What is next for Vancouver’s housing market?

The London-based research firm Capital Economics Ltd. has added a new spark to Canada’s housing debate with its assessment that the country’s real estate market is a bubble that is about to pop.

The boom in Canadian real estate has “resulted in the largest rises in house prices ever seen in Canada,” the firm says. “And the trigger of an increase in the Bank of Canada’s trendsetting interest rates could result in a 25-per-cent drop in property values.”

The organization released the research earlier this year in a report for its subscribers, and it received new currency with Bank of Canada Governor Mark Carney’s statement earlier this week warning Canadians that they should expect real estate prices to moderate.

However, while Carney did not use the word bubble, Capital markets wasn’t shy about doing so.

“We think [a bubble] exists and we expect a major correction in Canada’s housing market of up to 25 per cent over the next three years,” Capital Economics wrote June 15 in its response to Carney’s remarks. “The decline in prices is likely to be most severe in Vancouver.”

Capital Economics’ report hasn’t generated a consensus, but it does add fuel to the discussion about what is likely to happen next, particularly in markets such as high-priced Metro Vancouver, which has well-known problems with real estate being unaffordable for many.

Affordability is the crux of Capital Economics’ argument.

It found that housing values rose seven per cent per year on average between 1999 and 2010, triple the rate of income growth over the same period.

By 2010, the average price for a two-storey home on a national basis hit $314,000, which was roughly five times the $58,347 average disposable income per person. That is well above the long-term historical average of prices equalling 3.5 times average disposable income.

The monthly cost of home ownership compared with rent payments for similar properties has also reached the highest level since the peak of Canada’s last housing boom.

With both measures so high, Capital Economics argues prices are “probably unsustainable,” and should lead to a period where housing inflation slows or turns negative.

“In theory, the house-price-to-income ratio could adjust through a long period of stagnant house prices coupled with continued income growth,” Paul Ashworth, a Capital Economics’ economist wrote in a note to The Sun.

“But when the ratio gets this out of whack, that’s not how it happens in practice.”

However, some other analysts do not concur that the imbalance of prices to income will necessarily lead to a sudden correction, particularly for a city like Metro Vancouver.

Housing markets can diverge from a balance between prices and incomes and remain out of balance for a long time, argues housing economist Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of B.C.

“The fact they’re out of balance, in an economic sense, doesn’t mean they’re going to get back into balance on anybody’s particular timeline,” Somerville said.

Somerville argues that for Metro Vancouver in particular, using the price for a two-storey house — which would be more than double the national average — isn’t indicative of the kinds of housing people are living in and the decisions they make about where they live.

And while Canada and Metro Vancouver continue to deal with problems of housing unaffordability, Helmut Pastrick, chief economist for Central 1 Credit Union, argues long-term demographic trends indicate those problems will continue to persist long into the future, and not just in Canada.

“The world population is seven billion, climbing to 10 billion, and the planet isn’t growing,” Pastrick said.

“Something has to give,” he added, which is the price of land.

Over the long run, Pastrick said he expects people will have to spend larger portions of their income for shelter in an increasingly crowded world.

Source: Derrick Penner, Vancouver Sun

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