Ongoing Victoria Core Market Research Pillars. March 2020

I believe that it is important to try and find as much context as possible around the market at this time. Below are several ‘buckets’ of information that I try to focus on.  (Only meant as a rough guide and I hope it is useful) 

Pop Growth & Demographic Projections

  • Age demographics of current population
  • Historical pop growth
  • What User Profiles would be useful in making assumptions for future buyer behaviour for specific projects? User profiles are valuable when they provide information about your user population that can be used to design better product.

Employment Projections & Incomes of Buyer Group

  • What types of jobs are we losing during Covid Crisis and what percentage of these employees would buy or rent?
  • How fast can these employees return to work when circumstances permit?
  • How many jobs will be available again for ppl in the next 5-24 months?

15 year Statistical Research on Sales and Market Absorption Rate Assumptions. 

  • This is fairly relevant and I would suggest including the nasty numbers from the Credit Crunch as it might give us a better guess on where the market might be in a few years. 

Construction Costs

  • My assumption is they will continue to rise in the long term given the vast shortage of skilled labour.
  • Construction Materials overseas could be problematic in short term?  
  • Effects of the Step Code and changes to earthquake code etc….this will increase costs to build.

Supply Curve & Demand Curve of Victoria Core Real Estate Market

  • “But neither supply nor demand by itself can explain prices, which are determined by the combined effects of the two” Thomas Sowell. Economic Facts and Fallacies page 31. 
  • What projects will finish, what projects will stall and what projects will move forward?  

Credit: Civilization is built upon the back of leverage and trust.  

  • If Lenders stop giving the majority of ppl new mortgages than we will see pull back in market action to a large degree. The questions we need to ask of Lenders is what type of borrowers will still be able to access credit for a home given the current labor disruptions?
  • Stress Test, in my opinion it should be repealed for a period of time. However, if Stress Test remains as is, along with prime rate staying static then unlikely we will see an increase in borrowing. “We have historically low rates which will likely continue for the foreseeable future. OSFI introduced the mortgage stress test to protect homebuyers from rising rates. There is no reason now for the mortgage stress test except as a public relations tool for the govt to show they are allegedly doing something about rising prices. Except in this new COVID-19 environment, the test will harm demand & the economy. But the federal & provincial govts would rather not intercede in the domain of municipalities that have control over supply - so we have the stress test & speculation tax, school tax, etc. Housing is politics.” Casey Edge. 
  • “The ultimate problem for monetary authorities as they try to manipulate the supply of money in order to influence the real economy is that they cannot control the amount of money that households and corporations put into banks on deposit, nor can they easily control the willingness of banks to create money by expanding credit.” Page 394 2.5.3 CFA Programs Level 1 Economics. 

Rental Market

  • In high density areas with a high rent per sft I would predict a solid median price of real estate. I don’t expect as much price movement around the median price point. Especially around Toronto, Vancouver and Victoria core areas.  
  • Average Price will flux more given that it will include more outlier properties. 
  • Luxury markets that are priced well above what their rental yield can support would likely be impacted more especially against the contextual backdrop of Luxury Tax, Spec Tax etc. Market was already hurting this relatively small % of the market.
  • “Rent, considered as the price paid for the use of land, is naturally the highest which the tenant can afford to pay in the actual circumstances of the land” Adam Smith, Chapter XI Of The Rent Of Land, page 166. WEALTH OF NATIONS
  • How will the Victoria market adapt to renters unable to pay in the short term and how would this impact the market?  

Political Backdrop

  • How the local, provincial and fed levels of govt work together immediately and long term will affect things more than most ppl realize
  • The number one detriment to housing supply using comes from a complex and lengthy permitting process. Victoria, combining High Density financing challenges against a very anti- development city council will struggle even more unless the provincial or fed levels of govt limit the city council damage. In contrast Langford city council and low density combination would likely bounce back faster on creating more supply.  
  • The Stress Test should be repealed. At times you want to limit credit growth but at other times you will want to see ppl re enter the economy as quickly as possible. Incomes will be hurt and artificial barrier on credit is unwise at this time in my opinion.
  • History and the Emergency Room Bias. We are reading about this global event from the perspective of those most affected by it. “Reading a history book, without putting its events in perspective, offers a similar bias to reading an account of life in New York seen from an emergency room at Bellevue Hospital.” Skin in the Game, page 195 Nassim N. Taleb 

Inferior, Normal, Luxury Products via an Economic Lens.

  • In a recession Inferior Economic Products will often go up in value. So when designing product keep this point in mind. Having a larger % of studio units with no parking might be more of a consideration for some projects.  
  • Each project will have 2 different layers of IP, NP and LP. Go through where your project fits in the broad context of the market. Are you selling IP, NP or LP compared to your competition? Next look at organizing three separate buckets for your own project.  

Stock Market Context. What options does Capital have?

  • What are GICs and Govt Bonds Paying 
  • What are Corp Bonds Paying
  • Do your 1 bed condos yield more than a 5 year A- AAA Corp Bond?
  • Inflation impacts on real returns and its potential effect on real estate values.

Rate of Foreclosures 

  • Main Banks look to be fine so far.
  • Private MICs – how much debt do they have and is that debt secured?  

Construction Financing Stalling? Equity Banks pulling out of new deals?

  • I already know of some projects that will be stalled due to construction financing pools wanting to wait. This is a result of groups of investors who make up the pool of capital wanting to redirect their funds elsewhere to a better risk/reward ratio.   
  • High density project will likely be most vulnerable as they will have larger construction loans per project usually at any given time. Whereas low-density or sprawling type developments will be able roll their financing needs using a staged out development timeline.   

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