In just one year, Vancouver house prices have dropped by 12%, and unit sales are plummeting in both Vancouver and Toronto.
In August, the number of sales in Greater Vancouver fell 21.4% from the previous month, after dropping 11.2% in July and 17.2% in June. The Real Estate Board of Greater Vancouver chalked it up to a “summer lull,” but the numbers suggest a trend that can’t be dismissed as simply seasonal. Last month, unit sales were the lowest for any August in the past dozen years, and nearly 40% below the 10-year August norm. Even more worrying, the average home price in Vancouver is now down more than 12% from a year ago—a worrying sign for the country’s priciest city.
The poor global economy is souring foreign investors’ appetite for expensive property overseas. The federal government, meanwhile, is trying to tame the market by tightening mortgage lending standards and warning the public at every opportunity that Vancouver is a risky city for buying real estate. Interest rates are still low, but the Bank of Canada keeps promising to raise them, which would quickly lower affordability. All of which leads David Madani, an economist with Capital Economics, to conclude: “The Vancouver market has cracked.”
Vancouver won’t be the only one. The next market to crack will be Toronto, starting with the city’s overheated condo segment.
For months, policy-makers have expressed concerns about the country’s two biggest real estate markets. Now it’s clear that trouble is ahead. The weakness in both cities marks the start of a reversal in the long boom for Canadian real estate.
What’s surprising about the weakness on the West Coast is the absence of any change in economic fundamentals, such as a spike in unemployment, to explain it. The Vancouver market was cooling even before the latest round of mortgage tightening by Ottawa, which took effect in July.
A change in buyer psychology may also be occurring, says Madani. “I don’t think there are enough people now who believe we can continue these outsized price gains we’ve seen over the past decade,” he says. “As those expectations change, potential buyers step back.” With Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney constantly warning about Vancouver real estate, it’s not surprising their pleas for restraint are being heeded.
If this change in mindset truly takes hold, the entire Vancouver market will be affected, not just the multimillion-dollar homes.
The city’s real estate has always been mind-boggling to outsiders, but reached a particularly confounding peak this year in terms of affordability. The median house price in Vancouver is 10.6 times greater than the median income, according to urban policy consulting firm Demographia. That makes it the second-most-unaffordable major city on the planet after Hong Kong. The only way to account for the market becoming so detached from fundamentals, in Madani’s view, is a pervasive belief among buyers that prices will keep rising.
Of course, easy access to credit is necessary for people to act on their beliefs. Interest rates have been at record lows since the financial crisis in 2008, making it relatively easy to obtain large mortgages. Rates have, in fact, been falling steadily since the 1990s, helping push the home-ownership rate in Canada to a record high of 68.4%, according to Statistics Canada. Household debt has ballooned, whereas wages have not. “If home prices rise substantially above income growth, the only way you’re bridging that gap usually is through mortgage debt,” says Ben Rabidoux, an analyst with boutique research firm M Hanson Advisors.
While the average resale home price has jumped nearly 128% since 2000, rents have risen by just 16.7%, as measured by the Consumer Price Index. “In order to sustain prices at these elevated levels, you need a continuous supply of new buyers willing to take that mortgage debt, and [able to] get it cheaply,” he says. Those buyers may not be forthcoming. Interest rates will inevitably rise, as the Bank of Canada keeps pointing out, and the federal government has instituted numerous changes over the past few years that will make a home purchase more difficult for first-time buyers.
“It seems like Vancouver is past the tipping point,” says Sonya Gulati, a senior economist with Toronto-Dominion Bank. Gulati estimates the market is overvalued by 15% to 20%, and says prices could fall by an equivalent amount over the next two to three years. Rabidoux foresees an even greater decline, perhaps a 30% to 40% fall in average price. The weakness in sales and the rise in inventory is uncomfortably similar to the market drop in late 2008, he says. Back then, the Bank of Canada slashed interest rates and the federal government launched a program to repurchase mortgages from the banks, which sent the housing market rallying. This time, the authorities are taking away support for the housing market. In the past four years, the maximum amortization period for government-insured mortgages has fallen from 40 years to 25. Such tightening makes an immediate rebound unlikely.
What’s happening in Toronto and Vancouver today marks the start of a much broader slowdown in housing. Affordability is becoming an issue in other cities, especially Montreal, Kelowna and Abbotsford, B.C.
After past housing booms in Canada, the subsequent hangovers lasted many years. The average price in Vancouver fell by more than 20% in real terms between 1995 and 2001 after a steady run-up.
A price adjustment may sound scary, but some say it’s necessary to restore affordability to the housing market and stop Canadians from piling on debt. “We’ve had a very good run in housing over the last decade,” Madani says. “At some point, it just runs out of gas.”
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