RCA Insights

Vancouver Home Prices Have Sunk. Are CRE Prices Next?

By on July 29th, 2019

Home prices have been in a sharp retreat in Vancouver, Canada’s second largest investment market, ever since the British Columbia government introduced a foreign buyers tax in mid-2016. The concern for some is that commercial property prices will be pulled down by the residential sector. Recent price history suggests that won’t necessarily be the case, however.

When I visited Vancouver earlier this year, market participants seemed to be waiting for the next shoe to drop. With single family homes and commercial properties competing for land, the thinking is that the decline in residential prices will bring down land values, and in turn bring down commercial property prices to the same degree as residential assets.

Historically, these price series had moved together. From 2005 to 2014 each exhibited a 6% CAGR with only a few bumps and differences between the series over time. This linkage lends credence to the argument that a transmission vehicle such as land prices might translate the decline in single family prices over to the commercial sector, forcing these price series to converge once again.

1907 Vancouver price growth MAIN_1

The convergence evident over the longer history is not true of recent trends, however:

–Commercial property prices did not participate in the run-up of prices to the same degree as the residential sector. Given the intense interest by cross-border buyers for residential assets in Vancouver, single family home prices grew at a faster pace than commercial properties from 2014 to 2017. The Canadian Real Estate Association MLS® HPI for Vancouver single family assets grew at a 17% CAGR from 2014 to 2017. A custom RCA commercial property price indicator for British Columbia grew at only an 11% CAGR over the same time period. This CAGR was sizeable and put BC in the same league as other global technology hubs like San Francisco, but prices for the residential sector moved far ahead of commercial properties.

–When the BC government introduced the foreign buyers tax, residential property prices slid as a pool of buyers left the market, deterred by the tax on purchase prices (introduced at 15% and since raised to 20%). From January ’18 to May ’19, the Vancouver single family price index has fallen a cumulative 14%. (Growth in single family home prices across Canada have been stalling too, in part because of costs related to risk management for residential mortgages.) Over the same time frame, commercial property prices for BC have climbed a cumulative 7%.

Commercial property prices in BC have fallen slightly in 2019 – down a cumulative 1% into May from the end of 2018. This decline came at a time when the yield on the 10-year benchmark bond in Canada fell from 2.5% to 1.5% which, when combined with record low commercial property vacancy in Vancouver, should shore up the value of the income streams from these commercial assets.

Yes, prices are down slightly, but a 1% decline is indicative of flat prices. Unless an owner is forced to sell assets in a distressed situation, there just is not the incentive to cut sale prices the same way for commercial assets as there is in the residential sector. (It should be noted that the sale of the Bentall Centre Portfolio in 2016 did not enter into the construction of the RCA BC commercial property price indicator, nor will the announced sale in Q2’19 enter the data set.)

If owners of commercial assets are unwilling to sell, commercial property prices can remain flat or even grow in line with the favorable income trends for assets in the region. Such positive trends could happen even as residential prices slowly recover from the introduction of the foreign buyers tax. Convergence in price trends might not mean commercial prices falling off a cliff, but instead residential prices facing a steady climb in the years ahead.

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An RCA price indicator is a custom index generated using the same process as the RCA CPPI, but is not part of the office suite of indices. To learn more about the RCA CPPI visit: rcanalytics.com/our-data/rca_cppi/

Also on RCA Insights:

Hey Big Spender: A Look at Canada’s Cross-Border Flows

Does Price Growth in Canada Correlate?

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.