VREP #94 | CMHC Chief Economist Talks Vancouver Real Estate


What better source for an in-depth analysis of our market than CMHC Chief Economist Bob Dugan?

Adam and Matt dig deep into the tools used by the Canadian Mortgage and Housing Corporation in an effort to make sense of the wild swings we have seen in the market in the past few years.

Bob also offers some insight into what the market has in store for us in the near future.

Check out the latest CMHC Housing Market Assessment for Vancouver HERE.


Episode Summary

Can you tell us about yourself?

I’ve been the Chief Economist with the CMHC for about 14-15 years. I’ve had a long career at CMHC, but also in the private sector and with government departments for about 24-25 years.

You’re a student of Canadian real estate. What are your general thoughts on the Vancouver real estate market as it currently exists?

Great question. The Vancouver market is looked at very closely (among others); it’s experiencing strong price growth in recent years and is one of the higher-priced markets in Canada. CMHC developed a housing market assessment tool to identify imbalances in housing markets – this is important because we care about stability and when people hear about our concerns, it will help them make informed decisions which will help minimize the possible downside of an imbalance getting too large.

With this background, the Vancouver housing market is certainly one where we see imbalances. In particular, we look at over-valuation. This is when we compare the level of house prices over what can be supported by fundamentals in the market, e.g. personal disposable income, mortgage rates, and population growth. We’re finding in Vancouver that housing prices are higher than what can be explained by these fundamentals – there’s a certain amount of over-valuation. It’s important to communicate that to people so they know our thoughts.

We see price acceleration in Vancouver. This is part of the housing market assessment – it’s an indicator that points to the possibility there’s speculative activity that may be pushing house prices higher. That’s a concern we like to talk about to ensure people are aware of that risk, because if speculators pull out of the market it can lead to accentuated correction in house prices.

These kinds of things are looked at in our overall assessment of the Vancouver market, which says there are imbalances.

Fascinating. We’ve had many people talk about a bubble for the past 10 years or so. The fundamentals don’t make sense. Has Vancouver ever made sense?

Vancouver has been a more highly priced market than others in the country for a long time. When you look at house prices and over-valuation when estimating the relationship between these fundamentals – income, mortgage rates – the relationship is different for Vancouver than for a city like Ottawa for example, because there’s a history in Vancouver of supporting the higher price level with a given fundamental level. The analysis is targeted and the estimation is done with local variables. This doesn’t change the history that Vancouver’s market has been higher priced than many others in Canada, but it wasn’t always over-valued. Even over the HMA [housing market assessment] published results history since 2014, Vancouver wasn’t always seen as over-valued. But right now it is, and it’s at its highest level. We look at it on a scale of green-yellow-red, where green is the lowest level of concern, yellow is a moderate level, and red is a high level of concern. Right now, we call it a high level.

Can you explain that?

The main reason we get concerned about these things is because we care about promoting housing market stability. From our perspective, what we can do to help promote this is to put information out there. Potential home buyers, lenders, homebuilders – everyone involved in the housing market, if they read our reports it helps inform their decisions. Vancouver has a very low level of supply, but if you take other markets like Calgary where we’re more concerned about overbuilding because the level of completed and unsold homes is very high, we tell builders to channel sales towards units that are already built and manage the inventory. We try to send messages like that with meaningful interpretation of the data, so people can take it into account in their decision-making.

In Vancouver and Toronto, markets that resemble each other as they’re both being flagged for over-valuation and price acceleration, our message is that price acceleration is something that can be consistent with speculative demand in the market. If you’re buying a home, ensure the home is in line with your needs and you’re aware of the risks and have an idea of the outlook for house prices in these markets. Getting this information out there and creating awareness in the market promotes stability. The larger the imbalance, the less likely of a smooth correction.

You wrote a piece a little while back in Maclean’s about the foreign buyers’ tax. You made a strong case for supply. Is supply in Vancouver a key tool for taking care of this speculative activity you’re talking about?

That’s an interesting question. In supply-constrained markets, if homebuilders can’t increase supply when demand is strong, usually prices go up. Where there are supply-constrained markets, speculators can often see house prices as a one-way bet, which encourages price speculation in the market. Supply is an important part of the solution. Vancouver’s and Toronto’s local economies are very strong. Vancouver generates a lot of job growth, which attracts people to the city and increases demand in home ownership. At the same time if housing supply cannot accommodate that demand, you get price pressures. Making that supply more flexible would be key to alleviate price pressures. Anecdotally, Vancouver and Toronto are increasingly becoming world-class cities. When you compare them to places like Manhattan where there are not many single-family homes, there is much higher density housing. In Toronto and Vancouver as land prices continues to rise, the land accounts for a much larger share of total house prices (about 80%), whereas in Montreal it’s more like 30-35%. In places like Montreal, the cost to build a house is much more tied to lumber, labour – the materials to build a home. When you have land constraints, the pricing of housing isn’t as much tied to the raw materials for construction. The bigger factor is land prices reacting to macro-economic conditions. When you have strong employment growth and low mortgage rates, etc., this increases demand and puts more pressure on land prices. When price per sq. ft. of land goes up, single family homes go up. Higher density like condo construction spreads out that cost per sq. ft. to more homeowners and makes housing more affordable. Increasing the ability of supply to respond and increasing density of housing will help people cope with higher land prices, which are one of the key drivers of the increase in home prices in Toronto and Vancouver.

There’s a real push for more density across the city of Vancouver and Metro Vancouver generally but, if present trends continue, what do you see the next couple of years looking like in the Vancouver market?

We recently updated our forecasts and a key part of Vancouver’s is because of the high land price, which drives a wedge between prices of single family and higher density homes, we’re seeing a transfer or shift in demand towards more expensive and less expensive housing. Market conditions for condos and semi-detached homes are much tighter because they’re in more demand because they’re more affordable. There is a more balanced market in single-family homes. This is slowing growth in average prices; so, the mix is changing. But, if you look at individual types of housing, we’re seeing very strong growth in things like condos and semi-detached homes. There’s more pressure in the more affordable housing types; we’ll continue to see upward pressure on prices with the increased price per sq. ft. This forces the market to create adjustments in what kind of homes are built. Toronto and Vancouver’s price per sq. ft. is still cheaper than in places like Hong Kong, New York, Boston, and San Francisco; however, the gap is narrowing. As the gap narrows, decisions about density will be dictated by the market looking ahead.

If you’re focused on local markets and, generally speaking, at a national level, can you speak to how Vancouver is an outlier (if it is) and how you adjust your metrics for Vancouver specifically?

It’s not about adjusting the metrics for Vancouver – our housing market assessment tool has four different factors:

  1. Overheating (balance between supply and demand);
  2. Price acceleration (possible speculative activity);
  3. Over-valuation (comparing house pricing to fundamentals); and
  4. Over-building

For each factor, you have the level of indicator and a threshold to show if an imbalance is developing. The thresholds are unique to each centre. Vancouver’s will be different from Halifax’s. So, that’s how we adapt the metrics – we evaluate Vancouver relative to its own past, rather than another market’s or a national average.

How can people find out more about CMHC and some of these reports?

Look under housing market information on CMHC’s website to download these reports for free. We publish housing market assessments for Canada and also individual reports for 15 centres across Canada. For Vancouver, we have a 10-page report that digs into more details than the national-level publication.



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