The Housing Bubble?
What do our experts say today?
Since 2001, we’ve been Realtor Link OCTOBER 20, 2006
hearing about our doomed
housing market.
From a serious downturn to a
full-blown bubble burst, the
naysayers continue to capture
our attention and heighten
our concerns.
Is there any truth to the
prophesized collapse?
To find out, we asked some
experts.
“The fundamentals underlying
housing demand in Vancouver
are positive and will remain
so next year,” reports Gregory
Klump, Chief Economist at
the Canadian Real Estate
Association.
These fundamentals include
a strong economy, high
employment and income
growth, and low interest
rates.
Urban Futures Institute
economist Andrew Ramlo
expects international
immigration will accelerate,
along with in-migration from
other provinces as babyboomers
start to retire and
head west. “I also see job
growth remaining positive,
given rising investment in
public infrastructure such
as the RAV line, the Gateway
Project and the Olympics,”
says Ramlo.
What would have to happen
for a bubble to occur?
Several telltale signs must
exist, says Helmut Pastrick,
Chief Economist at Credit
Union Central of BC. “A
necessary condition is a
high level of speculation,”
says Pastrick, who defines
speculation as a market
characterized by large
numbers of investors buying
homes which they hold for
short time periods, typically
less than six months.
To gauge speculation Pastrick
uses Land Registry data. It
indicates that in Greater
Vancouver, just seven per cent
of properties are being
bought and resold in less
than six months. In 1981 this
rate was three times higher
and in 1990 it was about
twice as high. The most
speculative activity is the
downtown Vancouver high
rise condominium market.
There, 20 per cent of
properties are bought and
resold within six months.
For evidence of a bubble,
analysts typically look for a
telltale parabolic (hockey
stick-shaped) increase in home
prices.
“This isn’t the case right now,”
explains Klump. “Home price
increases in Vancouver have
risen significantly in the past
few years because of high
demand and tight supply,”
explains Klump. “In the past
few months, increases in
average price have slowed.”
Now that sales are returning
to more normal levels and
new listings are on the rise,
Greater Vancouver’s housing
market is becoming more
balanced, concludes Klump.
And, while prices are at an
all-time high, the majority of
home buyers can still afford a
home for two reasons:
• most first-time buyers (about
20% of the market) typically
pay less than the benchmark
price, buying condominiums
or townhomes in suburbs; and
• most buyers already own
homes and are benefiting
from rising prices as a result
of increases in home equity
position.
With sales starting to slow,
can our market hold up or
should we expect a marked
slowdown?
“Most figure that a slowdown
is inevitable given the run
of growth we’ve have in the
past few years. But, nobody
is speculating that the
slowdown will be a decline,
just a more moderate rate of
growth,” says Ramlo.
Sauder School of Business at
UBC professor Tsur Somerville,
agrees.
“The market is slowing, but
slowing is not a collapse.”
Somerville is most concerned
about the downturn in the US
economy and its impact on us.
“The US is still onethird
of the world’s economy so
we’re sensitive to a slower
US economy. It impacts our
tourism and softwood lumber
industries.”
Somerville also thinks that
public infrastructure projects
like the Olympics and the
convention centre are positive
for our tourism industry. And,
overall Somerville thinks these
negatives and positives add up
to a soft landing.
But, cautions Somerville,
“Investors are still a bit of a
wild card. We don’t know how
they would respond to a price
decline – whether they will
sell or hold.”
“Since most home purchases
are bought as principal
residences and are held for a
long time period, short-term
price swings are less important
than the longer-term trend,”
reminds Pastrick. “In the last
45 years, home prices have
doubled more than five times.
The long-term price supply
outlook remains favourable
owing to continuing demand
growth and ever present land
supply constraints.”
These market fundamentals
would have to shift both
dramatically and rapidly for
us to hear a resounding pop
coming from the housing
market, explains Ramlo. “In
the absence of any rapid
changes, the only pop to
be heard should be in the
naysayers assertions about
a burst.”
That said, the strong period
of growth we have seen since
the late 1990s will inevitably
be balanced by a period of
much more tempered growth
in the near future. This more
moderate growth could help
address issues of affordability
that have arisen over the past
couple of years.
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