Pam Allen (www.housesinvancouver.com) : Housing Bubble 2

The Housing Bubble - What do our Experts Say

Since 2001, we have been 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?

"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 baby-boomers start to retire and head west. "I also see job growth remaining positive, giving 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 Hemut Pastrick, Chief Economist at Credit Union Central of BC. "A necessary condition is a high level of speculation," says Pastrick, who denies 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.

"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 town homes 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 out market hold up or should we expect a marked slowdown?

"Most figure that a slowdown is inevitable given the run of growth we have had 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 one-third of the world's economy so we are sensitive to a slower US economy. It impacts out 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 principle 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 favorable owing to continuing demand growth and ever present land supply constraints.

These market fundamental 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 1990's 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.

Pam Allen
RE/MAX Real Estate Services
#410 - 650 West 41st Street, Vancouver, BC, V5Z 2M9
Cell: 604-790-8464 Fax: 604-263-1057
Email: pamallen@pallen.com Website: www.housesinvancouver.com,
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