Economist believes the risk of a bubble is ‘elevated’
Michael Kane
Sun
CREDIT: Peter Battistoni, Vancouver Sun Neil Singh, a 34-year-old computer artist in Yaletown, recently bought a $219,000 townhouse in Langley as an alternative to renting in Coquitlam. Carl Gomez of TD Economics bases his concerns about Vancouver and Victoria prices being pushed beyond justifiable levels on the growing gap between prices and rents.
British Columbia‘s hottest housing markets have been put on “bubble watch” by a national bank which says prices in Vancouver and Victoria are being pushed beyond justifiable levels.
Carl Gomez of TD Economics says Vancouver‘s unique geography and shortage of space for new construction cannot in themselves explain the rapidly growing gap between rents and prices. Instead, he blames real estate speculation by both investors and home buyers.
“I don’t want to say there is going to be some sort of massive correction and the market is going to crumble,” the Toronto-based economist said in an interview Wednesday. “What we are saying is that the risks of a bubble are elevated in Vancouver and Victoria, more so than the rest of the country.”
While analysts take issue with some of the measures used in the TD Economics Housing Bubble Watch unveiled Wednesday, they acknowledge that housing affordability is declining in B.C. and the market will correct sooner or later.
Economist Jock Finlayson doesn’t see any of the signs that have precipitated major price corrections in the past, but suggests the report is a useful “yellow warning light” that recent price increases cannot be sustained.
“We are in line for a levelling off in prices, and perhaps a slight dip,” said Finlayson, executive-vice president of the Business Council of B.C. “However, the fundamental economic picture is too favourable to lead one to expect a big correction, like a 20- to 25-per-cent drop in average resale housing prices.”
Helmut Pastrick, chief economist at the Credit Union Central of B.C., pointed out that the housing market is cyclical and we should expect a correction at some point.
“I don’t see negative economic factors coming into play any time soon,” Pastrick said. “I don’t see interest rates rising to sufficient levels to choke off this housing market. And nor do I have an economic recession in the works.”
Patti Croft, chief economist with Vancouver investment managers Phillips, Hager & North, suggests the launch of TD’s bubble watch may indicate a market top.
“Our indicators for Vancouver are suggesting that the market is indeed frothy. Real prices are at an all-time high, and affordability is beginning to show signs of strain.”
She said out-of-province buyers might sustain price levels, but she added that a yellow caution signal is flashing.
“We feel there is a broad-based bubble in the U.S. market. If it corrects, it could have second-round effects on Canada, their largest trading partner.”
Gomez, a former resident of Vancouver who last visited the city in June, prefaces the study by saying that it is impossible to identify a bubble before it bursts, since rational investors would refuse to hold any asset whose price was certain to fall.
His concerns about Vancouver and Victoria are based on the growing gap between prices and rents, and “a little bit of irrational exuberance” around consumer confidence and the strong provincial economy.
“I really think it depends on consumer psychology, which is helping to push prices forward,” he said. “If that psychology suddenly changed, it could trigger a big correction.”
While there are few signs of homes being flipped — bought and sold at a profit within six months — he said some buyers are motivated by the expectation that prices will continue to climb and the fear that if they don’t buy now, they will be locked out of the market.
“If you are buying right now, because you hope to trade up in five years, or because you feel if you don’t buy you are going to miss out, that’s a very scary prospect. Trying to stretch yourself just to afford to buy a home doesn’t make a whole lot of sense when it may be cheaper to rent.”
Pastrick said rent-to-price ratios have limited utility because home buyers are prepared to pay a premium for the non-economic benefits of ownership, and they are making a long-term investment which they have every reason to believe will pay dividends over time.
“I certainly wouldn’t see it as a bad sign that we have seen renters move into the ownership market, and rents have stayed flat as a result.”
HOME RUNS:
Home prices outpaced incomes in both B.C. and Alberta in 2004, but in B.C. home prices took a much bigger lead.
ALBERTA
Personal disposable income 6.2%
Average home prices 6.5%
BRITISH COLUMBIA
Personal disposable income 4.0%
Average home prices 11.6%
Source: Statistics Canada, Canadian Real Estate Association
© The Vancouver Sun 2005
