November 1, 2012
REW.ca

The Metro Vancouver real estate market has climbed since 2002, with one big dip during the recession of 2008–09 and a current flattening trend.  During that time interest rates have fallen until they've bottomed out for the last two years. 

It's been a fertile environment for flipping: buying properties, improving them (or not) and selling them again in a short time, hoping to make a profit.

Flippers, speculators or short-term investors — depending on what you like to call them — include everyone from  the couple who buy a house, fix it up and sell it, to the offshore investor who scoops up pre-sale condos and sells once the building is up, to the builder who knocks down a house and builds a spec triplex with a laneway house in back, all the way to the giant development company that buys up a block of houses and puts high-rise condos in their place.

We wanted to know, is flipping is as prevalent as it seems to be in the real estate markets of Vancouver and the Lower Mainland? And was it ever? We asked Landcor Data Corporation to do what they do best and sift through their stats for the answers.

They tracked eight years of data on houses, townhouses and condos that were bought and sold within short periods of time: under 6 months, 6 months to 1 year, 1 year to 18 months, and 18 months to 2 years. The findings were intriguing:

• Flipping activity peaked in 2005–07 and never returned to those levels after the 2008–09 recession
• Six-month flips practically disappeared this year
• Yields also peaked in 2005–07, despite large increases in home prices and low interest rates after the recession
• Except for the bottom of the recession, it's been profitable to flip in the Metro Vancouver market since at least 2004

How much flipping is going on?

The volume chart covers all three housing types (detached, townhouse, condo). It shows that Vancouver has consistently been the investor hot spot in the Lower Mainland. This stands out particularly in the 6-month term, where a property is bought, upgraded cosmetically and turned around fast. In the one-year-plus terms, where properties are being substantially renovated or replaced by new homes, Surrey experienced a surge of activity before the recession. Then, both Surrey and Vancouver saw activity fall off by a factor of two or three afterwards.

Why has activity dropped steeply since the 2008–09 recession? It's fallen off much more than the average housing price has come up.

We talked to a couple of local companies with many years in the building trade to see if the numbers match their observations.

Graham Collins of Kenorah Construction & Design in Delta remembers the pre-2008 market as "the wild west," when a lot of amateurs entered the market with dollar signs in their eyes.

"If you  look back to those  statistics, five to eight  years ago a lot of the companies that were doing this flipping work, they were purely cosmetic changes, and they were not performing all of the code- and bylaw-driven requirements we see now. It's very difficult to get away with that now unless they're going to avoid permiting and do it on the sly."

When it comes to making a quick profit these days by selling homes, he sees three big hurdles:

• The enormously escalated cost of buying a property
• The increased burden of code and bylaw compliance
• The reduced inventory of homes that meet the criteria for flipping

A lot of the good flip opportunities in detached houses have been exhausted, he says.

"You're looking for excellent bones and dated interiors, and therefore the flip is going to focus on that cosmetic upgrade, maybe with some modest reconfiguring. Those are few and far between these days.

"Now the inventory of homes tends to fall into two categories. They're either still in good shape, in which case the seller is trying to capture that value on resale, so there is no flip opportunity. Or this is no longer a $100,000 upgrade, this is  a $400,000 upgrade because there are structural, mechanical, performance issues in the home that require a far more invasive level of change.

"And those things are not as visible to the prospective homeowner. People who are going to buy a flipped house are looking for sexy finishing. A builder may have had to upgade mechanical systems, do fireproofing… legitimate costs, but not things that are going to gather the full return on investment."

Lloyd Kinney of MLK Properties  in Steveston points to what he calls "the HGTV effect," where   it looks a lot easier on TV than it is in real life. Small-time flippers are not going to be able to get an army of skilled workers descending on their property and wrapping it up in three weeks.

"There was a lot of large-scale multifamily activity over the last five years. It was very difficult to get trades when it was busy because the trades were focusing on working with the big developers. So to go and do a one-off here and there, it was very difficult to line up. And then if you did manage to get them there, you were going be charged at a premium, so that affects your return on investment."

He also sees the HST, introduced in July 2010, as a big factor.

"If you are someone who flips homes on the side, you're going to wait until HST runs out. If you're building a new home from scratch and you have to add another 12% on top of the already increased land values and inflated home prices, it makes it a lot tougher for homeowners to make that return. So on a million- or two-million-dollar home investment, you're saving yourself hundreds of thousands of dollars."

In other words, flipping has dropped off in the Lower Mainland because it's become less profitable. And the numbers bear that out.

Is there money to be made?

