Risk, Reward and Barriers
By Ron Friesen
As the Greater Vancouver residential real estate market becomes more and more challenging for local citizens to get into and get ahead in the question of future value becomes more poignant. Discomfort sets in when a risk decision needs to be made about future real estate values. Understandable. We can refer to the past and look at facts. But where do we find reliable information about the future?
The future has always been built on faith. Future is a romantic concept and needs to be considered using classical data. We all contribute to the shape of the future through our decisions and future actions, typically following revelations found in historical statistics, stories, trusted advice, all blended in with our individual tolerance for risk and varying degrees of faith in the future.
The local residential real estate market in Greater Vancouver is a challenging one to enter. It’s true. One requires a higher degree of faith because of greater risk, ie. the discrepancy between average earning power and the cost of entry into the market. However, the future cost of not owning real estate should be an equally serious consideration for most folks and families.
How, then, do people decide if now is a good time to make the heavy financial commitment to purchase a home, or trade up? Well, if not now, then when?
Density, the new frontier.
We know Vancouver is geographically challenged by the limited amount of land available for new residential construction. There is already considerable pressure on zoning authorities to allow building into the agricultural reserves within and around the area. Industrial interests seem continually under pressure to find suitable ground to continue to expand facilities and continue to grow jobs in the region. The pressure is pushing residential construction skyward and we are seeing what seems a remarkable amount of vertical residential space integrating into the urban landscape.
According to City of Vancouver published data, there have been thirteen permits for construction of multi-family dwellings over three stories January through March 2017 accounting for 1,211 new attached residential units. This compares to six permits issued in the same three-month period in 2016, accounting for 886 residential units.
Visionaries see continued vertical progress for the residential future of Vancouver. Condominium sales continue strong in this market as more buyers adapt to the fact a detached home is currently out of their financial reach. Purchasing a condominium is central to many owners strategy to make future detached home ownership possible. It’s today’s ‘land rush’. Opportunity. Start up.
Let’s think about this future. As sky-scraping residential towers continue to rise up and sell out, the idea of living in a detached home with a private yard fades out of reach for many. The past tells us the value of detached homes will continue to rise into the future, just as any rare and desirable commodity. In this case rare being defined as opportunity to own compared with demand to own. Vancouver has global appeal.
The prices of detached homes continue to rise even as demand slows as a result of changing mortgage rules, foreign buyer tax and the seeming inability of so many to afford a detached home in Vancouver.
Is it less risky to buy, or to wait?
Let’s look at a typical residential property in North Vancouver and watch its sales performance over the past twenty years using the historical Median Selling Price data available. And let’s also create some fictional characters to give the story a bit of life and resonance.
Jeb and Amy, let’s say, purchase this subject property in the spring of 1997. A year later, Jeb and Amy welcomed a son into their family, so he is now nineteen years old and his parents want to help him purchase a home, lucky fellow.
In spring 1997, Jeb and Amy purchased a home in North Vancouver for $366,000. Ten years later in spring 2007 they sold the home for $770,000, a gain of approximately 110%. Nice! And imagine the improved equity position they now find themselves in.
They immediately purchased another home in North Vancouver in the Median Selling Price range for $780,000, aggressively paid the mortgage off in 2012, and now, in April 2017 they would like to purchase an income property to rent and hold until their son is ready to take on the homeowner responsibility. This new purchase would require a minimum 20% down payment, over $400,000, and leave them with a mortgage in the range of almost $1.4M, based on the current Median Selling Price for detached homes in North Vancouver of $1,850,000. This price is another 137 per cent increase over the price they paid for their principle residence home, similarly positioned in the market ten years earlier in 2007. Are Jeb and Amy getting ahead with their real estate?
Of course they are. They now own one property free and clear. This principle residence is now valued significantly higher than when they purchased it, even after adjusting for inflation. The only obstacle to their next step could be carrying the debt load and the high periodic payments of making the next purchase. However, rental net income should go a long way to covering carrying costs until their son is able to take over. Still, Jeb and Amy will need to consider their earning power, lifestyle expense, any inheritances and other financial windfalls and setbacks they may have experienced…all of this against alternative life choices. It hasn’t been easy but Jeb and Amy are in a good position.
The question for prospective buyers today is, can they find a way to be in the position Jeb and Amy are in today? Are the new buyers willing and able to risk, make the sacrifices and pay the bills to own their own home, and to create options in the future?
These days, in most cases owning a detached home will begin with strata ownership. Taking advantage of the lower financial entry barrier. People who purchased condominiums in Vancouver East five years ago have seen the Benchmark Price (BP) for their property increase 54% according to the Real Estate Board of Greater Vancouver (REBGV) Home Price Index (HPI) statistics. There is no guarantee going forward this rate of increase will continue, but being in the market is the only chance to get ahead in the market.
By comparison using the same source, the BP for a detached home in Vancouver East saw an increase of just over 73% over the same five-year period. Better, of course. However, the entry barrier is much too high out of the gate for most first-time buyers.
Most who study the subject will conclude, for those who desire home ownership it is less risky to buy into the local real estate market as they can, as soon as they can, than it is to wait. However, be cautious. No one should take on more risk than they can bear.
Keep your nose in statistics and get trusted advice from someone who knows how to interpret them. Only the past is clear.