By Ron Friesen
Valuation growth in the Vancouver residential real estate market is slowing down. Really? It depends how we take our measurements.
Buyer velocity continues with lower than traditional inventory available for sale. At the same time the rate of property valuation is slowing, though not yet devaluating. Is there a limit to how much buyers are willing, or able to pay for a home?
An observable indication surfaces as homebuilders in Vancouver are being more cautious about their future builds. They have growing cost concerns as they shop for land and plan new projects. The profit margins for builders of new homes in Vancouver are not well publicized. However, through careful listening and figuring our best guesses are indicating margins have dropped by half over the past year.
Where builders could have expect an end-of-project gross profit of 24% as recently as June 2016, I have heard talk of numbers down in the 12% range in 2017. It seems increasing costs for land, labour and materials are limiting profits as price growth for finished projects is slowing under competition and increasing buyer resistance.
Another costly problem increasingly affecting builders and developers is with suppliers delaying or otherwise interrupting delivery of appliances, fixtures and other materials. Buyers need to be aware of clauses in Developer Disclosures regarding substitutions in equipment, finishes and other changes allowed upon delivery. And we as buyers need also to understand many of these substitution clauses are fair and necessary.
Where is the line of buyer resistance?
Real estate market statistics are revealing pre-sale prices ranging as high as $1,200 to $1,500 per square foot for new condominiums. This is not so surprising for new premium units near the Cambie Street / Canada Line and other areas close to Vancouver’s core. But we are hearing unverified indications of these kinds of prices in East Vancouver near the Joyce Street Sky Train Station.
But no matter what the actual figures are the market continues to perform to the distress of some, the benefit of others, and the entertainment of outsiders and the less affected. Competition for condominiums is driving their prices higher, but whether the value is sustainable remains questionable. At what point are the prices too high? Most will say when a Buyer pays more than they can possibly hope to recover, including all inflation-indexed costs to improve and resell at some point in the future, then the value is unsustainable.
Others will factor in the value enjoyed by homeowners living in the home they are actually paying for and the personal equity they are building. During this period of relatively low finance interest rates this seems a fair argument. Considering how a replacement home purchase would be valued relative to one’s own at the time of sale further supports this.
No matter how one perceives the new residential real estate realities we can be certain the market is beginning to creak under the weight of media and public scrutiny. Builders are increasingly nervous and cautious about remaining within product demand limitations. Buyers continue to face challenges from competing buyers and relatively low inventory. Sellers continue to take profits, but wonder where and at what cost they will relocate? Realtors continue to service the market under the burden of increasingly complex legal, regulatory and market conditions. Governments are responding to public pressure to steer the market. And the media continues to report the obvious and polarize public opinion.
This should, and is making residential real estate investors nervous. The real estate market is showing early signs of instability providing us with the feeling we experience at about the half-way point in a round of Jenga®.
The Effects of Shrinking Employment In A Rapidly Evolving Future
There are opinions expressing the service and retail industries will show increasing job loss as department stores, grocery chains and other brick & mortar service providers continue to take advantage of autonomous vehicle, self-service and other AI technologies to replace human workers. I have heard from reliable sources how the role of professionals in many industries will be significantly reduced over the next decade. Increasingly, consumers will rely on service from automated, artificial intelligence processes rather than from human representatives.
We read about the 100,000 plus jobs in US department stores lost in six months ending April 2017. This number is more than the total number of working coal miners or steel workers in the US. The number of jobs lost at department stores since 2001 is eighteen times higher than in the coal industry over the same period. Lives are changing.
In Canada the population grew 4.4 percent between 2012 and 2016 while employment over the same period grew by only 3.7 percent. Employment numbers are down over the period in manufacturing, agriculture, natural resources and the service industries, among other industries where artificial intelligence is being integrated.
The next decade will be upon us rapidly, and the changes continue to accelerate. I suspect many of us will not appreciate the impact until after we are affected personally. During the twentieth century industrial revolution it can be argued more jobs were created in new opportunities than were lost. A great deal of this result was the creation of greatly increased markets for the products of the new automated industries.
The difference with this new technology revolution is how it is greatly reducing the number of human brains required to manage processes, activity and results. How many workers will be required to manage the affairs and delivery of service for a fleet of taxis as the autonomous vehicle evolves?
I’m not an economist, but how will people pay for services and goods if they do not have a sufficient income relative to the cost of things? This is excellent food for thought for those thinking about opportunities, new models and solutions for the challenges in the decades ahead. Rather than doom and gloom, these thoughts are a specter to consider in terms of how markets and investors might benefit from the age of accelerating and yet-to-be-revealed technologies. I believe the question of how does technology serve the people will be reversed. The driving considerations for civic and business leaders could well be questions such as, ‘What size of population is optimum?’ and ‘How will people best serve the new technologies?’ and ‘What about housing?’ Let’s not be overwhelmed, rather we ready ourselves to carefully shape continuing progress.