2 Top Economists vs The Bubble


Cameron Muir of BC Real Estate Association on Vancouver housing bubbleWarren Jestin Chief Economist of Scotiabank on Vancouver housing bubble, April 9, 2012

Just relax. Vancouver real estate bubble fears are overblown, and the numbers don't bear them out.

Two top economists told the same thing about where the Lower Mainland and Vancouver real estate market is going, and neither of them foresees the kind of sudden, extreme correction many people are worried about (or hoping for).

Cameron Muir (left) is the Chief Economist of the BC Real Estate Association, and the familiar face delivering BCREA's video outlook every month. Warren Jestin (right) is Chief Economist at Scotiabank, where he studies Canadian and global economic issues. Both will be speaking at the Vancouver Real Estate Forum on Wednesday, April 11 at the Vancouver Convention Centre West.

 Muir describes the real estate market as "a constellation of factors that interplay with one another," but he says the age-old demand and supply ratio is the most telling. In real estate that's sales-to-listings, and he says that ratio is currently in balanced territory: in between 15 and 20 per cent. With unit sales below the 10-year average across the region, expect "moderate-average typical demand scenario."

Demand -- distinct market segments


When it comes to demand, Warren Jestin says there are two distinct market segments. The high end, driven by wealthy families, produces eye-popping numbers like the benchmark price of $2,250,100 for single detached houses in Vancouver West.

As Cameron Muir points out, luxury home sales appreciate much faster during good times. Those extremes put upward pressure on average prices by skewing the whole regional price picture, as we saw last year.

(The new MLS® Home Price Index and benchmark prices give a truer picture of typical home prices and trends for each market area, as they're less affected by a few ultra-high-end sales. For instance, the average March price for a detached house in Greater Vancouver was $1,155,521, while the benchmark price was $1,056,400 -- almost a full $100,000 apart.)

The other market segment -- let's call it The Rest of Us -- will buy homes when there's optimism about job security and continued income. That's a much larger market segment.

Strong economic fundamentals for BC


BC is doing well on the job front, says Jestin. Our province has outperformed the national average fairly consistently, and he believes that over the next year BC will outperform Central Canada and the Maritimes and see  employment growth.

In Asia, 20 million new homes are being built, fueling a 2.25 - 2.5 per cent growth in demand for construction-grade lumber. And Asia has a net demand for other resources, including natural gas and oil. BC's position as a gateway to those developing markets will require new infrastructure, creating jobs and economic activity. 

These strong economic fundamentals result in confidence that will drive consumer spending on the biggest item on the household balance sheet: the home.

Interest rates -- low and stable


But how affordable is that home? Greater Vancouver has the highest benchmark prices in Canada and the Fraser Valley is in third place behind Toronto. We've seen numerous affordability studies warning about the high ratio of home price to income.

Muir says those studies leave out one factor in the calculation: interest rates. We're at lifetime lows -- the bottom of a 25-year decline in interest rates -- which means you can borrow more for the same payments.

Neither economist sees interest rates rising sharply. It's true they have nowhere to go but up, but it would take a worldwide economic shock to drive rates steeply upwards, so low interest rates should continue to buoy the market for at least a year.

Jestin sees three- and five-year mortgage rates going up about 0.5 per cent over this year, and a year from now the beginning of a rise in short-term interest rates, which will affect variable mortgages.

He says, "In the purchase decision, that reality has to be there. Now is the time to temper enthusiasm, but not panic.

Multifamily construction takes over


Even with low mortgage rates, single-family detached houses are out of reach for most first-time buyers, particularly in Metro Vancouver. Muir expects to see detached-house prices continue to increase for two reasons: there's no place to build more of them because of our geography, and they're becoming a smaller and smaller proportion of our housing stock. Most of the new ones being built are replacing houses that were torn down.

Construction is moving to condos and away from single-family detached. In fact, condo construction is outpacing household formation in Greater Vancouver, and the growth of condo prices has flattened, with a possible drop in prices predicted.

Now, condos are fulfilling a new role, says Jestin. First-time buyers are starting in condos/townhouses as "the starter house" becomes too expensive to contemplate.

Condos are also becoming the source of rental properties. Investors see them as a good opportunity for cashflow because the rental market is so tight.

No bubble


"Prices are nuts!" "Nobody can afford to get into the market!" "It's all gotta collapse sometime... "

We Lower Mainland locals talk about our real estate market obsessively, and try to make sense of it from anecdotal evidence and a tsunami of unrelated statistics. 

So it's educational to hear from two professionals whose job it is to make sense of statistics and put them in context.

Our market is definitely changing, with multifamily housing growing fast. Our prices are definitely out there, but because of strong demand in particular areas, not rampant speculation. Activity is definitely slower, but in the last couple of years we've seen "a profound run-up."

Warren Jestin admits there's a risk for slower growth and higher interest rates, but doesn't believe there's a bubble about to burst because he doesn't forsee job destruction (as happened in the US housing crisis).

Cameron Muir says, "Prices are very sticky on the way down. If there are no big macro-economic shocks, we're not going to see dramatic changes." 

The state of the local real estate market is the subject of the Vancouver Real Estate Forum on Wednesday, April 11 at the Vancouver Convention Centre West. Warren Jestin will be giving the keynote address and Cameron Muir will be on the panel for "Residential Market: Is this Market Sustainable?"



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