In light of news this past week that 3 more condominium projects in the Vancouver area are being forced into receivership, I figured I'd pen my thoughts on why it will have a profoundly negative impact on the Vancouver real estate market. Here is the news story.
First, some debunking, as some people are claiming that because these projects aren't being completed it will put positive price pressure on existing inventory. This is a ridiculous statement for a couple reasons:
1 - the construction workers who were working on those projects are now working on other projects that will complete quicker;
2 - the Sophia, H&H, etc projects will be completed by the receiver at some point;
3 - the number of units we are discussing here is miniscule compared to the total number of households and available housing inventory in Greater Vancouver; and
4 - perhaps only 10% - 20% of the total number of units in question here was destined to be purchased by an actual owner-occupier so there is not a pent up demand for these housing units except for the pent up demand of the speculator to buy a new BMW. See quotes below.
Now lets talk about the main reasons these receivership proceedings will cause such a negative effect. There are two main reasons:
1 - speculators are going to get cold feet as they realize that risk is part of trying to make money in real estate - the days of putting your name down on any pre-sale and selling the assignment or completed condo at a highly inflated price are coming to a close. I figure that this may begin a 'rush for the exits' type of scenario where speculators begin clamouring over each other to get out of the market. This will flood supply at a time when demand is dropping. Econ 101 anyone?
2 - Psychology - this has a huge effect that is immeasurable but as it becomes apparent that the original pre-sale buyers at these projects will have lost their stake in the Vancouver real estate game many will question the wisdom of playing the game at all.
Here is some choice quotes from CBC News:
"When asked about buyers left scrambling to find a home because of construction delays, Eden said he believed most buyers were actually real estate speculators who would not need the homes to live in, and who know pre-sale agreements are always a risk.
The executive director of the Condominium Home Owner's Association, Tony Gioventu, agrees that buying pre-sale condos is a game of speculation.
But he says there are people who buy them who aren't in it for the investment and don't realize the risk.
"Normally, only between five to 30 per cent of pre-sale buyers plan to live in the condo once it's built, estimated Gioventu, "but those who aren't in it for the investment need to protect themselves."
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