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An open house in Vancouver’s Arbutus neighbourhood. Low housing inventory and high demand are forcing prices to rise.

DARRYL DYCK/The Globe and Mail

Emma Co has been a real estate agent for several years in Vancouver, but she's never seen the market so fired up, particularly on the city's east side.

"I can't believe this market," she said, seated in a coffee shop near Kingsway and Fraser. "I was talking to one realtor, and she said, 'where is this going?' "

It's a reasonable question, considering the selling prices. The average price for a detached house on the Multiple Listing Service in May was $2.23-million in Vancouver proper. In some cases, east-side houses are going for west-side prices. Urban planner Andy Yan said in March that the invisible $1-million line that once divided east from west has evaporated. We're now looking at pockets of expensive homes throughout the east side, and some pockets are hotter than others.

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As agent Keith Roy says: "Every month this year, the value of the detached home has gone up. The attitude of sellers right now is, 'Why sell now when my house is going to be worth more next month?' "

Inventory is low and demand is high, which is pushing prices up with each passing month. Buyers are getting anxious and so are sellers, who are questioning whether they're getting top dollar. Sellers often change their minds on the asking price and re-list higher after receiving a flood of offers.

It's not often that inventory on detached houses gets this low.

"If we stopped adding new houses to the inventory and kept selling at the current rate, we would run out of houses in about 35 days – they would all be sold," says Mr. Roy. "It's super tight inventory, and we have enormous demand. Every time you hear of a story where a house sells over asking with 10 offers, it means there are nine people who didn't get a house and they are still shopping."

At 895 E. 14th Avenue, east of Fraser, a completely renovated 2,440-square-foot character house with garden suite was listed this month for $1.599-million. It sits on a standard 33-by-122-foot lot, but has no garage. The house had been renovated from top to bottom, while maintaining some original features from when it was built in 1925. It sold in 11 days for $1,751,571.

Local buyers are either panicking to get into the market to settle down, or they're investors looking for a deal, Ms. Co says.

"They want to buy because the interest rates are very low, and they are panicking because the market keeps going up."

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One neighbourhood is under extra pressure because of rezoning.

The Kingsway neighbourhood dubbed Norquay Village – part of Renfrew Collingwood – has become a beehive of agent and developer interest since the city rezoned the area from single-family to multiple-family housing. Norquay is part of a push to transition select areas to higher density housing from single-family detached homes.

As a result of the rezoning, a couple of old bungalows that might have sold for $950,000 a year ago are now going for at least 50-per-cent more.

As part of her job, Ms. Co looks for rezoning potential on behalf of builder and developer clients. She found two side-by-side houses on 44-by-88-foot lots for her client after drawn out negotiations with the homeowners. In the end, the house at 2396 E. 34th was listed for $1.420-million and sold for $1.440-million, and the house next door at 2384 E. 34th sold for $1.350-million. The street is zoned RM-7, for stacked townhouses or rowhouses.

Another house, a Vancouver Special at 6797 Butler St., sold for $1.220-million last June. It's back on the market and it was just re-listed for $100,000 more than the price it was at a week ago. The asking price is now $1.580-million.

"It's hot right now because of the densification approved two years ago. It's now having an effect."

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Rezoning for more density has the effect of turning land into gold. The intention by the city was to create denser housing that would offer affordable entry-level housing for people struggling to get into the Vancouver market. However, if rezoning escalates land values, then development costs go higher, which means the consumer pays more in the end.

Real estate development consultant Richard Wozny is skeptical that an increase in density is the antidote to unaffordability.

"Speculation on rezoning houses into higher densities always leads to higher prices as buyers overwhelm sellers," says Site Economics' Mr. Wozny. "Once the former house sites are redeveloped to multifamily, the units do cost a little less than the cost of the original house if no rezoning or redevelopment ever took place. While that seems affordable, it is worth noting that $1-million for a house is far better value for a family than a townhouse or condo which costs 25- to 35-per-cent less."

Economist Will Dunning, who used to work for Canada Mortgage and Housing Corp., is based in Toronto. He's studied Vancouver and recently wrote a report for Vancouver-based Landcor, which provides data and quarterly reports on the real estate industry. He forecasts that the B.C. market will slow, at least for domestic purchasers. He attributes the slowdown to the weak job market in the past couple of years, as well as a levelling off of mortgage rates. Rates are unlikely to go down much further. Although he expects "quite good" real estate numbers in the second quarter this year, that combination of factors should slow the current frenzy.

One of the pressures on the Vancouver resale market is the low supply of detached houses. With the crush of new buyers on the scene, there's not enough to go around.

"What's driving Toronto is the same as Vancouver – the lack of land for construction of new low-rise housing," he says. "What are their avenues? Compete in the resale market, buy from a small [new] supply that is available, but not in the right location, or buy a small existing property and tear it down. Or buy from a builder. We had a similar pressure in Toronto, which is resulting in rapid price growth here."

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Perhaps a sign of an already cooling market is the recent sale of a Kitsilano house for well below asking. The two-storey renovated house on a 40-by-105-foot lot at 2765 W. 8th Ave. was listed at $1.799-million and sold for $1.580-million after 34 days on the market.

"It's still active, no question, but I don't think you see the same activity we experienced about six weeks ago," says agent Christopher Rivers, who sold a house down the street for $1.569-million.

Also, in terms of prices, the line between east and west has definitely blurred, he says.

"The east and the west are starting to blend. "A lot of people are going to the east side because they want a neighbourhood that still plays street hockey. Plus, you can buy something over there for $1.6 [million] or $1.7 [million] and have community."

There's a theory among some agents that the low supply is due to homeowners' fears that they won't have anywhere to go if they sell.

Ms. Co knows of a couple that is looking for a home after selling as part of an assembly land sale. They got good value for their house, but they wanted to remain in the area. If they'd held out and stayed in their home while their neighbours had sold, their house could have dropped in value. So, they see themselves as having been kicked out of the market. Now, they're trying to get back in and are desperate to find something.

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Another factor driving the market is that rents are on the rise, particularly with a vacancy rate that's almost at zero. That's welcome news for investors and buyers who can't make payments without a mortgage helper.

Agent Paul Albrighton says the majority of his transactions involve properties between $500,000 and $2-million. Few buyers put only 5 per cent down. The majority has at least a 25-per-cent down payment.

"They're taking big mortgages, but they aren't over leveraged like we saw in 2007," he says.

Mr. Albrighton says he's frequently explaining to his buyers that they can expect to spend around $1.3-million or $1.5-million for a decent house. If that doesn't scare them off, he then explains the current process. They need to have all their financing in place before they start looking. If they want an inspection, they need to have it done prior to making the offer. The offer needs to be presented with a deposit in hand, and without any subjects.

"It's so competitive buying these very nice east-side houses, you can't have subjects," says Mr. Albrighton.

Mr. Albrighton says the media overlook the group of domestic buyers that have good jobs and have earned money in local real estate. That group is also fuelling the market, especially those buyers who now prefer the east side to the west side.

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"Interest rates are helping people to go to a higher price. And there is a lot of consumer confidence. That gets people into buying mode. And there is foreign investment from all sorts of places, because our dollar is lower. I had clients recently buying from Europe. There are quite a few reasons why this is happening."

As to whether the frenzy will continue, Mr. Roy, the agent, believes the market has plateaued and could go either way.

"Expectations keep going up, but at some point, that changes. Over the long term, your house will be worth more than it is today. But there's going to be one day when your home is worth less than it was the day before."

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