How long can this real estate boom go on?

N. Shore house prices yet to soften. The numbers are startling. In the past three years, the average price of a detached home in West Vancouver has shot up $600,000, passing $1.5 million in 2006.

Prices in North Vancouver, which generally sit at a little over half of those west of the Capilano, gained almost 50 per cent in the same period, and the average price now sits at a lofty $775,000.

These jaw-dropping rises have left some asking how much longer the boom can last. Surely, with prices reaching into the millions, buyers will have to say enough is enough.

But the market has shown little sign of slowing. Last year, nearly 500,000 homes were sold in Canada, more than in any year in history. The figure is largely fed by the West. It is the fifth consecutive year the country has set a new sales record, and by the end of 2006 we are expected to break it again.

That projection, published in June by the Canadian Real Estate Association, was actually a revision upward. In February, the association had predicted sales would drop by more than four per cent this year. By last month it became clear they would not, and so they pushed their numbers up.

Faced with these figures, many market observers think the real estate freight train is a long way from running out of steam. But there are others who are beginning to sound warning bells, saying it is only a matter of time before that train comes off the rails.

One of those sounding the alarm is Doug Porter, deputy chief economist for BMO Nesbitt Burns. Porter grabbed headlines at the end of May when he published an article claiming the Western housing market was starting to show signs of bubbling. Like any bubble, he argued, it would sooner or later have to burst.

"Just as U.S. housing is finally cooling, there are signs that the Canadian housing market is actually heating up," wrote Porter. "Potentially, dangerously so."

Porter argued that while the market looks strong for the time being, there are some telltale signs that suggest all may not be as it appears.

Foremost among them is the staggering rate of the price increases in Western Canada, which have left the rest of the country and even the United States in their dust.

In the first five months of 2006, Calgary house prices had jumped almost 30 per cent, and Vancouver prices almost 22, easily outstripping Toronto, Montreal, and other Canadian cities.

The trend has fuelled a building boom out west, pushing residential construction's slice of Canada's gross domestic product up to around 6.5 per cent. This does not sound alarming, except that the figure is approaching the levels it hit just before the last two major housing crashes in the mid-1970s and late '80s.

These numbers, and the fact that low interest rates will likely add fuel to the fire for some time to come, make for a worrisome trend, wrote Porter.

"The longer the current boom lasts and the higher it climbs, the greater the risks of an ugly end to this housing cycle," he wrote.

While there is no sign of a glut of homes on the market - a classic indication of an imminent crash - there are some numbers that warrant closer examination, said Porter in a recent interview.

One of these is the rate of sales. While home prices in the Vancouver area have continued to shoot up, the number of homes sold monthly has actually dropped a little.

The Canadian Real Estate Association is expecting this trend to continue, projecting that the number of homes sold in British Columbia will drop by 4.5 per cent this year and three more per cent in 2007, while prices will keep rising by about 10 per cent year over year.

"It's never a good sign to see sales moderating" while prices are still going up," said Porter.

But not everyone shares the economist's qualms.

In its June Financial Systems Review, the Bank of Canada included a special section addressing the condominium market, an entry intended to address fears of a bubble.

"Overall, the risk of a broad reversal of condominium prices appears limited," wrote Virginia Traclet, author of that section of the review.

The current price boom is unlike those seen before previous crashes, she argued. There is no oversupply this time around and little speculation on the part of homebuyers.

"In Vancouver, for example, only 12 per cent of the condominiums sold in the first eight months of 2005 had been purchased within the previous 12 months, compared with close to 30 per cent in 1989 and 50 per cent in 1981," she wrote.

In other words, people are buying homes to live in them, rather than to flip them for a quick profit - a fact which points toward stability.

The number of newly built but unoccupied dwellings is also down below its 20-year average, she said, meaning that there is no glut of homes developers are struggling to move - another positive sign. While there are "disquieting signs" in this regard in Montreal and Edmonton, it is not the case in Vancouver, Toronto and Calgary.

A number of other high-profile observers share the Bank of Canada's rosy outlook. The Credit Union Central of British Columbia forecast last month that the housing boom would grow and spread throughout British Columbia over the next two years, and similarly noted there are few signs of speculation in the market. The institution is one of several in recent months to have foretold of good things to come.

