The Home pocalypse
THE UPSHOT: In the aftermath of a worldwide trade war or another macroeconomic shock, financial markets dive– and Vancouver's bloated property prices drop 50 percent or more
WHO'S CALLING IT: Marc Cohodes, the ex–wall Street trader who recently (and successfully) shorted Canadian lender Home Capital Group, has predicted a 50- to 80-percent correction; the dinner party guest who has a lot to say about this and that
PROBABILITY: Long odds against
In the months following the Great Housing Crash of 2019, Vancouver looks much the same as it had before. Homeless men and women, faces pulled hard by abuse, sit on Hastings Street selling pilfered wares. The Pacific Ocean laps against the Stanley Park seawall, which, during a weekday morning, is crowded. A dust-covered, late model Bentley Flying Spur (retail price: $325,490) is parked on the north side of Alberni Street. But the driver’s-side windows are smashed, and the street itself, once busy servicing those who know how to pronounce “Hermès,” is deserted.
From a vantage point on False Creek’s southern shore, a short drive from Chip Wilson’s abandoned, graffiti-scarred home, tourists squint at Yaletown’s sun-soaked green glass towers, still standing proud among a forest of silent construction cranes— testament to the forces that once shaped this city so profoundly and are shaping it yet again.
Vancouver’s ascension to global piggybank and supercar parking lot had been spectacular. However, its fall was, as Mayor Eveline Xia put it, “a colossal shit show.”
This is Vancouver, post-homepocalypse. Or, rather, one amped-up version.
It’s a future for which many are hoping. Magazine articles with titles like “Praying for a Real Estate Crash” or “Bring on the Real Estate Crash” have reflected and stoked this sentiment, and not without cause. Prices for some new units in the downtown core exceed $3,000 per square foot, putting the city in league with New York and San Francisco. But we’ve been on the verge of “pop” for almost a decade. Could a major property crash be just around the corner?
Elisabeth Gugl, an associate professor of economics at Uvic, cites the robust provincial economy as a bulwark. “The fundamentals are strong,” Gugl says, “and so any correction is not going to have such an impact.” An across-the-board price drop of 70 to 80 percent isn’t in the cards, reckons UBC economist Tom Davidoff. “I think 80 percent would be exceedingly unlikely,” says the associate professor at the Sauder School of Business, whose research interests include housing. If a massive correction did occur, it would be confined to the highest-priced homes, where values aren’t supported by local incomes, Davidoff adds.
In online forums and casual conversation, though, there’s a growing, palpable longing for some sort of reversal. But even for those who are heavily invested in schadenfreude, if not property, “be careful what you wish for” applies.
The first and hardest-hit industries would involve real estate. In 2016, construction accounted for about 215,000 jobs throughout the province, according to the British Columbia Construction Association. But ancillary industries would face major difficulties, too. From realtors and mortgage brokers to lawyers and notaries, the pain would be felt deeply and widely. We’ve seen this before, south of the border. “The subprime crisis in the U.S. was really rough on a lot of people, especially people working in the trades,” Davidoff says.
Unemployment would rise across the board,
Retirees who had been banking on equity gains to finance their non-working years would have to rethink that strategy, especially if they’d used their homes as a cash machine to fund everything from roof repairs to trips to Cabo
reverberating throughout the provincial economy and propelled by the negative wealth effect. When house prices are rising, homeowners adjust their spending, disproportionately reflecting paper gains. The general rule? A 1-percent uptick in prices comes with a 5-percent increase in spending. But when property values dip, the opposite holds true as people cut back on luxury cars, dining out and other non-essentials. Lesson: When the housing market catches cold, the economy gets congestive heart failure.
Retirees who had been banking on equity gains to finance their non-working years would have to rethink that strategy, especially if they’d used their homes as a cash machine to fund everything from roof repairs to trips to Cabo. But because most bought before the stratospheric rise in housing prices, they’d likely be insulated from the most toxic effects.
Not those who recently began climbing the property ladder. In 2016 the Bank of Canada predicted that a 25-percent drop in Greater Vancouver prices would translate into one in every four mortgages being “underwater”—a negative equity position, where the value of the home would be less than the amount owed on it.
If interest rates remain relatively low, many would choose to hold on and keep making the payments. But in a serious crash, a significant number of recent buyers might bolt. “Now the banks have a property they want to dispose of, and they want to get it off their balance sheet quickly,” Davidoff says. “Prices fall further because there’s so much inventory on the market.”
That doesn’t even take into account the presale condo market, where many buyers would choose to lose their deposit (even if faced with a potential breach-of-contract lawsuit) rather than take possession of a property whose value has tanked. This puts even more inventory on the market, creating more downward pricing pressure.
Still, those who could afford to own would probably stay put. And those who rent? Counterintuitively, their situation wouldn’t improve. In the U.K. in 2008-10, after the last great global macroeconomic shock, housing prices fell 25 percent. Rents, however, remained high, dipping only 2 percent overall. And a slide in construction activity would exacerbate an already desperate situation. “In a rising-interest-rate world where nobody’s building,” Davidoff says, “rents get worse.”
If prices did crater, it would be a buying opportunity for some renters. But you’d need to be holding a very good hand: employment unaffected by a constricting economy and income streams that could pass the rigorous B-20 mortgage stress test, at least. Then there’s the prospect of buying in a downturning market: when housing prices are dropping and the bottom is unclear—and it’s always unclear until later—will you be the one brave or stupid enough to catch a falling knife?
Next year marks the 37th anniversary of the start of the Meibion Glyndwr arson campaign in Wales. This crime spree was the work of nationalist groups opposed to an influx of wealthy English property buyers who had bid up housing prices, rendering Wales unaffordable to the Welsh. Declaring “every white settler is a target,” the militants, who apparently did not possess mirrors, eventually exported their brand of umbrage to London and Liverpool, where a Conservative Party office and real estate agencies were bombed. By the time the campaign ended 12 years after it began, more than 200 holiday cottages had been torched.
“Real estate makes people nasty,” says UBC’S Tom Davidoff. That’s one of the first lessons he learned when he first became interested in it as an area of study, he notes. The reasons aren’t elusive: shelter is a fundamental human need, so people understandably get worked up when they see a
Today in B.C., the possibility that things could get nasty isn’t far-fetched—especially if prices continue to climb steadily. Surging nativism isn’t the only problem on the horizon if housing costs, like some fairy-tale beanstalk, keep growing skyward