January 7, 2013
Tight Housing Market Likely in 2013
Small changes in the supply of housing can make for a big difference in price, especially in certain areas of Metro Vancouver
Many expect, at the beginning of a new year, to hear all kinds of predictions. Of course, in our part of the world, where real estate markets and housing prices have been popular topics for idle conversation for more than two decades, many look to crystal-ball gazers for advice or hope. I am often asked for my opinion on where real estate markets or housing prices might be headed. I always hesitate to offer an opinion in this area. I simply don’t follow the markets closely enough, analyzing the necessary statistics, to offer an informed opinion. Some might argue that I’ve never hesitated offering uninformed opinions on other matters, but that is a debate for another time.
Housing prices and real estate markets are determined by supply and demand. Demand trends are pretty easy to follow. For the past 25 years or so, demand has continued on a steady upward trend in Metro Vancouver, fuelled by population growth. Most of that population growth has come from international immigration. Population statistics and, especially those that relate to international immigration, are tracked closely and reported often. It’s the supply side where it is harder to track statistics, and harder still to follow, project by project, the supply of new housing.
‘When in doubt, predict that the present trend will continue.” — Anonymous
Why is it so important to follow and analyze these supply-and-demand statistics to understand where the market is headed? The answer is pretty simple. Small changes in supply can make a big difference in price, particularly where those changes are in certain areas of the market, either geographically within the region or in housing type. We live in an area where the market is a very tight one and I have no doubt in predicting that it will continue to be a tight housing market in the year ahead because supply is so constrained.
It isn’t easy to respond to market demand for new housing. First, there isn’t a lot of land in Metro Vancouver available on which to build new houses. Second, it takes a long time to respond to demand for new housing with new supply. Unlike some other areas in North America, our region doesn’t have developers who own huge banks of land that they can simply clear when they want to build the next single family subdivision, townhouse project or condominium building. Geography constrains land supply and so does the land-use approval process. The approval process, which involves everything from politics to the environment and from social concerns to engineering issues and building technology, takes time.
In most Metro Vancouver municipalities, it is now taking between two and a half to four years from the time that a developer identifies a property that can be developed — and it is usually one that is being redeveloped after having been used for housing or some other use in the past — to the time approvals can be obtained and the new housing is constructed. There are also a lot of risks along the way in that long process, from changing economic conditions to militant neighbours influential enough to block the approval. Those risks can derail an entire project.
I don’t need to analyze the project-by-project numbers to predict that the present trend will continue: a tight housing market. The big picture numbers over the last 15 years tell the story of steady demand and slow-to-respond supply. International net migration to B.C. between 1996 and 2011 averaged close to 43,000 new arrivals annually for a total of 644,401 people. It is clear the trend is continuing if you look at the third quarter of the year that just passed. In that three-month period alone, the net international migration to B.C. was 15,104 people.
Most immigrants landed in Metro Vancouver. This immigration is fuelling growth of the region’s population. Over that 15- year period — 1996 to 2011 — Metro Vancouver’s population increased by 481,663 people. That’s the big-picture demand side. Now, let’s look at the big numbers on the supply side. Today, the average household size in Metro Vancouver is 2.5 people per dwelling.
Annual housing starts in the region have fluctuated in Metro Vancouver more than population growth has during the same 15-year period. The highest annual number of housing starts was 20,736 homes in 2007 and the lowest was 8,203 in 2000. During five of the 15 years in that period, more than 16,000 homes were built annually. During four of those years, fewer than 11,000 homes were built annually.
A total of 197,000 new homes were built during that same 15-year period in which the region’s population grew by approximately 482,000 people. If you do the math, you’ll see how tight the market really has been. With today’s average household size of 2.5 people per home, theoretically, approximately 492,500 people could be accommodated in the region with the new homes that were built. It’s clear past trends have made for a very tight housing market. A number of factors, including continued international immigration and a dwindling supply of developable land indicate the present trends will continue.
Bob Ransford is a public affairs consultant with Counterpoint Communications Inc. He is a former real estate developer who specializes in urban land-use issues. Email: firstname.lastname@example.org or Twitter.com/BobRansford