If we could distill an entire year’s worth of real estate news about Vancouver into a single headline, it would probably look something like “Home prices in Vancouver are dropping in a rate not seen in decades.” At this point, no one can argue that the market has definitely shifted away from being a seller’s market, and buyers have more housing choices than they’ve had in years.
Although the federal and provincial governments have created market cooling regulations such as the mortgage stress test, the foreign investor taxes, and these have had some degree of success in causing prices to stabilize, prices remain quite high. As a result, a large number of would-be home buyers are sitting on the sidelines, hoping that home prices to drop, with a few of them are even holding out hope for a housing bubble burst that would make home prices plummet.
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Though we’re no longer seeing the same level of anxiety regarding a catastrophic market crash as we saw just a year ago, there are still plenty of alarmist articles trying to stoke the public fear (or hope) for a housing crash in Vancouver. Is there any possibility that the current trend of home prices dropping an indicator that we’re heading for another 2008-styled housing market crash?
Are we due for another housing crash?
Though it’s possible to study the market and identify factors that can lead to a market crash, it’s impossible to know for certain the exact moment in which it finally happens, regardless of what economists may tell you. The only way to know for sure when a market crash happens is after the fact.
With the power of hindsight, it’s easy to see why 2008’s global housing market crisis happened: loose lending regulations, credit rating agencies manipulating ratings, banks handing mortgages to just about anyone, rampant housing speculation, etc. Of course, those lending practices were unsustainable, and it was only a matter of time until the bubble burst. The result was that millions lost their homes, the global economy fell into a recession, and governments were forced to step in and bailout banks, and pass lending regulations.
But unlike most of the developed world, Canada managed to escape basically unscathed. And that is because Canada has a concentrated banking system that controls mortgage lending and investment banking under the watchful eye of a single, strong regulator.
How does the current Canadian housing market stack up when compared with 2008’s market? Quite well actually. The fact that the housing market has slowed down without going through a recession is evidence that those market guardrails are still in place.
Sure, it’s easy to look at Vancouver’s housing prices, and make the argument that there’s no way that these prices are anything but unsustainably inflated. But we need to remind ourselves that Vancouver is a world class city on the same level as Paris, San Francisco, London, Tokyo, and Geneva. And one feature all these cities have in common is expensive real estate. Not because all of these cities have countless foreign investors flocking in and overpaying for properties, or crime syndicates laundering billions of dollars, but because their housing demand is quite high, and there isn’t enough inventory to satisfy it. Of course, it would be disingenuous to say that money laundry and gentrification doesn’t have any effect in housing prices, but factors such as location, available inventory, perceived value, and availability of capital have a greater effect. Let’s not forget that most of Canada saw a decade long housing boom fueled by low interest rates, and cheap credit, not just Vancouver and Toronto.
And yet, even after considering its housing prices compared to local average incomes, Vancouver’s average per-square-foot prices are actually quite modest when compared to other expensive world-class cities.
Should you wait until prices drop significantly before purchasing a home?
Just like it’s impossible to know for certain when a market peaks, it’s also impossible to know the exact point in which the market hits its lowest point. There are countless would-be home buyers and investors waiting on the sidelines for prices to significantly drop. Some of them are waiting because they simply can’t afford to purchase a home in the current market, and some of them because they can’t resist the temptation of trying to beat the market and want to buy when prices are at their lowest and sell it when prices peak.
It’s not wise to delay your home purchasing decision solely on the hope that prices will drop significantly in the near future, or on the hope that Vancouver is heading for a housing crash you can capitalize on. Simply put, baring a massive global economic collapse or an unprecedented natural disaster, the conditions for a massive housing prices drop simply aren’t there.
Though signs point towards housing prices to remain stagnant throughout 2019, especially in the luxury and detached home market, this slowdown won’t last forever. As we have mentioned in previous posts, it’s always a good time to purchase real estate, because it’s always possible to find great deals. Your home purchasing decisions should be based on your current economic situation, your ability to carry a mortgage, and the quality of the deal you’re considering.