How would Vancouver react to a real estate meltdown?
The housing market has been the talk of the town around the Lower Mainland for years – and rightfully so. With housing prices hitting record highs and homes selling for millions more than their asking price, it’s been hard to have a conversation without referencing real estate.
But if the saying is true, and what goes up, must come down, is a drop in the market imminent? And can the city survive a crash if it were to happen?
While potential buyers would be crossing their fingers hoping their chance to enter the highly competitive market is around the corner, experts are predicting that it’s not in the cards in the near future. “[There is] no sign of a slowdown in 2017,” says realtor Jessica Prasad P.R.E.C. from Re/Max Sabre Realty. “Vancouver condos have been increasing at 2.2 per cent per month. Townhouses are on fire this year, too.” But what would happen if a drop were to occur? Prasad believes Vancouver would survive – with a strong economy and the draw of the area’s outdoor amenities and beauty, she believes people from all over the world will still be interested in and able to support the real estate industry.
“Historically the market has come up and gone down but the long term trajectory has been consistently upward,” notes Elise Weatherby, realtor with Keller Williams Black Diamond. “When we have seen corrections of a strong market in the past, the Lower Mainland and Fraser Valley to date has always recovered and gone on to rise even further.”
“A drop in housing prices might not even be a bad thing, it would give buyers a chance to get into the market who have been priced out and forced to rent, and sellers a chance to sell without being subject to a feeding frenzy! There are also many current owners who would like to “buy up” but can’t. A correction would reduce their current property value but it would also make the overall gap between the next pricing bracket more attainable.”
Weatherby notes that as long as homeowners can afford their monthly payments, those who are able to wait it out until the market recovers have historically done well. “A market decrease will mostly negatively affect people that need to sell and will not be buying again in the same market,” she says.
While a drop over the next several years may not bring all bad news, a crash on the other hand could have serious long term affects for many throughout the province, and potentially the country, depending on the catalyst for such a substantial downturn. “I think it would be pretty bad for the local economy,” says Tom Davidoff, an economist at UBC’s Sauder School of Business. “A lot of people are employed in real estate and affiliated industries.”
“Locally the real estate industry is a huge support to the economy,” says Weatherby, noting its prominence over the province’s major exports in the forest industry. “We saw a small correction in the housing market in 2008; many other industries dependent on the real estate market were affected. The building and construction industry is the largest dependent on the housing market, from new home builders and their trades people to little local furniture shops; it’s shocking to think how many revenue streams are hinged on housing.”
Jack Favilukis, professor at UBC’s Sauder School of Business, says that a city’s reaction to a drop or crash in the housing market is as complicated as the reasoning behind it. “If the drop happens because foreigners pull out of the market, and if the locals haven’t been speculating and overleveraging themselves, then the drop won’t really have many negative consequences,” he says. “Sure, some people will feel poorer, and some people won’t be able to borrow against their house to buy a new TV or car, but we would be unlikely to see mass defaults and spillovers to the rest of the economy (as we saw in the US in 2008).”
However, Favilukis says that if foreign investors pull out and locals have been “buying housing with the hope to sell it for more in a year and using short term financing – then these people will have no way to refinance and we will see mass defaults. This will affect the banks and can cascade to the rest of the economy.”
If Vancouver were to see a drop or crash in the near future, it could be a matter of waiting out the storm or expecting strategic intervention depending on the severity of the downturn. There are risks to investors, the economy, and potential and existing homeowners but the past has proven that with the right tools in place, the market can and would recover.
PHOTO: courtesy ilovehomes.ca, ubc sauder school of business, istock