This past week, multiple news outlets reported the listing of a Vancouver teardown at a price of $2.4 million dollars. This has created a lot of buzz not only in the city, but throughout the rest of Canada and the USA as well.
Pictures of this house are being shared all over social media with people commenting about the ridiculousness of the Vancouver market. There was one particular comment that caught my eye on Facebook. Someone living in the lower mainland, but originally from Nova Scotia I believe it was, said that a virtually identical house to the one featured in the article, in his home town would cost a fraction of the $2.4 million asking price, followed by the hashtags #overvalued #bubble #asianinfluence.
While it definitely is true that a similar house in another area would unlikely carry the same price tag as the one in question. However, what is important to note, is the fact that many people seem to be forgetting about is that the actual house itself has little to do with the overall value. It is the land that is carrying the bulk of the value; the neighbourhood is coveted.
Although it can be argued that the value is still inflated, the purpose of this article is not to debate whether or not values in Vancouver are inflated, but rather to review reasons for a property like this one in question, which is essentially a tear down… why are properties like this so expensive?
While there are many factors that lead to the increasing prices in certain pockets, the following are some of the major reasons why tear downs in Vancouver are so expensive. These points are all interrelated to a certain degree.
First off, as mentioned, in the particular case of the property featured in multiple news clips, people’s focus is on the condition of the house, but in actuality the neighbourhood is highly sought after and many people want to live there. The lot size, relatively speaking, is actually quite large and as the realtor in the article, Ian Tang, mentions this is a builder’s dream.
Next, space in Vancouver is limited in these hot pockets, the area cannot expand due to simple geographical logistics, and this is a contributing factor to those areas carrying more value, especially as the population of the city as a whole increases.
Thirdly, the argument by many is that there are not many people residing in Vancouver that can afford these prices. The median income being where it is in comparison to the national average, looking at where the housing prices are today, at last count the average single family home is going for around 1.8 million dollars. It certainly is hard to imagine who is able to afford these prices.
What is driving these prices up? Well the answer to this question (or blame is as some people see it) put on the Asian influence, and Asian buyers from mainland China coming here and buying up the property to park their money and driving up our prices. While this may be true for the last 10 years, the fact is that there are people from other parts of the world now, including other parts of Canada that are finding Vancouver more desirable. This will continue to be the case as long as those magazines and all of those surveys have the city of Vancouver continue to be listed amongst the most desirable places to live in. It is going to continue to grab the attention of those with the means across the world, who will want to have a vacation home or a place where they can come and live for a few months of out the year.
When we dig further into the circumstances, we see that there is essentially no more developable land in Vancouver proper. Virtually all developable land is already owned by developers, therefore the value of single family detached homes has risen dramatically over this relatively short period of time. Why you ask? Well because now the only way to obtain land for development is to assemble single family or other smaller parcels of land, making the demand for these pieces of land that much more desirable.
The other aspect of this is that building a home is a way of creating or adding value. In the case of the property that has caused up the stir- which is essentially a lot for $2.4 million dollars- as the realtor stated in the clipping, a builder can build a beautiful home for about $1 million dollars in construction costs and can turn around and sell the finished product for upwards of $4.5 million dollars. When you look at the math, it definitely does make sense for a builder to buy for $2.4 million.
You can call it overvalued but again when you look at the geographical limits surrounding the city, there is an ocean on one side of the city, the US border on the other side and mountains on the other- there is literally nowhere else to go. We cannot sprawl like in Toronto or the Prairies.
Canada as a country and Vancouver in particular is consistently ranked as one of the best cities in the world to live (see climate, stable government and economy, great healthcare and education, safety and security). Couple all of this with the Canadian dollar in the proverbial tank – meaning that our dollar is cheaper across the rest of the world, and investing in our country has not been this cheap/attractive in at least a decade, then you can understand how we are a great place to invest for foreigners with money.
Like it or not, for the above reasons (and no doubt more), we will most likely continue to see prices trend up and situations like these, at least for the foreseeable future, or until the government steps in with some restrictive policies to slow things down-or as many would say “to even the playing field”.
Aleem Peermohamed is an Accredited Mortgage Professional with over a decade experience in the financial services industry.
Image via The Kavanagh Group