The Hedge Transformed into a Zombie

A client recently sent me an interesting article from the New Yorker about Vancouver being one of the most expensive housing markets in North America.  Why is Vancouver real estate as expensive as San Francisco’s ?  The article quotes Andy Yan, an urban planner at Bing Thom Architects who says “If you look at per-capita incomes, we look like Reno or Nashville” but Vancouver has somehow transformed itself into what some economists call a “superstar city”.  Other “superstar cities” include London , New York and Paris and can be identified by the steep increase in housing prices from 1950 to today.

The article refers to Vancouver as a “hedge city” –  not hedge as in garden hedge, but hedge as a financial term. Vancouver offers investors both social and political stability as well as long term protection against climate change. Wealthy international investors concerned with uncertainty at home are willing to purchase real estate in Vancouver as they feel it is one of the cities with the least risk world wide and a hedge against uncertainty at home.  Some investors are rationally overpaying in order to protect themselves against risk at home. Yan says, “If the choice is between losing ten to twenty per cent in Vancouver versus potentially losing a hundred per cent in Beijing or Tehran, then people are still going to be buying in Vancouver”.

Some believe that the Vancouver housing bubble is about to burst but a truly global real estate market, which Vancouver is now part of, will not react to local fundamentals the way that other non-global cities will. One of the dangers for locals trying to live and work in a superstar global city is that prices begin to move out of reach. Prices have no real connection with the local economy especially in communities like West Vancouver where it’s now difficult to find detached family homes for under $1,000,000.

Another issue for locals of these global market cities is the rise of what Yan refers to as the “zombie neighbourhood”.  The term is used to describe neighbourhoods with a high percentage of vacant homes due to their wealthy owners living off shore without renting them. These properties can sometimes lay empty for years. The article sites Vancouver’s Coal Harbour as an example of a current zombie neighbourhood.  Some would argue that West Vancouver’s British Properties was a Zombie neighbourhood for much of the 1990’s as wealthy Hong Kong investors purchased millions of dollars worth of real estate as a hedge against the return of communist rule.

Here is the link to The New Yorker article:  http://www.newyorker.com/talk/financial/2014/05/26/140526ta_talk_surowiecki

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