In late 2019, the real estate market started to bounce back after a pretty lengthy lull, but it wasn’t until early 2020 that it really took off. Buyers were lined up outside of doors and multiple bids again became common place. Throughout 2020 and in spite of a worldwide pandemic, there were some pretty significant value increases in most markets as the Lower Mainland region struggled with an imbalance of inventory and buyer demand. In the second half of 2021 and start of 2022, housing prices increased at an even steeper pace. Yet depending on where you live and what sort of housing type you own (or are interested in owning), the extent of the rising housing prices could wildly vary. In one Greater Vancouver city, the typical apartment only increased +7.2% between January 2021 and January 2022, whereas a typical single family home in a Fraser Valley city, less than 45 minutes away, skyrocketed +48.4% in that same time! Why is this? While there isn’t a lot of data to rely on, there are some hints to why this goes well beyond what many people are saying: it’s not just that people want more space.
LACK OF DATA PREVENTS REAL SOLUTIONS
Unfortunately, there is no one polling Realtors or their buyers to understand the reasons or motivations behind exactly why this is happening, which has led to some pretty lazy journalism on the backs of self-interested industry marketing pieces. The general idea that “people want more space” during the pandemic is, while somewhat true, a shallow generalization considering that this statement could be considered to be almost as true in 2012 as it is in 2022. Furthermore, it all but completely falls apart when examining the condo market across the region. Why would 800 sq.ft. apartments with limited transit and infrastructure be gaining versus the same size where there is? Additionally, it doesn’t explain why some suburban municipalities are, in themselves, experiencing some wide variances, as we will analyze.
GOVERNMENT HAS NO POLITICAL INCENTIVE TO TACKLE AFFORDABILITY
As a side note, I don’t believe that most senior levels of government (especially provincial and federal) really desire to tackle housing affordability. This is an argument for another time, but it’s important to note because there is a severe lack of research into combatting unsustainable price increases. Without proper data on the real reasons behind hyper appreciation in the real estate sector, governments can feign ignorance in carrying out policies that favour the interests of the majority of voters (current homeowners) and powerful industries (banking and real estate development). However, this article isn’t about why housing affordability deteriorated at such a rapid pace, but rather, why it did more so in some areas than others: most of which are within an hour drive of each other.
While the depth of our data on housing affordability in our region is painfully limited, this doesn’t mean we don’t have any statistics. Like good investigators, we will have to take a closer look at what we do have. Let’s take a look at these hard facts - eg. statistics - before we get into the 3 reasons I believe that some Lower Mainland cities are leaving others in the dust when it comes to rapid shifts in housing prices. The table below is a compilation of the 19 primary markets in the region, with their respective year over year increases, between January 2021 and January 2022, of benchmark HPI values - essentially, the increase of the same “typical home” in that community over time. I have highlighted the top 5 cities by % increase in red in each housing type and the bottom 5 in blue.
There are 2 obvious general observations that stand out upon even a glance of this table and one additional one hidden in these statistics. First, it’s obvious that the Fraser Valley communities have substantially outpaced Greater Vancouver communities in every housing type. Even the Real Estate Board of Greater Vancouver’s 2 fastest rising performers are the easternmost communities of Pitt Meadows and Maple Ridge - both of which arguably have more in common with the Fraser Valley than Vancouver, especially considering the connection of the Golden Ears Bridge.
The second obvious observation is that single family homes have substantially outpaced attached homes; of the two attached housing types, townhomes have increased a fair bit more than apartments. While 9 of these communities had increases of over 30% in their single family homes and 8 in townhomes, only 2 could say that about apartments. Conversely, only 3 communities - all with Vancouver in the name - witnessed single family home price increases of under 20%, whereas 9 communities had apartment increases under that benchmark.
Slightly less obvious is that the highest priced communities in the region, more or less, had the lowest price increases, whereas the lowest priced communities in the region had the highest price increases over the last 12 months. In other words, we are seeing the gap in prices between the most and least expensive cities diminish. The most extreme exceptions of this trend were Whistler as a high priced community that exceeded the regional year over year average and New Westminster, as a lower priced community that was under the regional average. In the coming weeks, we will analyze why these two exceptions could provide lessons for the challenges of housing affordability.
