Good news: Vancouver real estate is getting more affordable. Bad news: not for Canadians.
Imagine four people in the summer of 2011. Each has $1,000,000 USD, and each goes all-in on one of the following investments:
1. Detached houses in Vancouver
2. Condos in Vancouver
3. TSX composite index, the benchmark of Canadian industry
4. Cash stuffed in a mattress
Which one would have been made the best return? To anyone paying attention to real estate prices in Vancouver, the answer should be obvious. Teardowns are selling for a million over the asking price. 1 out of every 8 condos is sitting vacant, presumably as an investment vehicle. And the TSX has been suffering for the last year, thanks in no small part to falling oil prices.
As for cash stuffed in a mattress… well, cash is lazy. Doesn’t do dick. Probably isn’t even comfortable to sleep on. It’s absolutely impossible that inert cash — not even earning the paltry 0.06% interest from a savings account — could outperform one of the hottest real estate markets in the world. It would be completely unthinkable. Totally absurd.
Right?
The Home Price Index
The Real Estate Board of Greater Vancouver is one of many real estate boards that publish a monthly Home Price Index. It’s a good way to see the general trend. If you just look at the raw numbers, everything looks great. Prices have been steadily increasing ever since the recession let up. “Damn, that’s some sweet returns,” you might say.
But real estate is an investment. A commodity. In November 2008, a metric ton of coal in Zimbabwe cost 670,000,000% more than the previous month. That’s not because somebody discovered eating coal cures male pattern baldness and makes your penis bigger. It’s because the Zimbabwe dollar was undergoing hyperinflation. When you’re pricing out a commodity, you don’t really care what the price is in the local currency, you want to know the price in a preferred reserve currency. IE: American dollars.
And that’s where things fall apart. When you examine Vancouver real estate prices removed from the Canadian dollar, it shows an entirely different picture.
For the last five years, those sweet returns on Vancouver real estate are the “I swear I have a girlfriend, she lives in Canada” of the financial world. It’s just not real.
Real estate isn’t more expensive, our money's worth less
It all comes down to our falling dollar. It’s been happening since the summer of 2011, but nobody really noticed for another three years or so. There’s lots of theories about why, including our reliance on oil revenue. Canada’s petrodollar is even listed as an example in the Wikipedia entry on Dutch disease (despite how it sounds, “the Dutch disease” is not an anachronistic term for syphilis).
Whatever the reason behind it, all I can say for sure is that my income hasn’t been rising to keep pace with our falling dollar. And I seriously doubt there’s many Canadians who would say differently.
“But you can’t measure real estate in a foreign currency!” Yes, you can. And you should. When the local currency isn’t stable, there’s no legitimate reason why you wouldn’t measure against a reserve currency. You will be investing against people from other countries. Since they’re not going to limit themselves to Canadian dollars, neither should you. If that seems unfair to you, as a Canadian earning Canadian dollars buying Canadian property… welcome to the unfairness of real estate speculation.
The bottom line is that prices have been falling for the last 5 years, and nobody noticed because it’s been falling slower than our dollar.
So what’s the best investment?
Back to where we started.
Four investors, each putting $1,000,000 USD in their investment of choice on July 1st, 2011. What sort of returns did each one make?
- Vancouver detached homes, the gold standard in real estate. Value in USD: $980,368
- Vancouver condos, the “affordable” choice for housing. Value in USD: $856,354
- S&P/TSX Composite Index, the largest companies on the Toronto Stock Exchange. Value in USD: $700,818
- Cash stuffed in a mattress, the insane choice that should never outperform real estate. Value in USD: $1,000,000
Most recent HPI data available is from Feb, 2016
That’s not even accounting for transfer fees, agent commissions, property taxes, condo/strata fees, utilities, or any of the hundred other costs associated with owning, buying, and selling property. Contrast that with the First National Bank of Mattress ($99 at Ikea before delivery). If that’s too rich for your blood, coffee cans buried in the back yard are another option.
The numbers are clear. Cash is king. The Real Estate Board of Greater Vancouver’s own data shows that everyone who has invested in Vancouver real estate in the last 5 years has lost money.
Just not as much as Canadians have lost.
