BCBusiness

34 BCBusiness jULY/AUGUST 2018 COURTESY Of UBC reverberating throughout the provincial economy and propelled by the negative wealth e•ect. When house prices are rising, homeowners adjust their spending, disproportionately ref lecting paper gains. The general rule? A 1-percent uptick in prices comes with a 5-percent increase in spend- ing. But when property values dip, the opposite holds true as people cut back on luxury cars, din- ing out and other non-essentials. Lesson: When the housing market catches cold, the economy gets congestive heart failure. Retirees who had been banking on equity gains to "nance their non-working years would have to rethink that strate"y, especially if they'd used their homes as a cash machine to fund everything from roof repairs to trips to Cabo. But because most bought before the stratospheric rise in hous- ing prices, they'd likely be insulated from the most toxic e•ects. Not those who recently began climbing the property ladder. In 2016 the Bank of Canada pre- dicted that a 25-percent drop in Greater Vancou- ver prices would translate into one in every four mortgages being "underwater"—a negative equity position, where the value of the home would be less than the amount owed on it. If interest rates remain relatively low, many would choose to hold on and keep making the pay- ments. But in a serious crash, a signi"cant number of recent buyers might bolt. "Now the banks have a property they want to dispose of, and they want to get it o• their balance sheet quickly," Davido• says. "Prices fall further because there's so much inventory on the market." That doesn't even take into account the presale condo market, where many buyers would choose to lose their deposit (even if faced with a potential breach-of-contract lawsuit) rather than take pos- session of a property whose value has tanked. This puts even more inventory on the market, creating more downward pricing pressure. Still, those who could a•ord to own would probably stay put. And those who rent? Counter- intuitively, their situation wouldn't improve. In the U.K. in 2008£10, after the last great global macro- economic shock, housing prices fell 25 percent. Rents, however, remained high, dipping only 2 percent overall. And a slide in construction activity would exacerbate an already desperate situation. "In a rising-interest-rate world where nobody's building," Davido• says, "rents get worse." If prices did crater, it would be a buying oppor- tunity for some renters. But you'd need to be hold- ing a very good hand: employment una•ected by a constricting economy and income streams that could pass the rigorous B£20 mortgage stress test, at least. Then there's the prospect of buying in a downturning market: when housing prices are dropping and the bottom is unclear—and it's always unclear until later—will you be the one brave or stupid enough to catch a falling knife? S C E N A R I O N O . 2 Up, Up and Away! the upshot: Demand and supply side measures fail to stop–or even slow–the province's red-hot housing market, and prices keep rising year after year Who's CaLLing it: Developers, real estate agents, ferrari dealers, the guy who just bought. Who benefits: Developers, real estate agents… proBaBiLit Y: Long (but not impossible) odds HOmE TRuTHs UBC professor Tom Davidoff says that even if hous- ing prices fall, rents probably won't

• Cover