Saturday, May 12, 2012

Vancouver's Real Estate Woes

Toronto isn't the only city in Canada which is facing a market correction.

Vancouver has also seen real estate prices soaring in the stratosphere.

However I don't think Vancouver and Toronto will see market corrections at the same time. Their economies are separated by 4492 km and very different market modifiers.

Those modifiers are:

The amount of local demand for real estate. How many people are looking to buy?

The amount of real estate investors in Vancouver. How many are looking to flip for a profit?

The amount of available supply of houses and condos (and rental supply).

The amount of upcoming supply of houses and condos (and increasing rental supply).

The strength of the local economy (the employment rate + the median salary of the middle class).

Local consumer confidence.

Local household debt.

Ratio of average home sale prices to the middle class median income. (No point using lower class incomes because many of them can't afford to buy homes, diddo for wealthy people who have more stable incomes.)

Local demographics (ie. What age groups are buying condos? Elderly? Young professionals? Families?)

And lastly the ratio of housing starts vs condo starts.

ie. In Toronto housing starts has dropped, but condo starts are through the roof. Mostly due to the rising price of land and the air-space is comparatively cheap.

In Vancouver? Housing starts were steady in April 2012 (but up in the rest of British Columbia) and have been growing steadier since the huge market decline in 2009. But its the volume of condo starts in Vancouver which are worrying.

In Toronto (not the GTA) the average price of a house reached $568,436 in April 2012. The average price for a detached single-family home hit $831,214 (doubled in price since 2002), according to TREB.

In contrast the average single detached home in Vancouver runs over $1 million, but the market for homes is softening while the condo market is heating up.

So evidently the high prices of houses is fueling the demand for condos, which is causing prices to skyrocket.

Price growth in the GTA are up 10% compared to one year ago (and household debt is likewise up, but salaries are stable). Its a bidding war in Toronto due to lack of supply for homes and the high price of land even in Toronto's satellite cities.

Restrictive Greenbelt policies, strong immigration and low interest rates have kept demand in the GTA high.

Vancouver likewise has benefitted from strong immigration and low interest rates, and judging by the housing growth centres in Vancouver most of the demand is near the shoreline.

According to BMO Deputy chief economist Doug Porter the softening in Vancouver's housing market could see foreign investors, who fueled Vancouver prices, start looking to Toronto as a new place to invest.

The worry however is that the investors ditching of Vancouver (whenever it happens) would cause Vancouver's real estate market to go into a tailspin, and then if Toronto's market overheats a year later the investors will ditch Toronto amidst a similar collapse in prices.

So... here is my prediction. Vancouver's condo and housing bubble may burst first, Toronto's market will go into overdrive (creating an even bigger bubble) and then when Toronto's real estate bubble will burst too when it gets too hot for buyers.

In which case there are two possibilites in terms of a price correction for both Toronto and Vancouver:

Option 1: A minor price correction, going down slightly and then buyers jumping on the opportunity. (Which means a larger correction will be delayed, possibly for years.)

Option 2: A major price correction, with buyers waiting until prices bottom out before taking advantage of the super low prices.

Me? I would prefer a larger correction. The prices on both Vancouver and Toronto are outrageous.

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