A Vancouver Real Estate Market Crash: Really?


Blog by Arnold Shuchat | August 17th, 2016


I have found that people who own a lot of real estate do not spend time blogging about the impending "bubble" bursting. Those who do this are the ones who don't have the most to lose if that happens.  It is not difficult to see why.

An old expression I've heard many times, is that those that can do, and those that can't teach. There probably is a negative market bias in all the media and blogshpere propagated by those who sit as simply real estate market observers.  This was evident to me when I first started publishing on my website in or about 2011.  As time went on, hails of negative market sentiment and "anonymous", classless real estate market watchers laced into any market observations with livid, rude and stereotypical comments, looking for any possible tidbit to prove their thesis.  Each of these web participants sought credibility from a successful prediction of an impending market collapse.  That happened as well for the better part of 2012 through late 2013;  except for the fact that the "burst" never happened.  Slowly, many of these blogs became far less active and those that "did" as opposed to those that "talked" made a bunch of money.  I feel sorry for some of the people that bought into the negative hype and based their financial decisions and their family's residential security on the sentiments ellicited by many of those anonymous bloggers and the media who sold papers from the whole process. I know Realtors who did likewise.

Those without real estate holdings will be all over the hype of an impending "bubble burst".  It is in their interest to do so. They got out too early; they want back in. Properties are too expensive now.  I get it.  But there is a problem with this real estate "bear" thesis and it is laid out in the following graph which represents the Housing Price Index for all detached homes in the Greater Vancouver Area over the last 10 years.  Whether you live in a particular neighbourhood is likely irrelevant.  The peaks and dips pretty much occurred in parrallel. (You can cursor over the graph to see the actual numbers.)

 

As you can see from the "live" graph above, the largest dip over the last 10 years occurred in the fall of 2008 with the international credit crisis and fallout from the defaulting of all of the sub-prime mortgages. The market for SFDs peaked at $803,000 in June of 2008 and bottomed in March of 2009 at the price of $688,600 for a gross possible gain of $111,400 if you actually timed it perfectly. Commissions on the way out, staging costs, moving costs both ways and Property Transfer Tax on the new place would eat up close to $47,000 of that $111,400 for a net possible gain of $64,400, unless you sat out and just rented a place for the minimum possible time of around 6 months.  That rent would likely cancel out the PTT.  In the end, even with perfect market timing, you might have been able to extract $64,400. And, I am assuming no mortgage pre-payment penalties which for the most part would be unlikely.

But what are the odds of most people doing that? The market declined by about 13.9% at the maximum.  I should add, that there are neighbourhoods where the decline was more pronounced and where some prices may have dropped some 25%.  The reversal however, still took place in March of 2009. Timing it perfectly would have meant selling in June with a late 3-4 month possession date and making the purchase decision at the begining of March 2009. 

The result of the above illustration is that for most families the disruption would not be worth the amount of the gain. People who live in their own homes are owners of a risk "hedged" transaction. They have themselves as a tenant and they are paying wholesale rental rates for their capital, i.e. their mortgage money.

Currently mortgage rates are the best they have ever been. Japan right now is operating at negative interest rates to help stimulate that economy and get back account money flowing in the economy and the world financial markets are still in stimulus mode.  Unless you personally envision yourself needing to move for personal reasons, I would hardly recommend a change of real estate asset mix for your principal residence as part of a play within your investment portfolio.  Your decision to do so really depends upon where you would plan to move and your forecasted time frame for doing so.