Real estate numbers are transitory, but value is forever

Real estate news can mean different things to different people. A headline announcing either a dramatic drop or a wild increase in real estate sales will attract a lot of attention.

But the change being recorded is cause for concern or excitement only for those who broker real estate. The news isn't necessarily a reflection of values, and needn't necessarily alarm or excite the owners of real estate.

For example, in April, 2009, the number of real estate transactions both declined and increased locally.

The headlines focused on a year-over-year decline, news that would have certainly concerned real estate agents, but that should not have concerned real estate owners: whatever took place in April 2009 was not a reflection of value. In fact, in that month, the number of transactions increased more than 30 per cent from the previous month and the value of the average transaction increased three per cent.

Those numbers offer important lessons. As a developer, I'm primarily concerned about value. As a real estate broker, I'd likely be more concerned with volume. Value and volume can fluctuate in parallel, or in opposition, depending on underlying market dynamics.

Greater Vancouver real estate values have now approximately recovered to their peaks of about two years ago, before the global economic and credit tsunami. Greater Vancouver's recovery surprised some, but it shouldn't have.

Although the principle of supply and demand is widely recognized, its context within a real estate market is often misunderstood. There are a specific number of people living in Greater Vancouver, and a finite number of homes. Some homes are owned by residents and others by landlords. Although that ownership balance varies over time due to market, economic and credit conditions, it's a diversion from the critical fact that a certain number of homes are required to keep everybody housed, regardless of ownership structure.

Let's get specific about supply and demand. Within a given real estate market, the overall supply is the total number of finished, habitable homes. In Greater Vancouver, that's about one million. Demand, on the other hand, is represented by the total number of individuals and families that need those homes. That includes just about everybody, not just those in the market for a new home.

Home-supply increasing

Most of metropolitan Vancouver's roughly one million homes are occupied. Every week, many new homes are completed and many old ones are demolished. The net result is a housing supply that's increasing, but at a considerably slower rate than existed before the global economic fright that took hold in 2008. Demand for housing, however, is growing as fast as ever, because our population is increasing. Greater Vancouver's share of provincial population growth is the better part of 1,000 per week, and has been for years.

The extent to which the total real estate demand approaches the total supply will continue to influence market pressure, regardless of the number of properties listed for sale at any time. Imagine if a town or city literally ran short of homes for its growing population. Prices would go through the roof -- literally. But that won't happen in Greater Vancouver because rising market prices would encourage more development to meet the rising demand.

It should also be noted that each real estate listing in a stable or growing population centre such as metropolitan Vancouver doesn't just represent an intention to sell. Each listing also typically represents a desire to either buy or rent, at a different address. Most sellers don't evaporate from the market. They move within it as their lifescycles change.

In the immediate term, apparently conflicting market dynamics are at work in metropolitan Vancouver. A slow development industry and robust population growth are combining to reduce the number of vacant homes, representing a decrease in effective inventory. Conversely, apparent inventory has grown with increased active listings during the spring -a common seasonal trend exacerbated by owners' desire to capitalize on recovered market values. The abundance of current listings may dampen perceptions and sale volume in the weeks ahead, but strong underlying supply and demand factors ought to preserve value in the months beyond.

The harmonized sales tax will have interesting consequences. Developers of new properties will be able to reduce pre-tax sale prices due to new-found input tax credits on some construction supplies that were previously subject to provincial sales tax.

However, even though developers can -- and will -- incrementally adjust pre-tax selling prices to compete, tax-inclusive development costs and selling prices will increase due to additional tax on some previously exempt development costs.

The upward pressure on prices will make existing real estate more attractive. The subject of interest rates is bound to arise during any real estate discussion.

In this regard, the economic performance of Canada, and more specifically B.C., relative to the U.S. and other countries is important.

Interest rates

In general terms, scary economic tremors around the world tend to suppress interest rates, including our borrowing costs at home.

If our economy continues to compare favourably to other jurisdictions, we'll likely maintain access to lower interest rates than our local economy deserves.

Rising interest rates could dampen appreciation of real estate values in the future, but could more significantly suppress sale volume, because more homeowners would stay longer in their existing homes.

In the long term, metropolitan Vancouver's real estate market health will continue to be significantly related to demand, a function of population. Lifestyle, security, culture, economy and other factors will influence population patterns. In many regards, we are extremely fortunate because many of the attributes that Vancouverites find so endearing are now bankable, from a global real estate market perspective. Our natural surroundings, the widely coveted concept of Vancouverism and our fortunate avoidance of freeways should not to be taken for granted. Many other factors are also working in our favour, not least the extraordinary promotional success of the Olympics.

Economic factors are, of course, important to any real estate market.

However, absolute measures of our local economy can mislead real estate expectations. Rather, our performance relative to other jurisdictions across Canada and beyond can be more influential, because it affects immigration, emigration and domestic migration.

Over the long term, Canada's immense per-capita resource wealth, and Vancouver's geographic and cultural connections to Asia will be increasingly significant as the global balance of population and commerce shifts toward that part of the world.

Where does that leave us? Don't expect any extreme market undulations in the immediate future, but do expect underlying supply and demand conditions to exert gradual upward pressure on values well into the future.

During the years ahead, metropolitan Vancouver will gradually move toward status as a leader of North American real estate markets, but not without market fluctuations.

I am neither a cheerleader for madly buying real estate nor an advocate of a wait-and-see attitude.

Have a great summer!

James Shouw's Grace new-home project was judged the 2008 highrise of the year in an industry competition called the Georgies, an achievement that prompted Westcoast Homes to invite him to provide our annual year-end commentary, "To understand recent industry gains, it's important to look at often misunderstood real estate dynamics, notes developer (Jan. 2).

(Source: Vancouver Sun)