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Little chance of correction in Vancouver real estate market

March 18, 2013

Roslyn KuninVANCOUVER, BC, Mar. 18, 2013/ Troy Media/ – Will the Vancouver housing market crash? Should I be waiting for a major drop in prices before buying a home in Vancouver? Should I sell my Vancouver home, rent for a while and then be able to buy an equivalent home for a lot less money? The answer to all of them is a resounding NO.

First let me clarify that I am using ‘Vancouver’ as the greater Vancouver area, sometimes referred to as Metro. Second, a crash is a large and sudden price decline where prices do not recover to previous levels in the short to medium term. Housing prices did crash in the 1980’s but a major difference is that at that time many homes had been bought by speculators on very small margins and interest rates soared well into double digit levels.

Now, very few homes are held on spec and any anticipated increase in interest rates is expected to be very modest. Mortgage rates may even go down. Canadian banks make a significant share of their profits from mortgage lending and it is a low risk part of their business since their prudent lending standards reduce the chance of default. Also, many mortgages are guaranteed by the Canadian Mortgage and Housing Corporation (CMHC). In fact, looking to maintain or increase the bank’s mortgage business, the Bank of Montreal has recently reduced its five year fixed mortgage lending rate from 3.09 per cent to 2.99 per cent making house buying a tad more affordable.

The cost of housing in Vancouver is not likely to change dramatically for the foreseeable future. It may soften a bit or it may even rise a bit. The MLS home price index in the Greater Vancouver area actually rose 0.4 per cent from January to February this year. Prices are about 3 per cent lower than they were six months or a year ago, but are 4 per cent higher than they were three years ago. Prices for detached homes have been the softest, while apartments and townhouses have seen much less change, reflecting the trend to condos as a more affordable form of housing.

February sales in Greater Vancouver and the Fraser Valley are still below trend, but are higher than they were in January and attendance at open houses has been rising. The housing industry has been expressing optimism about housing sales and prices, with a 43 per cent increase in single family starts over the past year. Starts of multiple units have fallen in that time, but this is attributed to banks demanding higher levels of pre-sales before offering financing. Anne McMullin, CEO of the Urban Development Institute, expects this to delay but not reduce the overall level of starts.

There are two groups which would benefit from declining home prices. First are people in the Vancouver area who do not own real estate and whose income level does not enable them to afford the size and location of home to which they aspire. Many have adjusted by seeking a smaller home and/or one in a less costly neighbourhood. But some cannot afford even that.

A second group are the retirement age baby boomers across Canada who hope to spend their golden years in this small corner of Canada where you don’t have to shovel snow. They are frustrated because a home anywhere else in Canada buys much less home in and around Vancouver. They are also one of the main reasons why a housing crash will not occur. Any drop in prices will lead to retirees entering the Vancouver housing market, putting a floor under prices.

Those in the international community do not seem to mind our house price levels. When looked at in a global context, home prices in Vancouver are not unreasonable. Ask anyone from London or Hong Kong. And people from around the world see not only good value in our real estate, but also an open society, a pleasant climate and a stable political environment.

Finally, the majority of people in greater Vancouver already own real estate, benefit from current housing values and would be hurt by a crash or any serious drop. They do not want to see the value of their biggest asset decline. Home equity often forms a large part of retirement savings and people count on it in their financial planning.

So, if you want some Vancouver real estate should you buy now even if you pay a little more and get a little less than you had hoped? Probably. And should you sell your Vancouver real estate in the hope of buying it back later for less? Definitely, not.

Troy Media BC’s Business columnist Roslyn Kunin is a consulting economist and speaker and can be reached at www.rkunin.com.

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