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This single-family detached property in Vancouver sold in mid-April for $3.4-million after being on the market for six months. The original asking price in October, 2018, was $4.5-million.Rafal Gerszak

In Canada’s frothiest housing market, prices are finally falling. Hip, hip, hooray.

Falling real estate prices are normally a negative economic indicator, but it’s been years since Vancouver had a normal housing market. Canada’s third-largest metropolitan area inflated into a bubble thanks to home prices that consistently rose much faster than local salaries. Real estate became disconnected from the real economy.

It now appears to be returning to Earth. So long as the bubble deflates at a slow and steady pace, that’s good news. It’s necessary – and not just in Vancouver.

Real estate markets are all about balance. It’s dangerous when prices get out of whack in either direction. That can happen when people lose confidence, prices collapse and buyers go on strike – as in the United States during the Great Recession. But that painful housing crash was preceded by several years of the opposite sort of excess, as desperate buyers bid prices ever higher. The bigger the bubble, the bigger the bust.

The goal in Vancouver is to deflate the balloon before it pops. It’s a similar story in the Greater Toronto Area, the country’s largest housing market, which before 2018 became nearly as overheated.

So how’s the preventive deflation going? As reported in Saturday’s Globe and Mail, there’s lots of evidence Vancouver prices are pulling back. Some homes purchased last year or the year before, at the market peak, have changed hands this year at lower prices. The Real Estate Board of Greater Vancouver reports that sales fell to a 24-year low in April, even as listings rose 46 per cent. Sellers are more eager to sell; buyers are less eager to buy.

According to the Teranet-National Bank House Price Index, which tracks prices in 11 Canadian metropolitan areas, Vancouver is still the country’s most inflated market. Prices are 180 per cent higher than in 2005. But since peaking in July, 2018, Vancouver prices are down 4.7 per cent, including a 0.45-per-cent decline in April.

If those numbers are right, then Vancouver’s housing market isn’t cratering. Instead, it appears to be correcting, gradually. Which is what government policy was aiming for.

There are six reasons why Vancouver housing is finally moderating. In early 2018, the federal government introduced mortgage stress tests, effectively reducing how much Canadians can borrow. In 2015, B.C. created a 15-per-cent tax on foreign buyers. Last year, the provincial NDP government raised that tax to 20 per cent. It also raised a transfer tax from 3 per cent to 5 per cent on homes worth more than $3-million. And Vancouver brought in a tax on empty homes to discourage speculators by forcing them to pay up if they are neither residents nor landlords.

Finally, B.C. created a residential-property registry, which will make it harder to use real estate as a laundromat for dirty money – whether soiled cash from domestic crime or shady overseas business. The registry goes into effect next month; it will force those who have until now enjoyed the veil of numbered companies to reveal a property’s human owner. The desire to avoid that may be driving some recent sales.

After years of dithering, those with the power to rein in the Vancouver housing market – federal, provincial and municipal politicians – all finally took action. Those actions are bearing fruit and, if all goes well, Metro Vancouver will become a more affordable place for residents – people who want to buy a home to live in for the long term.

But for politicians courting voters concerned about housing affordability, the temptation to do the wrong thing is always strong. Many governments have dabbled in home-ownership subsidies, which in one way or another involve giving taxpayer dollars to home buyers. The result is housing-price inflation, which is the opposite of affordability. The federal government’s new First Time Home Buyer Incentive, costing $1.25-billion over three years, is a classic example of such counterproductive policy.

And while the Vancouver market is clearly turning, Greater Toronto – which is much bigger, and where fewer anti-speculation measures have been taken – may be a different story. In Canada’s second hottest market, prices are down 4.1 per cent since their peak in mid-2017, according to Teranet-National Bank. However, over the past year, prices have rebounded, up more than 3 per cent. More cooling action could still be needed.