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Real estate overlooking Granville Island is seen in downtown Vancouver. (Rafal Gerszak For The Globe and Mail)
Real estate overlooking Granville Island is seen in downtown Vancouver. (Rafal Gerszak For The Globe and Mail)

SÉBASTIEN LAVOIE

Vancouver’s cooling market is a welcome development, but delicate Add to ...

Sébastien Lavoie is chief economist at Laurentian Bank Securities.

Vancouver housing has gotten increasingly out of reach for the average income earner. Yet, many households have been willing to bury themselves in debt to become homeowners. As such, British Columbia might no longer be “The Best Place on Earth,” as claimed on the province’s license plates in the years leading up to the 2010 Vancouver Olympics. Then, the average Vancouver house cost about $365,000 less than it does today.

The strengthening of B.C.’s economy and the rarity of available land to build on (the latter caused by geographical and municipal zoning restrictions) cannot be fully explained why prices soared that much in just a few years. Nor can they justify why a tiny condo in Vancouver now costs almost $200,000 more than a single-detached home in Montreal. Significant foreign investment in housing has likely contributed to the situation.

The B.C. government has now decided to take the bull by the horns. On top of the introduction of a tax break on the purchase of new units, new rules to end the controversial practice of shadow flipping were introduced in May and the 15-per-cent tax on foreign buyers purchasing properties on Aug 2. Other measures to improve affordability could still be announced – just this week, the City of Vancouver proposed to introduce a new tax on empty homes. Ultimately, authorities want to boost the stock of housing and eliminate speculative investments, which are distorting prices and availability.

Last spring, housing conditions had already begun to cool – even before the B.C. government’s measures were announced – due to the limited number of affordable residential units on the market. Then, after the introduction of the 15-per-cent tax in August, foreigners stopped pouring money into housing, realizing that their return on investment was going to become less promising. But as foreigners usually represent just 10 per cent of buyers, the 19-per-cent plunge in resale transactions observed in August also indicates that some local buyers were deciding to stay on the sidelines.

Moreover, the recurrent and exorbitant increases in home prices observed in recent years suddenly turned cold, with the benchmark price of residential properties edging up by a mere 0.3 per cent in August. This quasi-stagnation is a welcome development, as it seriously dampens the potential reward for purchases by foreigners and other speculators. It also reduces the odds of seeing more domestic borrowers taking on larger mortgages. Local buyers are also likely to feel less rushed to purchase immediately out of fear that prices will go even higher in the near future.

While the ideal scenario would be a stabilization of home prices, there are no such guarantees.

First, there are too many elusive factors that can still influence prices. For instance, we just learned more about the extensive scheme involving foreign money and flipping activities a few days ago, thanks to a recent Globe and Mail investigation.

Second, we do not know if robust demand conditions will persist. Granted, B.C.’s interprovincial migration flow is near a two-decade high, due to the return of former residents from the beleaguered Alberta economy. But risks around the global recovery are still tilted to the downside. It might only take an unexpected disruption in China’s economy, or a U.S. presidential election outcome threatening our trade agreements, to bring down Vancouver’s housing market.

Third, only time will tell whether potential local buyers, having taken a breather, will soon come back to the market or wait longer to purchase.

Fourth, and finally, foreigners could decide to pocket some of their profits by selling the units they currently hold. Such an outright disinvestment would put further downward pressure on home prices. And it would be inappropriate to take the narrow view that foreign capital will necessarily redirect into the Victoria and Toronto housing markets, where there is no foreign buyers’ tax for the moment. This money may simply end up elsewhere on the planet.

In the end, the implementation of the 15-per-cent foreign buyers’ tax is also treating the symptom of a much bigger problem: The ultra-low interest rate environment that’s ultimately leading to more risk-taking by global investors and Canadian homeowners.

All told, the Vancouver housing market is set to open a new chapter. This year will mark the beginning of a delicate adjustment process. We won’t pretend to know what the ultimate result will be, but at this stage, Vancouver’s current cooling appears to be a much more desirable outcome than the skyrocketing prices seen in recent years.

At the same time, however, the market is moving closer to a scenario where an outright decline in home prices could bring a broad-based loss of buyer confidence. In such a event, some highly vulnerable borrowers could have to absorb a drop in their assets’ value. This would exacerbate a tailspin in the housing market and hinder B.C.’s growth expectations, since a quarter of the province’s economy depends on real estate and residential construction activities – a comparable extent to which Alberta depends on mining, oil and gas.

That kind of negative feedback loop could happen, but it’s not what authorities have in mind. For now, the pro-active implementation of macro-prudential tools, rather than authorities passively watching the development of a housing bubble, is welcome news.

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