Deflating the Hot-Air Bubble on Real Estate Market Hype

Thursday, September 29th, 2016

New report on Vancouver?s housing market ?bubble risk? being highest in the world further inflates sensationalism on local real estate

Joannah Connolly

“Vancouver’s housing market most at risk of real estate bubble in the world,” announced numerous Canadian headlines this past week, in a story taken from the Global Real Estate Bubble Index report newly issued by Swiss bank UBS.

In fact, the bank’s report hit headlines across the globe, with almost every major city clamouring to announce its position on one of the the rankings produced – the “Risk of Real Estate Market Bubble.” (Which, of course, is exactly the attention-grabbing outcome that UBS was hoping for, hence the sensationalist nature of its report and its provocative use of words such as “vulnerable,” “risk” and “bubble.”)

So, Vancouver topped the bubble-risk chart, followed by London and Stockholm, with Singapore and Munich rounding out the top five and Hong Kong coming in sixth. (Fiendishly expensive New York, by the way, was considered by UBS to be “fairly valued.”)

Alarming news, isn’t it? That of all the places on the planet, our fair city is the most vulnerable to a house price crash. (Or, good news, perhaps – if you’re one of those pitchfork-wielding, angry folk clamouring for a return to 1980s house prices.)

But hold on a minute. Is UBS saying that Vancouver is most at risk of a house price crash happening soon, or most at risk of simply being vulnerable to a correction at any given time? Because that is not the same thing at all.

Indeed, the UBS report’s introduction is quick to point out, “Even in the cities with the clearest signs of a real estate bubble, it is not possible to predict exactly the timing and duration of a correction. The situation is nevertheless fragile for housing markets. A sharp increase in supply, higher interest rates or shifts in the international flow of capital could trigger a major price correction at any time.”

No kidding. Those Swiss bankers really know their stuff.

Of course those key factors could trigger a price correction, in any booming market, at any time. Expensive housing markets are always fragile, we all know that. But what’s relevant to local home buyers and sellers is, what’s the likelihood of any of those things actually happening in Vancouver any time soon?

Let’s look at those three factors, as they apply to Vancouver.

First, supply. We have a desperate shortage of new housing both for sale and to rent, despite the increase in building permit values and new housing investment – it’s still not catching up with demand. Cumbersome building permit processes, onerous development requirements and soaring land costs are all contributing to this. A sharp increase in supply, that flood of new housing to the market, just doesn’t seem on the cards.

Higher interest rates – absolutely, one of the major factors in high housing prices in the city today. But the federal government is keeping rates low, and is likely to continue to do so for a while, according to banks. Fixed mortgage rates might creep up gradually over the next few years, which could slow the rate of price growth. But unless rates suddenly jump up and leave millions unable to pay their mortgages or afford homes in the first place (which the feds simply won’t do), the market will likely absorb those changes naturally, as it has always done.

Shift in international demand – OK, here’s the big one for Vancouver, with the new foreign buyer tax in place, and seemingly effective in its early stages. Sales in August, and likely September, have slowed down for sure, especially at the high end of the market, leading to a drop in the average price of homes sold since the tax was launched. But experts suggest that’s more likely to be “policy shock” – buyers and sellers waiting to see what happens in the market – than it is a permanent state deliberately caused by the new tax. Historically, real estate markets tend to absorb major policy changes within six months, and then it simply becomes the new normal.

Vancouver won’t suddenly stop being one of the most desirable cities for real estate in the world. It won’t stop being breathtakingly beautiful, or offering an amazing lifestyle, or being geographically constrained. The transfer of the city’s wealth between generations – another major factor propping up the market – will go on and on. All those fundamentals aren’t going anywhere – bubble or no bubble.

Sure, there’s always a “risk” in any booming housing market at any time. And sure, real estate goes in cycles, so there will probably be a correction at some point. Maybe this year, maybe in five years, maybe 20.

The point is not to treat your own home, or your real estate needs, as part of a wider demand-and-supply-driven market – that way madness lies. The only thing that you, as a home buyer or owner, need to worry about is what you and your family need to live in, what you can comfortably afford with some wriggle room and a healthy amount of equity, and whether you’re happy to stay there a while.

As for that price crash? There’s no way of knowing for sure, and any of us could be wrong – but the perceived wisdom from all the intelligent sources that we’ve come across is that the most likely outcome is for Vancouver home prices to readjust after absorbing the foreign buyer tax, and continue to rise steadily.

And one final side note – in the other ranking in UBS’s report, that of house-price-to-average-income ratio, Vancouver came in seventh, despite being touted by other reports as second or third in the world for unaffordability under this measure. So go figure.

Really, the only bubble that should deflate is all the hot air about our housing market.

© 2016 Real Estate Weekly

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