November 1, 2012
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.