Real estate peddlers in Canada's hottest housing markets chalked up another remarkable month in July, as prices surged in Vancouver and Toronto and some nearby communities.
Vancouver home prices climbed for the 18th month in a row, with increases topping 2 per cent in each of the past six months, according to the latest Teranet-National Bank house price index. Prices were 24.3 per cent higher than a year earlier, nearly double Toronto's rise and the biggest jump since the national tracking service was launched in 1999.
Although existing home sales slid from a year earlier, the region remains in bubble territory. And the B.C. government's awkward intervention – in the form of an additional 15-per-cent land transfer tax slapped on real estate sold to foreign buyers in Metro Vancouver – is unlikely to have much of an impact.
It's not clear whether foreign acquisitors have even been much of a factor in a market marked by tight supply and strong demand fuelled by record low interest rates and healthy job growth.
"The story is not solely about alleged foreign capital flows," National Bank senior economist Marc Pinsonneault says in a note accompanying the index.
And if it's a case of hot foreign money pursuing relatively safe and still comparatively cheap assets (especially in lower loonies), it won't be put off by a one-time entry surcharge. So forget about those sad tales of offshore condo hunters taking their money to more welcoming markets. The disappearance of a handful of speculators on tight budgets won't be the reason the air leaks out of this balloon.
But the bubble will eventually collapse. We know this not only because that's what happens to all inflated assets. We've seen this movie before, set in Vancouver and featuring a cast of mysterious foreign buyers, hand-wringing politicians and long-time residents worried about the fate of their suddenly unaffordable and dramatically altered neighbourhoods.
Back in the early 1980s, Vancouver-area home prices fell off a cliff in the face of sky-high mortgage rates – the five-year rate peaked above 21 per cent in September, 1981 – and a nasty recession. House prices fell by more than 50 per cent over a five-year period.
But happy days began returning by mid-decade as a wave of Hong Kong and other Asian money washed into the market.
The trigger for the flood of Hong Kong capital was fear about what would happen to that vibrant centre of unfettered capitalism once it reverted to Chinese rule in 1997. Rather than wait around to find out, many families acquired property and businesses in friendly English-speaking environs such as Canada and Australia, where they could obtain citizenship and passports just in case.
Investors accounted for more than 30 per cent of Vancouver property purchases in 1988, many of them from the Far East, according to a study by a major real estate firm. Demand from Hong Kong was so strong that some pricey new condo projects were pitched solely to that market.
In a 10-year period beginning in the mid-1980s, the assessed value of houses in the most affluent areas shot up by as much as 300 per cent.
Then, as now, local residents worried about being priced out of their own city. But like today, there was no government data about how much of the bubble was being fuelled by foreign money. Some analysts cited domestic factors as more important, including a stronger economy, increased migration from other provinces and a surge of demand from baby-boomers.
Still, the offshore crowd was blamed for disrupting neighbourhoods, altering traditional West Coast-style houses, cutting down trees, adding multicar garages, planting high hedges and constructing monster homes.
When that bubble slowly began deflating in 1994, it was a case of market forces adjusting to a variety of influences, including slowing immigration and higher interest rates.
Property prices in Vancouver jumped 35 per cent between 1991 and 1994, as five-year mortgage rates fell to 7.25 per cent from 12 per cent. When rates climbed back to double digits in mid-1994, the market sputtered and didn't recover in earnest until 2001.
Today, it's cheap, easy credit that will keep the bubble aloft a while longer, even if foreign buyers start looking elsewhere.
Adam Smith, who knew a thing or two about property values, wrote that "the ordinary market price of land … depends everywhere upon the ordinary rate of interest."
It was true in 1776 when he was comparing French and British real estate prices in The Wealth of Nations and remains the biggest influence in the market today.