City house price shock
Paul Luke
Province
A University of B.C. study suggests that a house priced at $754,000 in the second quarter has been overvalued to the tune of $85,000. Gerry Kahrmann file photo – The Province
Brace yourself, Vancouver homeowner — the city’s out-of-whack real estate market has overpriced your house by about 11 per cent.
Homeowners in the city are living in an overvalued market where prices for detached homes must take a big hit to come into balance with rents, researchers at University of B.C.‘s Sauder School of Business say.
An 11-per-cent correction translates into an estimated drop of $85,000 on a house valued at $754,500 in the second quarter, says the study released yesterday by UBC professor Tsur Somerville and research assistant Kitson Swann.
“We find that the housing stock in many major Canadian cities is substantially overpriced,” the study said.
“Declining sales and weakening prices are signs that the decade-long boom in Canadian markets is over.”
The study defines equilibrium, or balanced housing prices, as the relationship between prices and house rents.
“We say a housing market is in equilibrium when the ratio of house rents to prices equals the cost of capital for owning a house — which is the sum of the mortgage rate and out-of-pocket costs, then minus the expected rate of long-run house price appreciation.”
Among nine Canadian cities, only Toronto‘s house prices are in balance, the study said.
Prices in Regina, Winnipeg, Ottawa, Montreal and Halifax would have to fall by 20 to 25 per cent from their second-quarter level to reach equilibrium, it said. Calgary‘s would have to come down by seven per cent.
“House prices can correct through sharp, rapid declines, through longer and slower declines, or by staying essentially flat for a long period,” the researchers said.
Edmonton‘s recent, pronounced declines mean its prices should rise by eight per cent to come into equilibrium with rents.
Vancouver‘s market is less unbalanced than those in Regina, Winnipeg, Ottawa, Montreal and Halifax, the study said.
But the report has particular concerns about Vancouver.
It warns that the potential for quick declines is greatest in cities where there is a mismatch between the number of units and the number of households ready to occupy them, and where there is a growing inventory of unabsorbed units.
“Recent data suggests that Vancouver is the most at risk in this regard,” the study said.
In a separate report yesterday, Statistics Canada reported that the value of building permits in B.C. and Alberta fell in July.
The value of B.C.’s permits dropped 19 per cent in July, pulled lower by a 37.6-per-cent plunge in non-residential permits.
In the Vancouver area, permit value fell 32.3 per cent to $407.5 million in July, StatsCan said.
Nationally, the value of permits rose by an unexpected 1.8 per cent in July, fuelled by growth in the value of multi-family units, StatsCan said.
Many economists had predicted a drop of one to two per cent.
© The Vancouver Province 2008
