The B.C. Real Estate Association has released a new study that examined price fluctuations in the housing market for the last four decades.

The picture that emerged from the BCREA’s analysis of the period between 1982 and 2020 was one of “volatility” in home prices.

“Far from just a steady upward march, home prices have fluctuated from periods of rapid acceleration to periods of sharp declines,” the paper stated.

The study titled ‘Supply and Demand: A Quantitative History of BC Home Prices’ came out Wednesday (March 17).

“An increase in home prices often has several underlying factors and it can be difficult to distinguish which of those factors is the principal cause,” the paper noted.

It added: “That difficulty can lead to misdiagnosed policy decisions and media narratives.”

In explaining movements in B.C. home prices over almost 40 years, the study listed five housing market and economic variables.

These are: growth in inflation-adjusted home prices, five-year fixed mortgage rate, new residential listings, sales-to-new listings ratio, and provincial employment growth.

According to the study, “unexpected movements” to these five variables produce “shocks” or “forces driving prices”.

One is demand shock. This “positive shock to housing demand from rising employment and income causes home prices to rise and increases supply as sellers opt to take advantage of higher prices”

Second is supply shock. An “upward-sloping supply curve means that a decline in supply, measured by new listings…will lead to rising prices”.

Third is mortgage rate shock. A “fall in interest rates, which makes borrowing cheaper, could result for several reasons such as a lowering of the overnight rate by the Bank of Canada or falling term-premiums, which leads to rising home prices”.

Fourth is price expectations shock. “Expectations of higher future prices will impact buying and selling behaviour today, perhaps through the so-called ‘fear of missing out’ factor, leading to rising prices,” the BCREA study noted.

Broadly, these four shocks account for 80 percent home price fluctuations from 1982 to 2020.

A snapshot of the 80s provides an example.

The “housing bubble” that burst in the early 1980s “shows up here as a decline in price expectations along with a large shock to interest rates as mortgage rates hovered near 20 per cent for several years”.

In the following years, there was a “massive run-up in prices” during the late 1980s, which “appears to have been largely driven by rapidly rising price expectations and a strong economy clashing with a very under-supplied market”.

Generally, according to the BCREA paper, demand and mortgage shocks are the “most important factors”, accounting for 24 percent and 22 percent, respectively, of the “total growth in home prices” for the past four decades.

Price growth expectations and supply shocks accounted for 18 percent and 16 percent, respectively, of price growth.

The remaining “unexplained portion is a function of the sales-to-new listings ratio, which helps capture short-run movements in prices but encompasses factors impacting both supply and demand, which makes it difficult to isolate or interpret as a stand-alone shock”.

“That said, we did estimate several alternative model specifications, focusing on external demand not linked to growth in the provincial economy, using the exchange rate, immigration and net migration, but the results of the analysis did not materially change,” the study noted.

It went on to note that another “high-profile candidate for explaining price growth is foreign investment”.

“We are constrained due to the limited set of official foreign investment data, however, based on the small amount of data that is available, we did not find any correlation with the unexplained residual variation,” the paper stated.

It continued: “This suggests that the impact of foreign investment is already being captured in one of the four shocks defined in our model.”

The BCREA paper noted that there were “certainly periods where expectations of rising prices played a fundamental role in rapid price growth”.

“However, too many are quick to blame foreign investors or foreign capital as the primary source of those rising price expectations,” the study noted.

It added: “Domestic investors and homebuyers are just as capable of inflated home price expectations as their non-resident counterparts.”

Simply put, Canadians are as capable as foreigners of speculating about rising prices, which in turn drive prices up even more.

Moreover, B.C. government policy makers have used tools to “dampen speculation with much of the province subject to a foreign-buyers tax and a speculation tax”.

“However, the relatively low impact of foreign investment was further enforced in 2020 as borders closed due to the pandemic and foreign investment sank to under 1 per cent of sales volume,” the study stated.

“At the same time,” the paper pointed out, “home sales and prices recovered to a record-setting pace, fueled by domestic demand and a lack of supply.”

In a previous interview, BCREA chief economist Brendon Ogmundson told the Straight that the share of foreign buyers in the fair market value of homes sold in 2020 was almost zero.

It was 0.56 percent, based on figures pulled by Ogmundson from the B.C. government’s property transfer tax data.

Also in 2020, foreign buyers accounted for 1.4 percent of homes sold in the province.

Meanwhile, the benchmark price of a typical home in markets served by the Real Estate Board of Greater Vancouver rose to $1,084,000 in February 2021.

This represents a 33.8 percent increase compared to the same month in 2016, the year when the B.C. Liberal government brought in a foreign buyer tax amid strong and mostly anti-Chinese sentiment.

The foreign buyer tax was increased and expanded by the succeeding B.C. NDP government.