Are Vancouver housing prices ready to fall?
BMO Capital Markets has published a new report, "A Tale of Three Housing Markets", which raises this spectre.
"Riding a wave of wealthy immigrants, Vancouver's house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners," writes senior economist Sal Guatieri. "Demand from China reportedly has been strong, stoked by looser travel restrictions, stricter purchase rules and lofty house prices in China."
That has pushed up the average home price in Vancouver to 11.2 times the median family income—more than double the ratio of a decade ago.
The report points out that the preceding valuation is based on the average price, which has been distorted by a "reported shift in sales to high-end homes in the past year". (This phenomenon was recently addressed by the Urban Futures Institute.)
In Toronto, the average home is 6.7 times the median family income, whereas in Calgary, it's only 4.2 times the median family income.
BMO Capital Markets notes that a survey by Demographia listed Vancouver as the third least affordable housing market behind Hong Kong and Sydney.
"While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb," Guatieri declares.
He also states that four corrections in the past 30 years resulted in average declines of 21 percent. But he offers this caveat: prices could remain stable if immigrants continue moving to Vancouver and interest rates remain low.
"Due to ultra-low interest rates, affordability isn't a major issue yet, with first-time buyers allocating about one-third of their disposable income for mortgage payments, as is the norm," Guatieri states. "But high valuations suggest that even a moderate increase in interest rates will slow the market in coming years."
In the past, investment houses have been more likely than real-estate associations to flag the possibility of large housing corrections. In the late 1980s, economist Jeff Rubin predicted a huge drop in Toronto real-estate values—for which he was ridiculed by people in the housing industry.
Rubin's forecast came true. But it's worth noting that if investors move their money from real estate to stocks and bonds, the prime beneficiaries are the investment houses—including BMO Capital Markets.
Follow Charlie Smith on Twitter at twitter.com/csmithstraight.