Is the Vancouver Real Estate Market in Trouble? With Tom Davidoff

Please tell us about yourself.

I’m an economist at the Sauder School of Business at UBC and my research is on aging, insurance and the housing market. I have a recent study on laneway homes. I take an interest in housing policy and spend too much time on Twitter.

Has the market in the first half of 2021 surprised you? 

I was surprised when the turnover happened late last year. We never got the covid crash people predicted and then there was a crazy boom. The surprise happened a few months ago. But once you tell yourself the story about why the market is so strong, it’s hard to be surprised. The story consists of two things: 1) people are able to continue working from home but they need more space and, 2) low interest rates lead to phenomenal affordability.

No one is talking about foreign buyers anymore; it’s all about the local demand. Is that what you’re seeing?

I think it has been locals driven by the need for more space and better affordability. We’re seeing this across North America. So foreign buyers are probably not the cause.

Does the current hot market change the narrative from 2016/2017 or is this a new moment?

When the foreign buyers tax came in, we saw a downturn throughout the market, especially in the high-end single family niche. People told me that it was just the high-end of the market that was impacted. But things have shifted now.

The millennial cohort has come of age and the great financial crisis has sorted itself out. It’s not just Vancouver that is seeing this. I think people missed the impact of the local market. 

Canada was recently named the second frothiest housing market in the world. What are your thoughts on the moment we’re in and where we go from here?

When you have low interest rates, and historical growth in prices and rents, it’s hard to rule out anything as rational pricing. If something snaps and we go to 7% mortgage rates, that could have devastating effects. But that’s not what is predicted. If we continue to see immigration into Vancouver and low interest rates, and Vancouver continues to be a hard place to build, these prices are justifiable.

When you look at the places in the US that got into trouble, you saw a run up of prices with an easy ability to build supply. We’re seeing places in Ontario like this where prices are way above construction costs when they should be lower, because it’s easy to enter the market. Those are the markets we should worry about.

What is your take on inflation in the next few years?

I have uncertainty. There’s a lot of supply shortages due to covid. I think we’ll see some more months of price increases. Are we converting to a new normal of 5% inflation year on year? Probably not. It will probably sort itself out within a year but maybe not.

We’ve talked about the K-shaped recovery. What does that look like for Canada moving forward? 

We’ve seen a slowdown that was not equal across segments of the economy. I was able to do my job as a professor. But if I ran a restaurant, hotel or yoga studio, it would’ve been a different story. The people whose jobs were threatened by covid are, generally, lower income earners who rent.

The big question now is if cities will still be relevant going forward where people want to work and socialize. When I grew up in the 70’s in New York, living in the city was not a plus. If we shift to a world where everyone can work from home and home can be Montana or Nelson, BC, then that is a risk.

I think cities will probably rebound. People do want to be around people. But it could go the other way.

Do you see the move away from cities as a risk for Vancouver? 

I don’t think it’s a huge risk anywhere; I think cities will come back. If it was a risk, I think New York or Toronto would be more at risk than Vancouver. People don’t want to be in downtown Vancouver just because they have a job there. There are amenities in Vancouver that will still be desirable. But if you’re thinking about where to invest, you may want to look at that uncertainty.

The market keeps chugging along year over year with high sales ratios. Is there a real estate market cycle in Vancouver?

Why do prices keep going up? Buying a bigger house should make you poorer, not richer, but that hasn’t been the case in Vancouver. Most working people don’t have the down payment to afford the current value of homes and that’s where we see institutions come in.

Kelowna is experiencing a lot of the same growth that Vancouver has seen for years. 

You see it in Halifax too. Halifax is really affordable. You see it in Montana too with Californians coming in. I think it relates to low interest rates; fundamental values get very high in a place with realistic growth prospects.

Until rates go up or something drastic happens, it may take some time until incomes catch up to fundamental values. 

Do you see financialization of housing as a risk?

It’s nice to live in a bigger house. It shouldn’t be true that if you buy a bigger house, you get to have more of other stuff. But it has been true. So that’s the puzzle. The resolution for the puzzle for me is we have high fundamental values that regular people can’t pay. That leaves the path open for institutions. Prices may increase and institutions require lower rates of return than human beings.

What will the market do in the next 6 months to 3 years?

I think rents will be in the news again. We had a bit of a reprieve during covid but I think we’ll see rents start to go up again. I could see small increases in the interest rate going forward. There’s huge uncertainty around the inflation number.

Where’s a safe place to put your money right now? Or a good place? 

The only thing riskless is good government debt, but then you have the risk of inflation. Short-term, cash-like products can be safe but there’s inflation risk there too. If you find something without inflation-risk, it’s usually a low rate.

Real estate has done well and I don’t want to be anti-real estate. A diversified stock portfolio is a good choice. It may be a little overvalued but you’ll do well in the long run.

• Thomas Davidoff