FIRST REASON: RAPID SHIFT IN BEHAVIOUR
The most common reason you might read about from the mainstream media and from those within the industry, especially those of us in the Fraser Valley, is that people just want more space, so of course they are all coming out here. This is anecdotal at best. I saw this explanation within a month or two of the first pandemic related restrictions. However, at the time, the price increases were about level between Greater Vancouver and the Fraser Valley. There wasn’t really any greater increases in the Fraser Valley in the first half of 2020. This hasty explanation also fails to consider that apartments and townhomes of equal density in the Fraser Valley have also increased greater in price than their Vancouver counterparts, as mentioned above.
Yet this isn’t to say it isn’t a factor at all: the pandemic did escalate trends that were already happening. Consider online shopping as an example. Prior to the pandemic, Canadians may have started online shopping, but not to the extent of the Americans: partially due to the higher shipping costs and delayed shipping times, even with the industry leading Amazon. However, the months that followed March 2020 saw a rapid shift in consumer habits as Canadians turned to online shopping in droves. Another example, perhaps more relevant, to consider: working from home. This was already a trend that we had seen increasing over the last decade, as more and more employers allowed employees more flexibility. Yet after March 2020, it was forced upon many as offices shut down and even became the norm - a norm that many were okay with.
Throughout 2020, we always seemed to be “two weeks away” from “flattening the curve”, and our government even eased restrictions several times, which manufactured an air of impermanence around the pandemic. How many people were actually ready to usurp their entire lives and move east merely because of a temporary pandemic with no real certainties? We don’t really know, because, as previously stated, there has been no polling, just a few lazy guesses.
Again, if this was the sole reason, or even the primary reason, it doesn’t come close to explaining why Fraser Valley townhomes and condos outpaced almost every Greater Vancouver price index, including single family homes. The typical Abbotsford condo rose 39.7%, despite a relative lack of infrastructure and transportation connectivity, meanwhile Burnaby single family homes rose only 20.3%, despite more urban park space than any other municipality in the region, fantastic transit access and ideal geographic positioning. There is something more to this story.
SECOND REASON: “MISSING MIDDLE”, UPGRADED
I remember back in the mid 2010’s showing a property in Surrey to an agent coming in from Richmond who expressed his awe of the number of townhomes we have. As a REALTOR based in Langley and the Fraser Valley, it was something I had always taken for granted. His comment stuck with me for years and I took note of the housing inventory in every community in the region that I visited. The fact was, there really were only two communities at the time that built townhomes en masse: Surrey and Langley (unfortunately, the province and most cities only report detached vs attached building permits, so we don’t get to see just how many townhomes are built). Entire new communities such as Clayton, Grandview, and Willoughby were built around massive townhome development. Modern apartment condo development really didn’t start in the Township of Langley until around 2015, and even then, it was a trickle until 2017. Fraser Valley townhomes really were built to house the Millennial population boom in the same way that “BC boxes” were built in Guildford, Brookswood, and Abbotsford in the 1970’s for the baby boomer generation.
What this did was push many in the region who couldn’t afford a single family home, but needed more space than a condo into these two communities. This is the sole reason why these two municipalities were also the fastest growing: they built the “missing middle” that Vancouver and other cities weren’t. This by itself doesn’t explain the increase in Surrey, Langley and Abbotsford prices - until you start looking at the timeline.
The first “modern” townhomes in neighbourhoods like Clayton and Willoughby started around 2000. It wasn’t uncommon to be able to pick up a good sized 1,350 sq.ft. townhome for well under $200,000 in a development like Langley’s Logan’s Landing, completed in 2002. By mid-2005, the typical Willoughby townhome, such as Amberleigh, was in the $240,000 range. The housing market exploded around this time, pushing the townhome prices up to $325,000 by mid-2008 when the market peaked and eventually collapsed. During this time, however, the market was saturated and owners got stuck underwater as prices fell. Yet as long as they could pay their mortgage, being “stuck” in a townhouse would eventually turn into a blessing for many later on.
