the government is clawing for every penny these days.

  • CJ Watson

    Ahhhhh that time of the month princess??

  • Albertneedstostopposting

    Okay Albert. Firstly, you have WAY too much on your hands. Please note that you have literally replied to EVERY SINGLE COMMENT that has an opinion against this article. Chill out. People are entitled to their opinions and so are you (but you’ve already announced that pretty clearly in your FIRST POST, we don’t need anymore). You posting and bashing on everyone else’s opinion against this matter is a little over the top.

    And finally, facts are facts, Vancouver housing prices are simply way too high. That’s not an opinion, it’s a fact.

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