Vancouver Love Affair

          I moved to Vancouver in October. This is the second time I have lived in the city. I have always loved living here. It is ranked amongst the top ten in the world for good reason. However, like all cities, it has its faults. Vancouver’s main one is real-estate. The citizens of Vancouver honestly believe that prices cannot correct. Every excuse in the world is used to justify the price of the asset. Unfortunately, the common sense used in the reasoning is as rare as the household income needed to justify its price.

          According to the Real Estate Board of Greater Vancou-ver's (REBGV), there were 2,853 sales through the Multiple Listing Service in May, a 15.5% decline from a year earlier. May sales were the lowest for the month since 2001 and 21.1% below the 10-year May sales average. At the same time listings increased by 6,927, a 16.8% increase from a year earlier. New listings for May were 15.3% above the 10-year average for the month.

          The REBGVD’s average price for all residential properties in Metro Vancouver ( Vancouver, North Vancouver, Surrey, Burnaby, Delta, Richmond, Fort Langley, and Coquitlam) was $625,100 in May, up 3.3% from May 2011. Specifically, detached home prices jumped 5.1% from a year ago to $967,500, apartments increased 1.7% from a year ago to $379,700 and town-home property prices rose 0.9% in May from a year ago to $470,000. However as pointed out by Garry Marr of the Financial Post, "using actual average prices instead of the index, average detached home prices are down 12.2% from a year ago, town-homes are down 0.2% and condominiums are off 1.1%."

          While I am unable to find any data for commercial property, I am certain that it is in worse shape than residential. My reasoning is all one must do is walk down any street to witness at least one empty store front or a "For Lease" sign on office buildings. This is true no matter what part of the city I visit.

          Values have become so crazy that even our financial institutions can no longer justify them. Our banks have started to jump on the price decline band wagon this spring with various calls for price declines ranging from 10 -20%. We feel this is very bullish on their part. However, the fact that banks (which are in the business of lending money and cannot create fear) are openly projecting price declines, it is safe to say the top of Vancouver’s housing market was in 2011.

          A collapse in real estate prices in Vancouver is going to have a profound impact on the city. According to Statscan, the median household income in the city is $67,500. Yet, people live as if it is double that. The city has industry and commerce, but not enough to justify its cost of living. Therefore, it is very reasonable to conclude that the local economy is very dependent on home equity. Should home prices collapse, home equity will be squeezed and spending will contract. The outlook for the local economy does not look promising.

          Vancouver home values are a gift to those who purchased decades ago. If you are one of these people and have thought of cashing in, now is the time. Prices are correcting and will continue. Invest the principal in low risk assets (see page 6) and the income will more than cover the cost of renting in the lifestyle you are accustomed to. Sure, price will eventually recover and break new highs, but, it will most likely not occur for at least a decade after the trough.