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High home prices in Vancouver are Justified

According to data from the Real Estate Board of Greater Vancouver, the benchmark price for a detached home in Greater Vancouver dropped sharply in November by 6.5% on a year-over-year basis. To put it into direct numerical terms, the benchmark home lost around $107,900 in value in just one year. Detached homes in West Vancouver saw a much more dramatic loss of 10.3% on a year-over-year basis.

At the same time, REBGV reported a 38% decrease in sales for November on a year-over-year basis, and a decrease of 18.61% in sales from October of this year. While this monthly decrease can be partially explained by a normal seasonal drop in sales, the year-over-year drop in sales is something that can’t be ignored or explained away as a seasonal adjustment.

Further dampening Vancouver’s previously blazing hot detached real estate market, Greater Vancouver’s total detached inventory went up by 24.44% on a year-over-year basis in November (though new listings did decrease by 30% from October of this year).

This combination of fewer sales and rising inventory has created the conditions that generally lead to Vancouver’s detached home prices dropping by an amount not seen since July of 2009. Vancouver’s sales to active listings ratio (SALR) is now down to 8.9%, solidly below the 12% threshold needed to declare a market a “buyer’s market”.

All current data seems to indicate that prices for real estate of all types will continue to drop well into 2019 unless something changes dramatically. Does that mean that Vancouver prices will finally become affordable again? According to economist Francis Fong, Vancouver’s high prices look like they may be here to stay.

Vancouver’s high home prices are here to stay

It’s easy to be wary of Vancouver’s “rapid” price appreciation, especially if we remember the housing crash in the United States ten years ago. After all, we saw similar symptoms: skyrocketing home prices, record high debt, and salaries not keeping up to pricing. And while the news media love to write scary stories about the upcoming housing crash, a closer inspection reveals that such scenario, while not impossible, it’s not very likely.

“Relative to the US, the fundamentals of Canada’s mortgage finance system are starkly different,” Fong says. “Most critically, Canada’s housing market has not been driven by growth in low credit quality mortgages, despite the impression given by rapid price gains. Rather, credit quality has actually improved over time.”

He goes on to cite Equifax data which shows that the percentage of homebuyers with “very good” or “excellent” credit ratings increased from 81.5% in 20013 to 84% in 2017. Additionally, first-time homebuyers saw an even more significant increase from 79.4% in 2013 to 82.4% in 2017. He also points out that 82% of Canadian mortgages are uninsured, meaning that the vast majority of home buyers had put at least 20% of down payment. “This suggests that home price gains are driven by those who can actually afford such prices.”

Though he admits that there are certain potential problems unique to the Canadian real estate market, such as the high level of personal debt, and the increasing number of new mortgages issued by less-regulated financial institutions besides banks, he does not believe those are enough to cause a major “correction”.

While all major metropolitan areas in Canada have witnessed downward pressure in home prices (particularly the Greater Vancouver Area and the Greater Toronto Area), and could see a further decrease throughout 2019, that pressure has been mostly fueled by external factors such as stricter mortgage rules and higher interest rates, which have in turn caused rising inventories and fewer sales.

So, if the housing situation wasn’t driven by low quality credit, zero percent down-payment mortgages, and lax lending regulations, then what caused prices to go up so high? As Fong puts it, “A possible answer, though unpalatable, is that homes are fairly priced. That contrary to Canada’s notion of fairness and equality, the laws of supply and demand have simply pushed the fair market price for housing in major markets beyond what many can afford. This could very well be what Canada is today: a country of world-class cities that are no longer the bastions of equal opportunity for homeownership they once were.”

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