When it comes to fixing the region’s affordability problem, municipal governments have a big role to play in getting more homes built, argues Rennie Intelligence’s senior economist
Ryan Berlin calls himself “lead geek” at Rennie Intelligence. He doesn’t disappoint—and we mean that as a compliment.
Director of intelligence and senior economist with the division of real estate marketing firm Rennie, Berlin is one of four analysts tasked with offering a thoughtful take on the Metro Vancouver housing market.
“We spend almost all of our time trying to unravel the things that are impacting our market and providing evidence-based information to our clients,” he says of the group. “That’s developers who are building new homes, and then it’s also the everyday person who’s buying and selling, or who owns a home in this market.”
Besides producing research and insights for public consumption, the intelligence team works with Rennie’s brokerage of roughly 180 agents.
We chatted with Berlin about how B.C.’s economy is faring as the province digs out from COVID-19, why it’s tougher to boost housing supply than to increase demand and where Vancouver home prices could be headed post-pandemic.
For the complete interview, check out The BCBusiness Podcast.
You just released the spring 2021 edition of the Rennie Landscape, a biannual report that tracks demographic and economic indicators influencing the Metro Vancouver housing market. Let’s start with the economy. More than a year into what you’ve dubbed the Great Suppression, what kind of shape are we in, jobs-wise and otherwise?
We have been through the wringer over the past year, and we’re certainly not through it. Clearly, many people and businesses are still suffering. And I think all of us, to a greater or lesser extent—whether we actually lost somebody to COVID or we lost a job or were forced to work from home, or we just haven’t been able to engage with other human beings in the ways that we’re used to and that we want to—are still being impacted by this.
But I think when we look big-picture, from an economic and an employment perspective, we’re on the whole not doing so bad. The most recent jobs data that came in for March just a couple of weeks ago showed that in Metro Vancouver, the total number of jobs is just slightly above the peak that we had achieved right before the pandemic, before we got smashed and lost a couple hundred thousand jobs.
I didn’t see much reported on this topic, but I think it’s a good milestone to reach, to say, Hey, we’re back, at least from a jobs perspective. And B.C. as a whole had recovered all of its jobs lost, plus added 5 percent. So the labour market has been fairly resilient, and the country has recouped about 90 percent of all jobs lost.
So there’s a ways to go there nationally, mostly in Ontario and Quebec. But we were initially looking at a three-million-job deficit that was creating this crater in employment during the first few months of the pandemic, and it’s now down to under 300,000. So probably from here on in, it’s two steps forward, one step back, because we have new restrictions coming in and we have to deal with the variants, and the vaccine rollout still has a ways to go. But we’re finally able to see the light at the end of the tunnel.
How did the types of job losses we saw over the past year help protect the B.C. housing market from the worst effects of COVID?
We can all probably remember how we felt last March, when we were told to stay home and not see anyone. There was so much uncertainty at that point, and there were a lot of dire predictions made for the economy and for the housing market.
Ultimately what happened was two things that shielded the ownership segment of the housing market from the very worst of typical recessionary consequences. One was that a mortgage deferral program was put into place for the first time ever, where all the big banks and other financial institutions that lend agreed to give homeowners a reprieve on their mortgage payments for up to six months. That provided some immediate cash for the households most in need who were owners.
But when you actually look at the segment of the economy that was hurt the most by the Great Suppression… That’s a term that we came up with because it’s a little bit cute. It plays off the Great Depression from the 1930s and the Great Recession from 12, 13 years ago. But Suppression because didn’t have these big imbalances in our economy going into this.
This is not a typical recession. The genesis is the health crisis. So we came in and said, Hey, we need to shut down certain parts of our economy, and that had a very specific consequence for workers. So it was mostly workers in retail and hospitality that were impacted, and then within that group, it was young people and part-time workers.
And so given that archetype for somebody who lost their job, particularly in the early days of the recession, it’s just not synonymous with the profile of a typical homeowner or homebuyer. And that’s where we saw some more traditional impacts on the rental market, where we saw rents rise more slowly over the past year, and we saw vacancy rates rise. That speaks to that demographic that was impacted.
As we head into May, what’s your take on Metro Vancouver housing?
I think for a lot of people, it harks back to the days of 2016 and 2017, when prices really ramped up. I would argue that FOMO—fear of missing out—was a more prominent factor then, but I think we’re seeing it now as well.
The issue that we have right now is one of supply. I don’t mean to sound like someone who beats that drum all the time, but the issue is on the inventory side. If we look at the resale market, inventory is down for all home types—detached, townhomes and condos—whether we compare it to last year or to the 10-year average.