These charts show the percentage increase in value from bought date to sold date. We don't know how much was invested in improving the properties, so the charts can't tell us actual profits, just yields.

Except for the trough in 2008–09, yields have consistently been over 10 per cent — in many cases, spectacularly so. Compare that to a stagnant stock market and low bond rates, and flipping appears to be a great investment.

But it's not for the faint of heart. Lloyd Kinney says he's noticed that with the higher costs and current correction, there's a bit of fear in the air.

"People aren't able to flip something in 6 months anymore. They may want to, but they're not able to because things are staying on the market longer, especially in the million-dollar-plus area. So that's why you're seeing plateauing on the 1-year-to-2-years charts."

He says a businesslike attitude is essential.

"A business doesn't make a 25–30 per cent return on investment every year. You see a lot of flippers and even builders that are sitting on a lot of inventory, trying to keep the price up because they're worried that it'll lower their value of their sales in the future. But you can't think about that. You have to write it off on the books, or say maybe I'll take 5% instead of 15%, and when things get rosy again we'll be back up to our 20% again." 

With lower margins and less opportunity to do a quick-and-dirty flip, the amateurs have mostly been shaken out, says Kenorah's Graham Collins."Flipping is being performed by companies by the book, according to code, therefore it's more costly.

"The winner in all of those things is the homeowner."

Landcor Data Corporation is an independent research firm  with the largest, most comprehensive database on BC real estate, provided by the BC Government. Landcor draws on a wide range of other data, and on almost 25 years of deep analysis of the real estate market.

The Greater Vancouver housing market saw a slight increase in the number of home sales, a slight reduction in the number of listings, and a slight decrease in home prices in October compared to the summer months. With those changes, the sales-to-active-listings ratio increased to 11 per cent in October from 8 per cent in September.

The Real Estate Board of Greater Vancouver (REBGV) reported 1,931 residential property sales of detached, attached and apartment properties on the region’s Multiple Listing Service® (MLS®) in October, a 16.7 per cent decline compared to the 2,317 sales in October 2011 and a 27.4 per cent increase compared to the 1,516 home sales in September 2012.

October sales were 28.5 per cent below the 10-year October sales average of 2,700.

“Buyer demand increased slightly in October compared to the previous few months,” Sandra Wyant, REBGV president-elect said. “Overall conditions in today’s market remain in favour of buyers, with low interest rates, more choice, and less time pressure in terms of decision-making. This translates into a calmer atmosphere for those looking to buy a home and it places more onus on sellers to ensure their homes are priced to compete in today’s marketplace.”

New listings for detached, attached and apartment properties in Greater Vancouver totalled 4,323 in October. This represents a 1.2 per cent decline compared to October 2011 when 4,374 properties were listed for sale on the MLS® and an 18.8 per cent decline compared to the 5,321 new listings in September 2012.

At 17,370, the total number of residential property listings on the MLS® increased 12 per cent from this time last year and declined 5.3 per cent compared to September 2012.

Since reaching a peak of $625,100 in May, the MLS Home Price Index® (MLS HPI®) composite benchmark price for all residential properties in Greater Vancouver declined 3.4 per cent to $603,800 in October. This represents a 0.8 per cent decline compared to last year.

“There’ve been modest price changes since they peaked in the spring. The largest reductions have occurred in the areas and property types that experienced the biggest price increases over the last few years,” Wyant said.

Since hitting a record high in April, the benchmark price of a detached home on the Westside of Vancouver has declined 8.6 per cent while detached homes in Richmond and West Vancouver have seen declines of 6 per cent over the same time period.

Sales of detached properties in Greater Vancouver reached 790 in October, a decrease of 18.9 per cent from the 974 detached sales recorded in October 2011, and a 19.1 per cent decrease from the 976 units sold in October 2010. Since reaching a peak in May, the benchmark price for a detached property in Greater Vancouver has declined 4.1 per cent to $927,500.

Sales of apartment properties reached 803 in October 2012, a 16.2 per cent decrease compared to the 958 sales in October 2011, and a decrease of 18.4 per cent compared to the 984 sales in October 2010. Since reaching a peak in May, the benchmark price for an apartment property in Greater Vancouver has declined 2.9 per cent to $368,800.

Attached property sales in October 2012 totalled 338, an 11.5 per cent decrease compared to the 382 sales in October 2011, and a 10.3 per cent decrease from the 377 attached properties sold in October 2010. Since reaching a peak in April, the benchmark price for an attached property in Greater Vancouver has declined 2.9 per cent to $457,700.