The view is also shared by some of the North Shore's most experienced realtors.

Lionel Lorence, a Realtor with Remax who has worked on the North Shore for 40 years, sees the positive trend lasting for some time, and at worst levelling out.

"I don't think there'll be a crash," he said. "I think it will stabilize."

W. Dave Watt, a Realtor with Royal Lepage North Shore who has worked here for about 25 years, hesitated to predict the market, but noted that much of the current trend is baby boomers moving out of their long-time homes as their living needs change, a process that should continue for some time. That, combined with the large influx of people to the region and other factors have made for a healthy market.

Of course, that does not mean the optimists believe the upward push will go on forever. The economists mentioned all project that the rate of the rise in the Western market will slow over the next couple of years. This does not mean a bust, necessarily, but rather a slower boom.

One of the central factors will be interest rates, they say.

Lending rates in Canada have bottomed out over the past few years, hitting a 40-year low in mid-2004. At that time, the Bank of Canada pegged its key overnight lending rate at just two per cent.

That number acts as a guideline for the rates banks charge customers on their mortgages. Usually they set them a few percentage points above the Bank of Canada's figure. As a result, it has been extremely cheap to borrow money in recent years, a fact which has encouraged home buying - and thus the housing boom.

But recently, those interest rates have begun to climb. The Bank of Canada, fearing the economy may be overheating, has pushed up its key lending rate nine times consecutively since summer 2004, pegging it at 4.25 per cent in May. For the moment, those rises have done little to slow the market, as Porter notes, but that cannot be the case forever.

A small rise in the key lending rate can make a big difference to the cost of a home. If a buyer were to purchase an average West Vancouver home at about $1.5 million, with a 25-year, 8.65 per cent mortgage and a five per cent down payment, that person would pay the bank about $11,790 a month. In all, the buyer would pay about $2 million in interest over the life of the loan.

An increase of just one percentage point in the lending rate would swell that monthly payment by almost $1,000, and add about $300,000 to the total interest charged over 25 years. It is not difficult to see why a rise in interest rates could slow a market.

But the optimists point to strong income and job growth as major factors in reducing the dampening effect of rising interest rates. When people have money, pricey houses are not a problem.

And the job market in British Columbia, driven by a strong economy, is certainly robust at the moment. The province's rate of unemployment hit a 30-year low in June.

Projections for Canada's economy as a whole are good as well, suggesting employment, and by extension the housing market, should remain strong, according to the Bank of Canada.

In its Financial Systems Review, the Bank of Canada argued the "favourable macroeconomic environment" points to good financial prospects for the nation as a whole. Global economic growth, high commodity prices, substantial corporate profit and shrinking corporate debt all suggest Canadians will be doing well for some time to come, according to the review.

But Porter points out that certain factors that are helping our economy now could actually turn against us in the event of a slow down. For one thing, much of the western job boom which is in part fuelling the real estate market is actually supported, paradoxically, by the real estate market itself.

More than a quarter of all new jobs in Canada over the past three years have been in construction, according to Porter. That figure is more than 35 per cent in British Columbia, he said. What's more, the ratio of construction to manufacturing jobs has risen 40 per cent in 10 years.

"These kind of things tend to feed back on themselves," said Porter. "Right now we're on the good side of that. . . . Inevitably we're going to be on the down side."

While Porter acknowledges it would take quite a jolt to disrupt the current situation, such a jolt is not entirely out of the question.

The Bank of Canada itself points to a number of factors on the horizon that could potentially be disruptive. The same low interest rates that are fuelling the housing frenzy are also leading to spiralling household debt, for instance.

Other unpredictable factors such as a slowdown in the U.S. economy, a rising loonie, skyrocketing fuel costs and even an outbreak of bird flu could all spell trouble for our economy, and by extension the housing market.

But even if the real estate boom were to bust, Watt, Lorence and Porter all acknowledged Vancouver has something in its favour that much of the rest of the country lacks. Put simply, it's a great place to live, and no economic forces will change that.

"History shows that Vancouver held up remarkably well when the rest of the country was hit very hard," said Porter. "Vancouver is still a huge magnet for people. I don't think that's going to go away."


(prepared by James Weldon/North Shore News)