Greater Vancouver’s home price gains during the pandemic have lagged behind most other Canadian jurisdictions as well as those in the United States, in stark contrast with the region’s unprecedented increases in the mid-2010s, when the provincial government intervened on foreign demand.
“It’s a different ballgame,” said Tom Davidoff, associate professor and director of the Centre for Urban Economics and Real Estate at the University of British Columbia.
“This is enhanced affordability for locals pushing up prices, as opposed to diminished affordability for locals, full stop, due to outside pressure.”
This time around, local residents – seen as the primary driver of the housing boom – have been able to access a greater pool of money with their relatively stagnant wages due to lower interest rates and more accessible bank credit. Adding to the housing froth has been heightened demand for suburban properties with more living space due to the COVID-19 pandemic, Davidoff says.
But these factors are being witnessed across North America.
Canada’s home prices have jumped 17.3%, whereas Greater Vancouver’s have risen just 6.8% between February 2020 and February 2021, according to the Canadian Real Estate Association. U.S. house prices rose 10.8% from December 2019 to December 2020, according to the Federal Housing Finance Agency (FHFA) House Price Index.
Despite the continental surge, some Vancouver-based media commentary has asked, “Where is the outrage?” now, in comparison with the significant political pressure applied on the B.C. government in 2017, when housing prices rose 48.5% over the prior three years, according to the Real Estate Board of Greater Vancouver (REBGV).
Then, foreign ownership – and money derived from foreign earnings – was perceived as a unique factor further disassociating local incomes (residents) from local housing prices in Vancouver.
Now, foreign purchases are down significantly in B.C. and immigration has vanished.
“The outrage was, you know, people who want to get into the market can’t, and renters are paying more. This time, it’s different, because the reason prices have escalated, in part, is because of enhanced affordability through the mortgage market,” said Davidoff.
“So instead of another group crowding out local demand, which was part of what was happening in 2016 – you know, how much of a part is controversial – but now, it’s pretty clear, it’s that people have more ability to pay,” he added.
People have more ability to pay because Bank of Canada (BOC) interest rates are at an all-time low of 0.25%. Furthermore, BOC is buying government bonds (debt) from financial institutions, allowing them to lend more freely and at historically low interest rates.
This process, called quantitative easing, “encourages households and businesses to borrow, spend and invest,” states BOC. “For example: We can buy five-year government bonds, which will lower their yield. This would be reflected in lower interest rates on five-year fixed-rate mortgages, making it cheaper to borrow to buy a house.”
The BOC has indicated low rates are here for the near term, at least until 2023.
Davidoff elaborated that suburban housing markets, such as in the Fraser Valley, have typically been cheaper as people factor in higher transportation costs. But buyers appear to be betting that working from home could become permanent.
“I think it’s true that the virus has made people want more space. Out in the suburbs, there’s more space, which is what you want. And the issue of transportation has been diminished,” said Davidoff.
Urban planner Andy Yan says outrage over housing still exists but “it’s a different type of outrage if you’re totally locked out of ownership, as opposed to moving on up.”
Yan, director of Simon Fraser University’s City Program, suggests people are leaving their condos and paying more for the suburbs.
Although Vancouver’s overall price change is 6.8%, detached homes are up 13.7%, townhouses are up 7.2% and apartments are up only 2.5%, according to the REBGV. However, the Fraser Valley Real Estate Board reports 25.3% price gains in all housing forms since February 2020.
“I think there is outrage. But it just depends on who you are,” said Yan, who has been criticized for his 2015 report suggesting overseas Chinese buyers fuelled the remarkable 2014-17 gains.
“My point wasn’t only just foreign money. But it was foreign money with cheap money, right? Now we have a scenario where cheap money completely takes over the environment,” said Yan.
Another difference between then and now, said Davidoff, is how rents have remained the same in Vancouver, due, in part, to government intervention (rent freezes through to December 2021). And so, a significant population is not faced with higher housing costs during the pandemic.
Yan said it is those renters who likely have had their incomes “vaporized” due to the pandemic.
“If you look at the core of unaffordability, it’s both very high housing prices with relatively low, very, very low paying jobs,” said Yan.
Both Yan and Davidoff suggest housing prices are now at a level of risk not seen before, should interest rates rise and transportation demands return to the pre-pandemic era.
The total proportion of Metro Vancouver residential properties owned by non-residents in 2018 reached 4.9% while “some non-resident participation” in properties amounted to 7.6%, according to the Canadian Mortgage and Housing Corporation (CMHC). International students who file an income tax return are considered residents by CMHC. Last year, the CMHC reported these figures have remained the same.
