June 2011


Title: High Vancouver house prices skewer national data

Sub-title: The $831,555 average selling price of homes in British Columbia’s largest city is making Canadian real estate look frothy.


It’s easy to pick out homeowners at cocktail parties these days. They are the ones wearing telltale smugs, due to lucrative recent wealth gains made in Canada’s exceptionally strong real estate market.


While much of the rest of the western world is mired in a post recession housing sector slump, during that time Canadian house prices dipped only slightly, before quickly bouncing back far above pre-recession levels. Nowhere is that more true than in Vancouver, where the average price of homes sold during May rose to $831,555, up a staggering 25.7 percent compared to the same period last year.


“Quite simply, no other city in the country is seeing anything remotely close to what’s unfolding in Vancouver,” says Douglas Porter, deputy chief economist at BMO Capital Markets. “In fact, many large cities have posted price declines over the past year, notably Calgary, Edmonton and Halifax. Among the other largest (Canadian) cities, only Toronto is showing anything close to overheating, and its year over year price gain, seems to fall well shy of bubble territory.”


Vancouver pushing Canadian totals up

Like Porter, few sector observers believe that the Canadian residential real estate market is in a bubble. However it should come as no surprise that when Mark Carney, the governor of the Bank of Canada decided to give a speech about housing earlier this month, Vancouver, where red hot prices are showing bubble-like characteristics and driving up national data, seemed like the perfect place.


“It’s a pleasure to be back in Vancouver, a place often rated as the world’s most liveable city,” said Carney. “Less frequently, is it viewed as the most affordable.”


Yet while Carney was careful to note that Vancouver is in a special group of cites that include Hong Kong and Sydney, which have “become part of a more globalized real estate market,” he also gave clear warnings about Canada as a whole, where average home prices have risen to four-and-a-half times average disposable income, up from three-and-a-half times 25 years ago.


Canadian residential real estate prices are also quite high by another key measure, the ratio of all-in monthly costs of owning a home versus renting one, which is close to its highest level ever.


While housing, which represents about 40 percent of the average family’s total assets, is the single biggest investment that most Canadians will ever make, price increases are a two-edged sword says Carney. That’s because although many in his audience had benefitted from wealth gains, recent increases mean that many of their children wouldn’t ever be able to buy property there.


Time for caution?

However the Bank of Canada governor’s warnings weren’t limited to Vancouver. “A home purchase triggers the biggest liability most families will ever take on,” warned Carney, who noted that Canadian housing related debt has nearly tripled during the past ten years to $1.3 trillion.


Housing debt data becomes even more worrying when one considers that it forms only a part of family obligations which also include car loans, credit card debt, lines of credit and the like. In all, the ratio of Canadian household debt to disposable income rose to a record 147.3 percent during the first quarter, up from 143.2 percent during the fourth quarter of last year.


Canadian banks, for which mortgages now account for 40 percent of all assets (up from 30 percent one years ago) also have more exposure to the housing sector, though they remain far more protected than their US counterparts ever were. That’s because Canadian banks generally lend out only “full recourse” mortgages, which enable them to seize almost all of a defaulting lender’s assets, whereas south of the border, defaulters just drop off their keys and walk away.


Market still in balance?

Despite Carney’s obvious concerns, particularly related to the condominium market, where “some excesses may exist in certain areas and market segments,” he still says that on the whole “Canada’s housing supply is relatively flexible compared with other countries and it appears to have grown at rates broadly consistent with underlying market forces.”


Of course that is not guaranteed to remain true forever, so homebuyers need to be prudent.


“Borrowers should remember that a fixed rate mortgage will reprice itself a number of times over the life of the mortgage,” said Carney. However “while asset prices rise and fall, debt endures.”



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