BMO Capital Markets says Vancouver housing prices "could prove unsustainable"

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      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.

      Comments

      10 Comments

      dc10

      Jun 7, 2011 at 7:42pm

      Interesting that the author feels the need to point out that BMO Capital Markets may benefit from a flight out of real estate. I have never seen this type of disclaimer when acticles quote RE indusrty pumpers. They have no hidden adenda...right?

      Rob Baxter

      Jun 7, 2011 at 10:42pm

      Of course Vancouver Real Estate will go down. The Real Estate market is cyclical. It always has been. Everywhere. There are always people who say "This time is different" or "This place is different." And they are always wrong.

      Just like in 1981 many people are going to loose money. The smart ones are waiting until the right time to buy.

      10 9Rating: +1

      glen p robbins

      Jun 7, 2011 at 10:44pm

      Not wishing to comment specifically on the article - I can tell you that of the over 700 polls I have published on the Internet since 2003 (I first started publishing polls in 1998) my site gets thousands and thousands of searches from all over the World on 2 "Best Places to Live in Vancouver" polls we have produced.

      Everywhere - China - Russia - Rio - Emirates - France - UK - US each and every day IP addresses arrive having made inquiries about Best Places to Live in Vancouver - Burnaby - Richmond - Surrey - Langley - on and on - it tells me - anecdotally that Vancouver is sought after - even a women student from Sydney - I recently spoke with - said - Sydney is really a great city - Vancouver is seen as a cut above.

      We shouldn't underestimate - at all how this city is perceived around the World. Having said that - Victoria and many other places in the province are considered outstanding.

      I suspect that if young people want to own - what is wrong with a condo?---where I live in the Tri-City region - there are incredible place to buy - Port Moody is really outstanding.

      Lastly, I noticed while researching our original Best Places to Live - that the average income of detached home purchasers is about 50% higher than average incomes. Though - what this BMO report doesn't discuss- and I really noticed it on our recent HST - poll that folks living in detached homes - even with great equity - are really feeling squeezed - and transfer some of this anger onto the HST.

      Christy - needs to make some deals on the property purchase tax - and if she loses the HST - keep the proposed tax on Corporations to offset.

      8 10Rating: -2

      Scott Blackstone

      Jun 8, 2011 at 7:18am

      "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."

      Equity doesn't work like that. If housing prices decline, the equity vanishes. It's not like it simply goes from here-to-there and magically shows up in the stock market. Sure, there will be those clever or lucky enough to time the crash and cash out at the peak, but they will be in the extreme minority.

      Also, BMO Capital Markets is NOT a brokerage that individuals investing in residential property have access to. They deal with governments and institutional investors (like pension funds), and stand apart from retail banking markets.

      10 9Rating: +1

      scathie

      Jun 8, 2011 at 7:45am

      dc10: BMO capital markets can't really benefit like the author suggests. they're an investment bank, not a brokerage like investorline. he's kinda confused.

      9 9Rating: 0

      Fan'o Truth

      Jun 8, 2011 at 2:13pm

      @dc10
      I have never seen this type of disclaimer when acticles quote RE indusrty pumpers. They have no hidden adenda...right?

      I just want to thank you for an extremely diplomatic understatement.

      It's a weird phenomon in Vancouver, hundreds of thousands of people living in homes/apartments that are orders of magnitude beyond their means, but there they are because they bought in twenty or thirty years ago.

      It's bound to lead to some pretty distorted thinking about all kinds of private and public issues, and a frantic search for means and rationales to protect the windfall gains.

      11 9Rating: +2

      Taxpayers R Us

      Jun 8, 2011 at 3:54pm

      The market here is quickly heading towards a correction. Our spineless politicians won't tighten down on foreign ownership (China, anyone?) or regulate the market, but as the quickly rising property values get turned over, basic living costs will go through the roof and send ripples throughout every sector in the region.

      As to interest rates, the BOC will be forced to raise prime sooner or later and it will probably prove to be significantly detrimental to local property values.

      I'm sitting back, watching and enjoying my cigar....while I can.

      11 9Rating: +2

      Steve Y

      Jun 8, 2011 at 8:00pm

      No doubt pricing will correct but unless we have massive financial devastation in the province (Like an NDP government) housing won't go down significantly. Friends of mine are still buying half million dollar places like nothing and they have the means to not sell them unless it's for a quarter million. The chinese buyers tend to buy cash or with huge downpayments so interest rates won't affect them very much.

      11 7Rating: +4

      Vancouver Bubble

      Jun 10, 2011 at 2:14pm

      Property prices in Vancouver have really gotten out of hand, and it's good that the idea of a bubble, at least, has made the mainstream news headlines.
      People need to be made aware of the possibility, and be made aware of the dangers of such a thing happening.
      http://www.vancouverpropertynews.com/vancouver%E2%80%99s-house-prices-be...

      9 9Rating: 0

      Joe Blow

      Jul 8, 2011 at 12:43am

      The interest rates our coming in a big way .Vancouver is being propped up by mass immigration & real estate the past 25 yrs since Expo 86 .This now is coming too a slow end & the global economy even scenic cities like Vancouver will implode. The people our miserable & phony & the leftist Goverment corrupt here. Feminism , Mass immigration ,Gay & civil rights ,political correctness is what this city is about .You make 65k or more and be single or you should leave this bubble tea city quickly .You make your money here then leave .This place is a complete joke .Most live in fantasy land here and believe they our all amazing .I have gold & silver & make 70 k a yr so i'm good but if you our a hockey watching ,bubbke tea monkey living here in lotus land with a 40 k salary you our so screwed .5 yrs Vancouver is a racist sesspool with angry homeowners watching there dream go poof.

      7 12Rating: -5