He’s a lawyer. She’s a manager. His mom’s a doctor. The family has breeding and expectations, not to mention wealth and upward mobility. Just the kind of people who could live anywhere, and do it well. Make the locals inadequate. But not Vancouver.
Some months ago he was offered a job at a prestigious BC law firm with the usual perqs, Big cheques. Moving costs. Status office. West Georgia ain’t Bay Street, but there was the appeal of a city which fashions itself green, progressive, sporty and insufferably self-centred. Besides, you can drive the Carrera all year. Sweet.
But it took just one weekend of house-hunting on the west side, in West Van, even North Van and down to White Rock to send the ambitious thirtysomethings fleeing back to godless Toronto. “They are,” he told me, “nuts. What possible benefit is there changing jobs and doubling my salary when I have to pay triple for a lesser house?” Left unsaid: If I’m going to move to a regional city with no subway and no prestige at least I expect to live better, not worse.
This is how a bubble can eat a city.
Now meet Mike.
Hi Garth: Regular reader and we are on the same page re: real estate and investing. I have written before but our situation is this: I am 58, she is 50, debt free, both working, conservative and diversified investments. Our humble 1 bdrm condo was purchased for 149k in Dec./96 and paid off years ago. Anyway, things are definitely slowing down here. Our building is one of the best in Kitsilano: concrete, well maintained, no leaks, tennis court, outdoor pool, gym. Units usually sell very quickly but not now. A one bedroom has been on the market for a month. Original asking price was 400k, now lowered to 359K and still no takers. Yet, the skyline is full of cranes as new condo buildings continue to be built on a massive scale. Who is going to buy them? In fact, as you have pointed out, prospective buyers (younger people) are up and leaving the city. Love your blog and many thanks. Michael.
As a rare insightful story in the Vancouver Sun pointed out this week, the same real estate which has Lower Mainland Boomers kissing their dirt is bankrupting their kids. In the last three decades household incomes for young couples have dropped by 6%, despite a steadily rising economy and a forty per cent surge in working women. But at the same time, real estate prices have shot up 150% (and 300% in Vancouver). A house used to cost three times your income. Now, if you’re insane enough to buy one in the city, it takes 11 annual incomes.
Said the author of a report on this economic vice: “BC is now the hardest province in which to raise a family.” And that’s precisely why net migration to that part of the country has turned negative, and why the pace of the outflow will continue. It’s what happens when real estate greed is infused into an entire local society, where people are measured by where they live, and where even government encourages numbing speculation.
But let’s not rag only on Vancouver.
Real estate delusion’s alive and well in Toronto, as well. In fact, these two cities are the main reason why a shocking 20% of Canada’s entire gross domestic product (GDP) is now made up of housing sector activity. That, by the way, parallels the experience of California before its bubble burst. That state, which has a bigger GDP than Canada’s, is now considered the world’s most affluent failed state, unable to pay all its employees or bondholders.
This is how a bubble can eat an economy.
Remember I told you a few weeks ago that we’ve been building more homes for that past ten years than we can absorb? About 40% more than the formation of new households, in fact. That compares with the 29% excess which ultimately brought down the American housing market.
Nothing now exemplifies that more than the forest of condo towers stretching from the north shore of Lake Ontario to the nether regions of suburbia. And a new report from Bank of America Merrill Lynch says this overbuilding will lead to a price correction of 15%.
Meh. Where have we heard that before?
Bank economist Ryan Bohren underscores this pathetic blog’s research: housing starts of 206,000 (September’s annualized number) far outstrip the natural formation rate of new households, which is just 150,000 to 175,000 a year. And it’s stunning how much of this excess has erupted in a single market.
There are 18,000 new condo units appearing on the Toronto scene this year alone, and another 38,000 in various stages of planning and construction. That’s enough to satisfy demand for almost five years, and yet the development orgy continues. Says Bohren: “Even if we assume 50% of Toronto’s household formation is now destined for condo purchase or rental that is still over 3 years of inventories. As these units are completed the market will likely have an increasingly hard time absorbing them, leading to higher vacancies and downward pressure on prices.”
By the way, as prices fall, so do rents. It’s estimated that somewhere between 80% and all of the new units coming to market are being bought by amateur speckers, convinced they can flip them for a cool buck. But as the city saturates and cools, many will turn into reluctant landlords – happy to find a tenant at any price who will help defray staggering property tax and condo fees which in many buildings now equal the market rent.
This is how a bubble eats speculators.
Now, I love real estate. I’m a junkie. Did my last deal on Friday.
But this will not end well.