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Special Report: Flipping on the rise, but still a small portion of sales

Lori Culbert, Vancouver Sun, March 20, 2016

Here’s an interesting tidbit to share with friends while rehashing Vancouver’s out-of-control real estate market: Nearly 600 homes were flipped in the city last year.

It is a far higher number than in 2014, when 356 homes were re-sold within a year of a previous sale, according to a Vancouver Sun analysis of every quick turnaround of houses and condos in the city of Vancouver between January 2011 and January 2016.

The practice is not illegal, and the numbers don’t explain why some buyers choose to re-sell so quickly, but it’s clear that flipping is increasingly lucrative in this hot market.

The Sun’s data, provided by Landcor Data Corp., shows increased activity on the city’s east side but little growth in flipping on the trendy and expensive west side. This may seem counterintuitive to most, but not to real estate experts who work in east Vancouver.

“East Van is very hot these days because East Van is still an area that people can afford. The west side is becoming unaffordable,” Realtor Amal Chebaya explained.

Chebaya has clients who bought a modest house on East 3rd Avenue in October for $1.2 million, and sold it in February for nearly $1.5 million — pocketing almost $300,000 in just four months. Her clients, she said, had planned to live in the house but circumstances changed, so they put it back on the market and made a quick profit.

“We did just fine on the resale because the market went more crazy since January, and properties were selling more,” Chebaya said.

Still, she argues the new owners would not be able to quickly flip the property again because they’ve now paid “prime dollar” for it.

Landcor used B.C. Assessment rolls to determine how many of the 60,000 houses and condos sold in the city between January 2011 and January 2016 were resold in less than 12 months, so The Sun could say definitively how frequently flipping was happening and whether it was increasing.

The answer brought some surprises. There were 1,874 houses and condos flipped during those five years, roughly three per cent of all sales. The data shows the number of flips jumped dramatically in 2015 but, because the number of property sales was also up, the overall percentage of flips only rose to four per cent.

When broken down by year and property type, though, the percentage of flips climbed much higher for detached houses in 2016 and 2015, and condos in 2016. And each of those sub-categories had the highest or near-the-highest average percentage change between the sale prices, all of them between 22 and 26 per cent.

“The incentive to flip would be greater when there is a rapid increase of prices because you can get a very quick return on your investment,” said David Ley, a University of B.C. geography professor and an expert in real estate.

Landcor, a local analytics firm with a massive database of real estate facts and figures, also broke down the sales into 30 Vancouver neighbourhoods. Numbers were small in some communities, so Ley suggested analyzing only those with a minimum number of flips.

The Sun isolated the 10 neighbourhoods with the highest count of homes flipped in a year, which also had a correspondingly high percentage of flipped homes — all of them between seven and 10 per cent.

In all but one of these top 10, the average price change between sales was greater than 20 per cent, and in some areas as high as 30 or 40 per cent.

Nine of the top 10 were in the year 2015, indicating the most active flipping activity of the five years analyzed. And all but three of the neighbourhoods (Dunbar, Kerrisdale and Arbutus/Mackenzie Heights) were on the east side: South Vancouver, Hastings East, Collingwood, Renfrew, Renfrew Heights, Killarney and Knight.

“The west side, that is sort of the trendsetter, but then the wave moves eastward,” Ley said. “Even though the prices are higher (on the west side), there are going to be times when the actual rate of change is going to be greater on the east side.”

(This data does not address so-called shadow-flipping, when a property exchanges hands multiple times before the sale is registered. Landcor collected this data from the B.C. assessment roll, which tracks only registered sales.)

So, what do all these numbers tell us?

- Flipping is on the increase, but still represents a small proportion of sales

- It is lucrative for the people who know what they are doing, typically netting a profit of more than 20 per cent and rising

- For all the hand-wringing about empty homes and foreign investment on the west side, in 2015 more flipping of houses and condos happened east of Main Street.

- In the past, twice as many condos flipped annually as detached houses, but today the two are almost at parity.

Although the data is slim for January 2016 (sales figures are incomplete because the registration of some sales can lag for weeks), it foreshadows a far higher percentage of flips than past years. For example, in the Hastings East neighbourhood, 15 sales were registered and four of them (27 per cent) were flips in January.

Landcor also tabulated the jump in price between the most recent sale and the one less than 12 months earlier. The price differential for detached houses has grown steadily over the years, to an average of $308,000 in 2015 and nearly $370,000 in January of 2016. But because house prices are also rising, this profit margin has remained steady at about 22 per cent for the past few years.

For flipped condos, the profit margin has slowly increased to nearly 17 per cent in 2015 (average price change of $83,000) and jumped to 26 per cent in January of this year (average price change $146,000). The most condo flips in 2015 happened in Mount Pleasant and downtown.

It is not unusual in a frenzied real estate market to see flipping increase as prices soar, said Ryan Berlin of Urban Futures, a Vancouver research firm specializing in demographic and economic growth.

But it’s important to remember the percentage of re-sales remains low, he argued, because the term flipping is a pejorative one, often associated with negative consequences for neighbourhoods.

It is not clear yet what portion of these sales are by speculators who keep a house sitting empty before re-selling, or families taking advantage of a hot market to buy elsewhere. And until that type of data is available, Berlin does not think a speculation tax should be slapped on every person who quickly re-sells a property.

“The key thing is to know what the dynamics are before there is a call to action to do something about it,” he said.

After the 2016 home assessments were released in January, Vancouver Mayor Gregor Robertson said a speculation tax “would help slow down the practice of flipping houses, which treats housing as a commodity and intensifies the price escalation.” Condo marketer Bob Rennie has made similar statements.

But Realtor Ben Chimes, who specializes in East Vancouver, said not all house flips are fuelled only by profit. He said there are four main reasons why his clients quickly re-sell.

- They buy a house to live in it, but after it increases in value by 20 or 30 per cent in less than a year, they sell to make some money, and possibly move to a different neighbourhood. “I have multiple clients in the last few months that would register as flips even though they had no intent (in the beginning) to do that.”

- Builders are targeting the east side more now because the ceiling for prices has risen, allowing them to buy a house for just over $1 million, fix it up, and re-sell it for $2 million or so. And they are doing this less on the west side now because of sky-high lot prices there.

- Some buyers are forced to sell because of relationship breakups, sometimes exacerbated by financial stress.

- The market is prime for flips because of the high number of potential buyers, which includes young families who can’t afford Dunbar or Point Grey and retirees who are selling their large west side houses for smaller east side homes. “We now have down-sizers competing with young families in the east side, which we didn’t have before,” Chimes said.

He does not think the percentage of flips is hurting communities right now, but would be concerned if it climbed to 15 or 20 per cent.

Tsur Somerville, director of the UBC Centre for Urban Economics and Real Estate, does not believe foreign buyers are responsible for local flipping.

“In a market where prices are going up 20 per cent, people are going to flip houses because it is profitable. And that is what happened in the U.S. in 2006 and 2007, without any foreign buyers,” he said.

The costs involved in flips, such as Realtor fees and transfer taxes, are about five per cent of the transaction, so sellers need a price bump of at least 10 per cent to make a decent profit. The potential risk faced by flippers is when “the gravy train stops,” or even slows down significantly, Somerville said.

He does not believe flipping is frequent enough to be responsible for the escalation of Vancouver home prices, so he is not a fan of the speculation tax.

Perhaps the main concern about flipping is the disruption to neighbourhoods if properties are left empty or under major renovations.

“I think that neighbourhood disruption and lack of continuity, those all have negative impacts on community,” Somerville said. “And community is important.”