B.C. introduced a foreign homebuyers tax in August 2016 and a so-called “speculation and vacancy tax” in 2018. Stricter mortgage requirements (“stress tests”) were also applied then by the CMHC, leading to house prices dropping in Vancouver in 2019.
Cracking down on potential crime and tax avoidance/evasion has also been an issue in Vancouver real estate. The B.C. government is conducting a public inquiry into money laundering that is to look at the regulatory regime in real estate. And between 2015 and 2020, a special Canada Revenue Agency audit program has issued $729.1 million of tax reassessments linked to Greater Vancouver real estate.
Budget Tips Canadians Should Consider Before Renovating Their Home
The decision to undergo a home renovation project should be exercised with an equal amount of excitement and caution. Most renovations require dealing with the foundation, plumbing, or electrical within the home, producing significant costs.
Canadians should approach each renovation with a firm understanding of their finances, especially if the project will involve a contractor or paid professional. To make sure you’re on the right track, these budget tips can help.
1. Estimate Your Costs
If you’re considering a renovation on your home you’ve likely come up with temporary plans and dreamed-up colour schemes and design ideas. The next step is evaluating the costs for each renovation to determine if you have the financials you need to get started.
When it comes to budgeting for a home renovation, it’s important to overprepare — creating a spreadsheet outlining each project and your projected costs will help you visualize your expenses. Once you have your costs in front of you, you’ll want to pad your budget slightly. Renovations are synonymous with surprises and inflated costs, and it’s always better to be overprepared.
2. Find Savings with DIY
One of the simplest ways to lower your renovation expenses is to take on specific projects yourself. The DIY approach can range from construction-based projects to simply painting the walls or re-furnishing your old furniture — it all depends on how handy you are and the time you have to contribute to the project. If you can manage to save money on professional painters or lessen the number of construction workers on any project, your chances of saving money are far more significant.
3. Know Your Financing Options
Ideally, you’ll want to have as much money saved as possible before undergoing any projects in your home. Every household is unique, which means your financing options may vary from your neighbours. What you’ll need to ask yourselves is, how much money will you require to complete this renovation and will you be able to pay back potential loans?
Homeowners are looking for alternative lending options that don’t require the stress and time that can come with traditional lenders — extensive interviews, paperwork, and the time it takes to receive any cash is unfavourable for most.
These days, homeowners are looking at online-only lenders like Flexmoney.ca for a faster, more convenient way to access the money they need to complete their projects. The new wave of lenders is focused on helping borrowers access the cash they need quickly and without the added stress of waiting and wondering if they’ve been approved. It’s easier to focus on what needs to be done in your home when you have the funds you need to get the job done.
4. Shopping Second-Hand
The idea of second-hand is still new for many homeowners, who are hesitant to purchase things for their homes that have been previously used. The reality is that second-hand goods are a beneficial tool for anyone looking to save money on their renovation. With some time and patience, you could find great deals on appliances, furniture, and home decor. With the extra savings, you can focus on the areas of the home that need the additional capital — or, if you’re right on budget, any money you’ve saved could go into a savings or investment account.
The housing boom, central banks and the inflation conundrum
By Sujata Rao
LONDON (Reuters) -A multi-year boom in global house prices which even a pandemic has failed to halt is forcing central banks around the world to confront a knotty question – what, if anything, should they be doing about it?
The surge in property values from Australia to Sweden is often viewed benignly by governments as creating wealth. But history also shows the risk of de-stabilising bubbles and the high social cost as millions find home ownership unaffordable.
The irony is that while the cheap money created by low or negative interest rates has driven the price rises, they barely figure in central banks’ calculations of inflation, one of the key drivers of their monetary policy.
While housing costs, whether rent or home repairs, are assigned varying weights in inflation indices ranging from 40%-plus in the United States to 6.5% in the euro zone, house prices themselves are left out. As they spiral higher and higher, many argue this is no longer tenable.
“The debate of whether we actually are reflecting inflation properly will come up more and more. House prices will start getting a lot of attention,” said Manoj Pradhan, co-author of a book called The Great Demographic Reversal, which predicts a global inflation resurgence in coming years.
Global residential property prices have risen 60% in the past 10 years, according to a Knight Frank index. In 2020, even as COVID-19 choked the world economy, they climbed an average 5.6%, with 20%-30% jumps in some markets.
While low interest rates have long been the main driver of the rally, existing government subsidies for home ownership and more recently pandemic-era support such as suspending property taxes have been factors too.
Many of these one-off support measures will start to be wound down, but governments often fight shy of politically tricky measures to keep a lid more firmly on prices, such as banning multiple property ownership or easing building regulations.
That raises the question of what central banks can do.