At the time of the 2008 housing peak, the difference between a typical Langley condo and townhome was only around $100,000. Yet following the 2016-2018 real estate boom, this gap had grown to $170,000, with the typical Willoughby townhouse now worth $600,000. What happened is what you would expect: owners who had been “stuck” before, used their now $300k or more of equity to upgrade, while apartment owners used their new equity to upgrade to townhomes. This eventually exhausted itself, leading to a correction that lasted from mid 2018 to the end of 2019.
What we are seeing again is the same cycle. Money is flowing into real estate in general, but disproportionately into the communities that have a plethora of townhomes. Perpetual cheap mortgage rates and the mass printing of money (required to pay for the bailouts and subsidies the government provided during the early days of the pandemic) is not considered in the “basket of goods” that inflation is calculated with.
Yet because of the lack of a “missing middle” housing types, it has become extremely difficult to upsize within one’s own community in the Greater Vancouver markets versus the Fraser Valley markets. A saturated condo market, such as Vancouver or Burnaby, is compounded by building relatively few townhomes. This equation creates a much more limited and binary inventory choice between the much cheaper condo and the detached home with expensive land. Since it is easier to upsize from a townhome into a single family home, the Fraser Valley has ended up with a major advantage.
The typical Willoughby Heights townhome is now valued over $260,000 MORE than the typical condo in the same neighbourhood, which is still $50,000 less expensive than the typical Vancouver condo. If you’re a townhome owner in Surrey or Langley, and you want to upsize now that you have significantly more equity than you did a few years ago, where do you go? Well, the typical Willoughby detached home is closing in on $1.7m as of February 2022, so many aren’t even able to, since a million dollar mortgage is pretty hard to qualify for even with all that equity. So you follow the trend and go east - often to Abbotsford or Chilliwack: much less expensive than Langley and for more land. The sales statistics back this up. Prior to 2016, Langley regularly had more detached home sales than Abbotsford, even upwards of 25% more. This started to shift with Abbotsford overtaking single family sales in mid 2016 and the easternmost Fraser Valley city has sold more single family homes ever since. However, the reverse is true with apartment condo sales and townhomes. January 2022 may have been an anomaly, with Abbotsford also overtaking Langley in attached sales as well, but this was primarily due to the collapse of Langley townhome inventory, leaving nothing for Langley buyers to purchase.
In summary, Langley and Surrey were the only communities that built so many highly desired townhomes, therefore allowing a greater proportion of homeowners to build equity at a faster pace than those who bought condos, whether in the same community or elsewhere. This led to the ability to buy single family homes in these areas, often with slight eastward movement: this is likely why Abbotsford and Mission homes increased even more rapidly than Langley and why Langley increased more than Surrey.
THIRD REASON: BLAME MILLENNIALS
Full disclosure: I’m a millennial: an “old” millennial that is on the cusp of the Gen X cohort. To be clear, I’m not blaming millennials as if they did something wrong - millennials merely want what their parents had, if not more. The rising real estate prices throughout North America and the world is evidence of this. At the crux of the entire contemporary real estate issue is that our “home buyer population” is currently growing faster than the pace of the supply of homes. However, how this breaks down into regional statistics is much less clear. For isn’t it true that municipalities like Langley and Surrey are building more homes than West Vancouver and New Westminster? If so, then why are the cities building such supply seeing prices outpacing the latter? Wouldn’t logic suggest that the greater new supply of the suburbs lead to more moderate price increases?
Yes, it would, if it were an apples to apples comparison. But it isn’t. Millennials are the largest age cohort in Canada and the United States: and the largest generation in human history. The second largest are the baby boomers. 10 years ago, the oldest Millennials were around 32 and the youngest was 12 years old. The “peak millennial” - the age at which most millennials were at the time - was 23. This means that in 2011, the majority of millennials were just establishing careers and some might be starting small families. The need of many people in this age group was to be close to high schools and universities, to entry level jobs, and some might require a little space for a toddler or two. However, the vast majority were still living at home and attending middle or high school. The importance of schools might be on the radar for some of the oldest millennials, but with more and more people having children later in life, this would not be the majority in this age group. On the other side of the spectrum, some hadn’t even hit puberty. Rather, it was the relatively small Gen-X group that had established their careers and had older kids in middle and high school that made up the majority of single family home buyers in 2011. At the time, the pace of new home supply balanced the demand. Meanwhile, the first, or eldest, millennials in 2011 only really had “need” for a condo or small townhome - if they could afford one at all.
