Population report Q2 2010

The Statcan quarterly population report is released today. Get your pdf here. This is always covered breathlessly in the local media, picking out data points that confirm the well-known fact that not only does everyone WANT to live here, they actually ARE moving here. Beyond confirming our own natural attractiveness, it also apparently provides some justification for our rising house prices.

Some context.

First, net migrants from other provinces is barely over zero. In fact, we have just barely gained back what was lost from 1998-2003. In TOTAL since Q1 1998, we are up a net 6,118 bodies from interprovincial migration.

Next, immigration. Immigration is doing fine. We are at the same level in terms of number of bodies that we reached in the mid 1990s. As a percent of population, it is lower than the mid-90s.
Combine these together and throw the natural growth (births - deaths) into the mix and you get total pop growth. Here it is. For new bodies, we have a cyclical peak in the late 90s, but lower than previous cyclical peaks. As a percent of population, however, this cyclical peak was around half of previous peaks--and lower than previous troughs!

How remarkable the 2000s were for population growth can be made clear by ranking the 5-year periods from 1960 to 2009 by population growth. 2000-04 and 2005-2009 were dead last. So much for the population boom.

School Closures in Vancouver

The Vancouver School Board has announced (PDF) closures of 11 schools.

As you may be aware, trustees faced difficult financial decisions this spring, and last evening approved a budget that includes approximately $16 million in spending reductions and eliminates 137 positions. We also received a report earlier this month from a government appointed special advisor recommending we consider school closures to reduce our costs.

It is in this context that district management prepared a list of schools that trustees might consider for possible closure. The schools on the pre-notification list were selected because of a number of factors, including low enrolment, under utilization and the availability of space at neighbouring schools.

Without delving into the politics of the matter there has been a general trend towards lower public school enrollment in the past number of years. This is not to say that the school-age population is necessarily dropping -- parents may be opting for private or home schooling instead. Statistics do indicate a dropping school-age population in Vancouver but, interestingly, the number of family-sized dwellings in the city has not commensurately dropped.

Looking at recent birth rates, it is likely these school closures may be a bit premature. But beyond even that, a look at the city's available housing stock shows a strange dichotomy between dwellings designed for families with school-age children and the actual residents of these dwellings. At some point it would seem reasonable the utility of these dwelling should match the residents' needs by way of demographic shift back towards more children or re-development away from the usual family-oriented architecture.

What Normal Looks Like

What is "normal" for Vancouver real estate? A very quick gauge is to look at a month at the peak of the annual real estate buffalo jump -- June -- and normalise it for population. This gives us sales per capita.

Note June 2010 is an estimate after 3/4 of the month's sales have been recorded. A fair estimate of sales in a "balanced" June market (where "balanced" refers to sales volume) will be about 1.5 sales per 1000 residents. Things will really get interesting if we see the 1.2 sales per kiloresident at the lower bounds of the data series, a level with historical precedent and far worse than even 2008 when prices began to fall precipitously.

Central1: The sheen is clearly off the housing market

You heard them. Read their report here (PDF). A few excerpts:

The sheen is clearly off the housing market, with this week’s release of the MLS® data. As expected, residential home sales in British Columbia continued to trend lower in May. Sales fell for the seventh consecutive month, dipping 6.5% from April on a seasonally adjusted basis. Since reaching a market peak in October, annualized sales have fallen 30% to 75,500. The markets that led last year’s rise in activity, namely the Lower Mainland and Victoria, are now leading the downtrend.

On the supply side, B.C. recorded an unseasonal decline in the flow of new listings in May -- the first April to May decline since 2002. We expect to see a pattern similar to early 2008 emerge, where potential sellers hold back on listing their homes in response to higher inventory levels and price declines. However, month-end inventory levels will likely rise over the next few months as the new listings remain elevated and sales continue to trend lower.

Note Credit 1 refers to seasonally adjusted (SA) sales. This blog typically refers to non-seasonally-adjusted (NSA) sales as do the real estate boards; both methods have their trade-offs: SA is good for comparing months long trends but NSA is more closely tied to the front-line effects of supply and demand. The seasonal adjusted data seem to indicate a persistent malaise of sales reminiscent of 2008 (though not as extreme). This was relatively obvious, given listings growth since the start of the year. Interestingly they claim an "unseasonal decline" in new listings for BC in May. Certainly in Vancouver and Victoria this did not seem to be true, however it looks like inventory is now not growing as fast, not because of a lack of new listings but because of a lack of sales and a large number of expiries. Remember that a recorded expiry, sale, or (usually) listing does not change the available housing stock.

We now segue into Central1 on rentals:

Results from Canada Mortgage and Housing Corporation’s semi-annual survey of the purpose-built rental market suggest that rental demand softened over the past year as higher unemployment, particularly among young workers, and a weaker economy slowed the rate of household formation. In addition, existing renters may have found alternative housing in the competing investor owned condominium rental stock or were induced into the ownership market by lower mortgage rates.