New Zealand’s government fired the first salvo in February when it told its central bank to consider the impact of interest rates on house prices, which soared 23% last year.
Others are considering the question too. European Central Bank President Christine Lagarde said last week that measuring housing’s role in the rising cost of living had emerged as a key point in a strategic policy review due to be unveiled this year.
If real inflation is higher than the official consumer price index is measuring, it could imply that central bank or government policies are more expansionary than they should be.
“If housing does not signal inflation via the CPI, then the economy is more likely to run hot, and what you get over time is generalised inflation pressures,” Pradhan said.
At present rental inflation is subdued due to pandemic hardship, or because low interest rates and remote working are encouraging home-buying.
Morgan Stanley’s chief cross-asset strategist Andrew Sheets said this may be giving a misleading signal. “The rental market will be weak and the housing market will be strong and that (rental weakness) could show up as a disinflationary force.”
There are strong arguments for excluding headline shifts in house prices from inflation indexes. Housing is, for most people a lifetime purchase rather than an ongoing expense, which they are designed to gauge.
Including house prices in the inflation measures central banks use to guide policy is also widely seen as impractical, given their extreme volatility.
More central banks may however consider adapting inflation indices to include a measure of the costs associated with living in one’s own home, such as maintenance and home improvements.
At present, inflation measures used by the Fed, the Bank of Japan, New Zealand and Australia include so-called owner-occupier costs. But the gauge employed by the Bank of England does not, and they are also not factored into the main inflation measure used by the ECB.
The ECB has argued for their inclusion, but collecting timely data from 19 countries and differing home ownership levels across the bloc would complicate the task.
Crucially, economists believe including these costs might have lifted euro zone inflation by 0.2 to 0.3 percentage points, taking the ECB nearer its elusive inflation target of close to 2%.
Ultimately, such policymaking shifts may be risky amid uncertainty created by the pandemic.
Adding property prices to CPI indexes just as long-dormant inflation finally awakes could send readings soaring, heaping pressure on central banks to tighten policy even as economies nurse pandemic-time wounds.
Some analysts, such as at ING Bank, predict that with some exceptions housing rallies may anyway start to cool as support measures introduced during the pandemic are unwound.
Voters’ anger may even goad governments into slugging property investors with higher taxes – as New Zealand did at the end of March.
Those who argue against extending central bank remits further into housing say tighter policy could even exacerbate the problem by crimping property supply.
George Washington University professor Danny Leipziger argues housing markets are more effectively cooled by regulation and measures outside central banks’ scope, such as raising capital gains taxes and increasing the supply of housing.
“I have no problem with the ECB adding rental or home-owners’ costs to its basket,” Leipziger said. “But if I am concerned about house prices in Berlin or Madrid, asking the ECB to deal with it is not the right way.”
(Additional reporting by Dhara Ranasinghe and David Milliken; Editing by Mark John and Jan Harvey)
Canadian home prices on fire and policymakers using ‘squirt gun’
By Julie Gordon
OTTAWA (Reuters) -Buyers are turning up the heat on Canada‘s searing hot housing market, their frenzy leading to record sales, prices and starts, but in a budget unveiled on Monday the federal government did little to tamp down the fire.
The Teranet-National Bank Composite House Price Index showed home price gains accelerated 1.5% in March from February, data released on Tuesday showed.
The index was up 10.8% on the year, with a record 81% of the broader 32 markets surveyed posting annual gains above 10%. That far exceeds the last peak in 2017.
On Monday, Finance Minister Chrystia Freeland, presenting Canada‘s first budget in over two years, fleshed out a previously announced tax on foreigners parking money in Canadian homes, along with limited investments in affordable housing.
“The idea here is that homes are for Canadians to live in. They are not assets for parking offshore money,” Freeland told reporters.
For those watching, it was nowhere near enough.
“It’s like a squirt gun next to a towering inferno,” said Doug Porter, chief economist at BMO Capital Markets.
“We need to break the psychology that real estate is this can’t lose investment that only goes up,” he added. “Before this turns into a full-on bubble.”
March was a record month for new housing starts and home resale prices surged 31.6% year-over-year.
New Zealand, facing a similarly red hot market, introduced a raft of cooling measures including new taxes on investors and stricter lending rules.
And most measures that would cool the frenzy are up to the provinces and federal government who remain cautious as a third wave of COVID-19 rages.
Real estate agents say more listing are now coming to market, but they still see a massive long-term shortage. They expected more than the 35,000 units pledged in the budget.
“It’s not going to do much to intervene in the activity level we’re seeing now across the country,” said Christopher Alexander of RE/MAX Ontario-Atlantic.
(Reporting by Julie Gordon in OttawaEditing by David Gregorio and Alistair Bell)
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