Every year that has passed has seen the growing pressure on the housing market as the Millennial population aged. The huge baby boomer generation were not selling off their single family homes in droves - partially because there isn’t anything appropriate for them to purchase. Most boomers I know who enjoy single family homes, even if they are bigger than they need, have little desire for small condo living and many see the typical 3 storey townhome as unsuitable for their future needs. By 2016, the oldest millennials had firmly established careers, were raising families, and wanted to be close to quality schools. Vancouver and Burnaby continued a trend of small 1 and 2 bedroom condos, not suitable for this buyer. Communities like Yorkson in Langley or Grandview in Surrey became obvious choices, generating massive local population booms, similar to what we would have seen with boomers driving the markets of Brookswood and Guildford in the 1970s. Single family home prices skyrocketed, especially with the growing equity in local townhomes. Still, the balance of young and old millennials (ie. 17 to 27 year olds vs 28 to 38 year olds) meant that the Vancouver and the Fraser Valley increases balanced out.
By 2021, however, we find a rapid and important shift in age cohorts. The typical millennial, as opposed to the oldest millennial, was now 33 years old. Many older millennials, aged 37-42 now held positions of senior management in companies, ran established businesses, and were starting to flex political power for the first time. Even the youngest millennials, ages 22-25, were now adults. What does all this mean for housing? An unbelievable and historic amount of demand. At the time of the outbreak of the coronavirus, millennials not only required, but also had the purchasing power, for bigger, newer homes close to more schools. Armed with the equity built in local townhomes and the sheer size of the generational cohort, the pressure on the market has never been greater.
Communities like Vancouver and Burnaby have not built townhomes. They’ve been building condos. Let’s go back to that “building supply” equations and consquences. Vancouver permitted 7,472 residential homes in 2018 alone - 5,333 of these were multifamily or mixed use units. This is in the same year that Vancouver resale market only sold 4,235 condos. Since imbalance led to a significant decrease in value as supply obviously outpaced demand. If you purchased a typical Vancouver condo in Spring of 2018, you would have paid $820,400 according to the HPI benchmark. Despite the hot 2020-21 market, if you sold that same condo in April 2021, 3 years later, you would have sold it for $824,300 - a supposed “gain” of just $4,300 in 3 years. In fact, when adjusted for inflation, that home owner would have actually lost over $61,000! That’s before any pre-payment mortgage penalties and real estate commissions, which could easily be in the $30,000 range. How manageable is it to “lose” over $90,000 and be able to upgrade in a market that has increasing demand on single family homes? Vancouver condo owners, and obviously Vancouver’s renters paying premium rental prices, ended up, and still end up, with a massive disadvantage in spite of being a part of the hottest real estate markets we’ve ever seen.
Meanwhile, a buyer of a typical Willoughby townhome, approximately 50 minutes to the east of Vancouver would have paid $568,000 in April 2018. If that buyer sold that same condo 3 years later in April 2021, they would have gained $104,000 in equity. Even adjusting for inflation, they are still $60,000 ahead. If they purchased earlier, that profit actually grows. Or consider if they held onto that townhome until last month, where it is now worth just shy of $800,000 (or more!)?
Therefore, the Fraser Valley communities have greatly outpaced Vancouver in every housing type because of the influx of millennials that moved to the Valley over the previous 5-10 years have ended up with greater equity because they purchased the townhomes or more economical Fraser Valley detached homes that would become the obvious choice for young families. Now aged between 22 and 42, the Millennial cohort now have a significant amount of greater equity and a much higher demand for larger homes. Those who purchased in the Fraser Valley earlier did so at less relative cost, since, as one will note from the table below, the greatest increases did, in fact, come in the communities with the lowest costs:
So what do you think of this analysis? Do you buy the idea that it primarily the result of the equity found in townhomes and the generational pressure that has led to the rapid increases in the Fraser Valley market? Let me know your thoughts.
As always, if you’re ready to make a move anywhere in the region, give Brad Richert a call at 778-240-4239 or shoot me an email!
In our next analysis, we will take a closer look at the cities of New Westminster and Whistler as anomalies to show what we can do right, what wrong, when we do aim to tackle housing affordability.
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