In a typical recession, you would see inventory rise because you would see more broad-based job losses and homeowners being more impacted than they have been in the past year, without the support of a mortgage deferral program. And you would see people not being able to afford their mortgage, so they would list their home. You would see more listings; you’d see more sellers willing to accept a lower price just to get out from under their mortgage. And then that creates a downward spiral, if you will, where demand doesn’t keep up and prices start to fall.
But what we have now is, people haven’t been listing their homes. Even though the unemployment rate spiked, because of the mortgage deferral program, because of the extraordinary stimulus on the part of the Bank of Canada and various levels of government, people said, You know, I’m going to stay put. And we all viewed this as transitory, so the issue has been, how do we get through together?
But meanwhile, on the demand side of the market, everybody is looking for the home that can accommodate them not just as a place to live but as a place to work and a place to play, because COVID has changed the rules on all of us. So I think people’s needs have come into focus more. And with interest rates so low, with all of this volatility in stock markets, especially early on in the pandemic, particularly from that older cohort, there was this change of perspective that, Hey, maybe hard assets from an investment perspective make more sense than having my money tied up in equities as I approach retirement.
And so from all sides, the demand side of the market has been supported, and now prices are rising. I think the most recent data for March on a year-over-year basis showed detached prices up 21 percent year-over-year. So that’s clearly not sustainable.
However, I will say that, going back to this analogy to 2016, 2017, detached home prices on a year-over-year basis back then reached a peak increase of over 40 percent, which in hindsight is just mind-blowing. I’m not saying we’re heading there, but what we’re experiencing now in some ways is like 2016 lite. But it’s very challenging for buyers.
But at the same time as we’ve got this crazy market, there hasn’t been a surge in residential construction. What’s going on there, and is it good or bad?
Predictably, I think, we didn’t see the investments in construction across the board, specifically residential, throughout Canada, particularly in the early days of the pandemic. Part of that had to do with social distancing restrictions. You just couldn’t have the same number of working on a site….There were a lot of logistical challenges there that slowed down construction. And construction that hadn’t started, because there was so much uncertainty last year, we didn’t see some projects get off the ground.
Now that we’ve turned the corner into 2021, the more recent data is showing a real pickup for Metro Vancouver. What we’ve seen as a company working with developer clients in the presale market—these are developers who are selling homes in multifamily towers before construction starts—a lot of them were ready to launch projects in 2020, not knowing COVID was on the horizon. And then it didn’t happen. Now that we have a lot more certainty, even though we’re not out of the woods from an economic or a health perspective, we’re seeing a bit of catchup.
It’s super important, because we can’t really control the demand side of the market that much. We have lots of migration to this region, there’s a lot of money in bank accounts right now, interest rates are low, and you can’t tax housing into affordability—you can’t tax out demand. So having the supply revitalized, in the last couple of months, at least, I would say is a good thing.
In Yaletown and elsewhere, condos are in short supply throughout Metro Vancouver
You spend a lot of time in your report talking about demographics. In B.C., where are we at when it comes to immigration? Obviously there was a big drop during the pandemic.
One of the most glaring manifestations of COVID has been on the demographic side, and it all starts at the national level. In some ways, we closed our borders. In other ways we didn’t, because we still had 185,000 immigrants. Not all of them crossed the border into Canada. Some of them were already here as temporary workers—so here with work permits, or as students converting to permanent residents.
But that 185,000 number for 2020 was the lowest in Canada since 1998. It was about half of what the pre-pandemic target had been for the country, 341,000. So it created quite a demographic hole. And nationally, we had our slowest annual growth rate, of 0.4 percent, since 1916. So this other notion that we might be saved, from a population growth perspective, by some sort of COVID baby boom definitely didn’t happen. And I think anybody who has kids realized, you know, during COVID, we don’t need another one.
B.C. was the same thing. It was the same growth rate in 2020 as the country, at 0.4 percent, but it was the slowest rate of growth since 1874. So it’s been a long time since we saw growth of that low magnitude.
And that matters; it’s more than academic. On the one hand, it provided a little bit of relief for the demand side of the new housing market, in the sense that fewer people coming to Canada and to B.C. means you need fewer additional homes to accommodate that growth.
But it’s a short-term thing. Long-term, we have an aging population. The typical resident in Canada and in B.C. is a baby boomer in their late 50s. The typical age of an immigrant and an interprovincial migrant is around 27. So about half of the age.
And the reason we have so much immigration to Canada in the first place primarily is to support our economy. It acknowledges our aging population, and we are trying to bolster our labour force. So the government responded to this deficit in immigration last year by raising the national immigration rates to over 400,000 for each of the next three years. I don’t think we’re going to get there this year, but they’ll just turn the tap to the right a little bit and increase the targets for the next two years.
