Homes in Vancouver have become so expensive you might have to win the lottery to afford one, says a prominent economist — and with prices that sky-high, odds are the city is ripe for a big drop.
Overpriced homes in some Canadian cities, along with elevated household debt, suggest the real estate market is vulnerable to a correction — especially in Vancouver, senior economist Sal Guatieri said in a Bank of Montreal report released Tuesday.
"Riding a wave of wealthy immigrants, Vancouver’s house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners," Guatieri said.
Homes in that Pacific Coast city now cost 11.2 times median family incomes — a ratio that measures the median home price to median annual household disposable income. That’s more than double the current Canadian average of 5.1 times income.
Chinese demand for houses in Vancouver has been strong, on the back of looser travel restrictions, as well as stricter buying rules and lofty prices in China. A recent survey by Demographia rated Vancouver the third least affordable city in the world, behind Hong Kong and Sydney, two other cities influenced by Chinese demand, he said.
"While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb," Guatieri said.
Past housing corrections have seen Vancouver home values fall an average of 21 per cent. But prices in the city are even higher today, averaging $815,000 in April, pushing the market further toward the brink of a housing bubble.
However, if interest rates stay low and foreign investment continues, the price correction could stabilize sooner than in the past, Guatieri said.
Even excluding Vancouver, average home prices have more than doubled in the past 10 years to a historically high level.
"Due to ultra-low interest rates, affordability isn’t a major issue yet, with first-time buyers allocating about one-third of their disposable income for mortgage payments, as is the norm," Guatieri said.
"But high valuations suggest that even a moderate increase in interest rates will slow the market in coming years."
Some triggers that could set off a broader collapse include a rapid rise in interest rates, a sharp increase in unemployment or a slowing of foreign investment.
High home prices in Toronto also mean the country’s biggest city is likely poised for softer prices in the near term, fuelled by a rising supply of condos that could soon outstrip demand, leaving a glut on the market.
Housing costs in the city eat up 6.7 times family income, comparable to costs in the late 1980s before prices slid 25 per cent. However, mortgage rates now are under four per cent, compared to 14 per cent in the earlier decade.
"That said, while high valuations might be sustainable in an ultra-low rate climate, they could come under pressure in a more normal rate environment," Guatieri said.
Meanwhile, the report said energy-rich Calgary could see home prices rise in coming years. It is one of the few Canadian cities, along with Edmonton, where prices have not returned to pre-recession peaks, reflecting the fallout of overbuilding during the oil boom before the financial crisis hit.