Among British Columbia’s larger urban areas (populations of 10,000+), 21 of 27 markets reported higher townhome and apartment vacancy rates in April 2010 from a year earlier. The aggregate figure for all urban areas rose from 2.5% in April 2009 to 3.2% this year. Among B.C.’s largest markets, the largest relative increase occurred in the Victoria and Abbotsford Census Metropolitan Areas, while the Chilliwack Census Area was the only major market to report a drop in the vacancy rate. Additional slack in the rental market also impacted the rate of growth in market rents, which rose at a much slower pace in 2010. Average rents of properties in B.C. common to both the 2009 and 2010 survey samples rose by 2.2% this April, compared to 3.4% a year earlier.

A relatively bearish report on both the capital and income portions of the BC housing market.

Tom Bradley on Real Estate

It is rare a mainstream media commentator has cut through the plethora of myths surrounding real estate investing AND writes something I agree with. Until Tom Bradley wrote this piece in the Globe and Mail.

We’re starting to see stories about a softening real estate market in Canada. Listings are up, sales are down, and even the always bullish industry executives are predicting lower prices in the coming year.

It reminded me of a quote I saw recently: “Real estate is the drunk driver on the economic highway.” This statement, attributed to Tom Barrack, the CEO of real estate investor Colony Capital, speaks to the fact that residential real estate can be volatile. Yet that same volatility highlights why it can be fertile ground for a disciplined, patient investor. There are a number of reasons for this.

First off, it’s cyclical in the best way – the cycles are generally long while memories are always short. The most recent trend, up or down, is assumed to be sustainable. For an investor willing to take a longer view, this is a good thing.

Second, real estate is a topic that produces lots of “armchair” experts. Despite a lack of rigorous analysis, views are strongly held and overconfidence is rampant. Again, this is good for someone who is less entrenched and has a broader perspective.

No argument, really. The first point is borne by the extensive analysis on this blog, where we have shown price movements are highly correlated to relative, not absolute, pricing. I certainly cannot argue the second point, being one of said "experts" myself.

Despite these attractive investment features, there are reasons why I don’t invest in real estate beyond my personal needs.

Hm. Now that really got my interest. He explains:

For one, I have a day job, and this type of investing is time intensive. It also doesn’t help that transaction costs are extremely high (commissions, legal fees and taxes), and there are significant carrying costs.
...
Because leverage is involved, real estate prices are sensitive to changes in interest rates. Purchases are often financed up to 90 per cent with debt, so mortgage payments are a key factor in determining prices.

For almost 30 years, we’ve been in a bull market for interest rates and with every tick down, property values have gone up. Given that we are somewhere near the end of the rate declines, investors have to recognize that a huge tail wind is swinging around.

So for one he doesn't have the time, or at least recognizes that real estate investment, even when many management duties are outsourced, still has a large time and cost component for the investor. In Mr. Bradley's case, his hourly chargeout rate is likely way higher than many investors.

The second point is more interesting. He's saying that recent valuations have been inflated by riding a decades-long secular trend of decreasing interest rates. Further gains due to this interest rate arbitrage are unlikely and could well reverse over the course of another few decades.

House owners deploy a strategy that is at the core of hedge fund investing – buy long-term assets with short-term financing. The strategy dials up the investment’s return potential, both on the upside and downside.

I think that's a key assessment. It is a monumental mistake to assume that short term financing rates will prevail indefinitely. Even if rates remain low, it is not a savior for prices: low rates in perpetuity imply incomes are stagnant or falling on average.

Read the full article. Understanding his basic tenet -- that real estate is in its essence a capital purchase with decades-long amortization -- is well worth a pause for consideration before investing in real estate in the current climate.

Hat tip to Tom on VCI

The Dirty Underbelly

I wanted to point people's attention to the blog Landlord Rescue, a fun blog to read on the trials and tribulations of a professional landlord in Ontario.

With BC property sales relatively weak (the pace for June sales is lower than May's; in strong markets it's almost always the opposite) but borrowing rates still relatively low compared to the 15 year average, we are likely to see many investors make a longer term commitment to become part-time landlords. Many if not most will find cash flows to be stable with little hassle. While they may not be making an exceptional return if they bought at recent prices, they won't necessarily have negative monthly carrying costs. It is certain, however, a select few will be stuck with significant problems. On average, revenue from real estate is less than headline rent and expenses more than regular maintenance and taxes, which is why professional landlords typically require some premium to account for this aggregated risk.

If you are thinking of renting out a property, it's worth considering what can and does happen every day to landlords. Perhaps reading Landlord Rescue concentrates too much on the fringe cases but, at least, I hope it gives some idea of what some landlords -- and not just the professionals -- will face in the coming years.

FVREB May 2010 Statistics

The Fraser Valley Real Estate Board has released the statistics package for May 2010 and here are the details.

Sales were 1477.


Active Listings were 11,411 at the end of May.


Months of Inventory rose significantly to 7.7 MOI which puts the FV solidly into price decline territory.


The MOI relationship with price changes is extremely robust as evidenced by May with a MOI of 7.7 and a price decline of -0.8 for the benchmark of all residential properties changing hands in the month.

I expect MOI will climb much higher this year and prices look set to decline dramatically.

Check out the entire statistics package here.