So we’re basically looking at 1.2 million immigrants over the next two years. We’ve never seen anything like that before. And that is a direct consequence of COVID.
As that approaches, where are we with housing stock in Metro Vancouver? Condos are pretty hard to find, right?
They are. It’s somewhat ironic, given the prognostications early in the pandemic. It sort of took me back. My reaction at that time was similar to after 9/11, when in the immediate aftermath, there was all kinds of commentary about, you know, we’ll never live in highrises again, we’ll never work in highrises again. And obviously, we moved past that.
So my feeling early in the pandemic was—I know we don’t want to be sharing elevators and corridors and common rooms with each other, and we just don’t want to be around people, and we need more space—that this movement away from the condo was probably somewhat temporary.
And if you look at downtown Vancouver, part of the value proposition of a condo is that you are close to outdoor public areas, beaches and parks, and you have access to all the culture that’s there, restaurants and cafés and bars and clubs and shopping. None of that was available, so it wasn’t that appealing if you were a new buyer moving in that market or looking at it.
But inventory now for condos, on the resale side, is down 9 percent versus where it was last year, and down even more versus the 10-year average. And on the newly completed side as well: there are fewer than 500 newly built condos that haven’t already been sold. Again, we go back to this supply issue. Certainly demand is very robust, but we don’t have that supply response to meet it at the moment.
On that note, how crucial is supply to addressing our affordability problem in Metro Vancouver?
It’s all about balance. At a very basic level, obviously what determines prices in any market is that intersection between supply and demand. So if one of those things is essentially remaining constant or is fairly inelastic, fairly fixed while the other one is changing, it’s going to influence the value of the product in that market.
So in the case of housing [supply], you can’t just turn the tap on or off. Demand can be generated. In relatively short order, you can see an increase in demand through elevated migration flows, or through job growth and income growth, or through lower interest rates. Or even changes in borrowing regulations—things that might make it easier to borrow, like elevated debt-service ratio thresholds, which would allow you to spend more of your current income on housing. All of that can create more demand.
And the flipside is true, too; all of that can pull it back. Some of that stuff can literally happen overnight.
Building homes takes a long time, and we have slack in our labour market, so to speak. We have an elevated unemployment rate versus where we were before the pandemic. But it’s not that easy to get stuff done right now. And as we head back to what economists might call full employment, which is back to a situation where we have unemployment at about 4.5 percent, it’s really, really hard to ramp up construction and add to the supply side of the equation.
So from a policy perspective, it’s really about, especially at a local level—and this is where I think municipal governments can have more of an impact than the provincial, or certainly the federal government—ensuring that there are fewer barriers to development and construction through the approvals process, the rezoning process and that sort of thing.
I’m not sitting here wagging my finger at anyone, but it’s a big challenge.
Finally, the billion-dollar question: Where do you think Vancouver housing prices are going after the pandemic, and why?
Based on the current trajectory, a billion dollars for a single detached house may not be out of the question.
As an economist, I’ve been working in this industry for the past 17 years, and I’ve been working within the Rennie Intelligence team for the past five. I’ve never produced a price forecast, simply because my primary goal is not to generate headlines, and that is what you will generate by publishing a price forecast, especially if you’re CMHC. It’s so difficult to accurately predict prices. So the question is, what is the utility in forecasting values in that sense?
In May of last year, a couple of months into the pandemic, CMHC—and this is a very capable, large organization with many analysts whom I respect; they’re my peers, and they have data and models that we don’t have—predicted a 9- to 18-percent drop in the average Canadian home value in the year ending spring of 2021. Obviously, it’s been the complete opposite.
So the question is, well, how did they get it so wrong? The reality is, you can say, Oh, you forgot this, or you didn’t consider this. It’s just that you’re forecasting the intersection of a multitude of demand-side factors and multitude of supply-side factors.
All of that being said, I think what we’re going to see is a continued increase in prices through this year. It’s very clear that the current pace is unsustainable. I think we’ll see that slow. The question is, how fast do we come back to full employment?
So I’m looking at the unemployment rate, I’m looking at inflation, and I’m looking at interest rates as we turn the corner into 2022. And if inflation is moving back and stabilizing in the neighbourhood of 2 percent, and the unemployment rate is moving down toward 5 percent, those are things that I think will bring balance to the market and create some more stability. And I think we’ll level off in the range of the annual 2- to 5-percent increases in home values beginning next year, assuming we get through all this in that time.