Vancouver's housing market looks primed for a correction, according to a report from BMO Nesbitt Burns, with the average house now costing "an astounding" 11.2 times a family's average income -- more than double the national average.
But senior economist Sal Guatieri said there's hope that any drop in prices could be less severe than previous corrections -- "if interest rates stay low and wealthy immigrants continue to pour into the city, prices could stabilize sooner than in past downturns."
The city has seen four corrections in the last 30 years -- in 1981-82 (-30 per cent), 1990-91 (-14 per cent), 1995-96 (-20 per cent) and 2008-09 (21 per cent). Even so, the average house has gained 21 per cent in the last year, or a whopping 188 per cent in the last decade and was worth $815,000 at the end of April.
"Riding a wave of wealthy immigrants, Vancouver's house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners," he said. "While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb."
He issued a report Tuesday that compared the markets in Vancouver, Calgary and Toronto. Here's what he had to say about the other two cities.
Toronto: "Greater Toronto house prices have nearly doubled in the past decade, and now stand at a high 6.7-times family income, compared with 4.3-times in 2001. This is comparable to valuations in the late 1980s that were subsequently followed by a 25 per cent slide in prices. But the key difference now is that mortgage rates are under 4 per cent instead of near 14 per cent, which underpins affordability. That said, while high valuations might be sustainable in an ultra-low rate climate, they could come under pressure in a more normal rate environment. Given our outlook for a moderate increase in rates in the next two years, prices could soften or at least stabilize for a while. A possible overhang of condos could aggravate the weakness."
Calgary: "Energy-rich Alberta was the country's housing hot spot five years ago. Soaring oil prices and rapid in-migration led to a doubling in Calgary's house prices within four years. But lofty valuations, a pullback in oil and the recession spurred a 17 per cent correction between mid-2007 and early 2009. Although the market has recovered more than half its losses, Calgary is still one of the few Canadian cities (Edmonton is another) that have yet to reclaim pre-recession peaks, reflecting payback from overbuilding and a glut of unsold condos. However, valuations have improved since 2007, with prices at 4.2-times income, less than the national norm. Barring a sharp pullback in energy prices, Calgary's house prices stand a reasonable chance of growing alongside incomes in coming years. "