Regional Real Estate Prices 'Not Necessarily In a Bubble'

Though Greater Vancouver's hot real estate markets might feel bubbly to the people trying to buy property, there are really few signs of over-inflation that would suggest markets are about to pop, according to economist Patricia Croft. At least not yet.

Croft, vice-president and chief economist for the investment management firm Phillips Hager & North, told a presentation Tuesday to the Vancouver Board of Trade that Greater Vancouver's real estate prices have risen steeply, and have hit record highs that are "out of whack" with the rest of Canada.

"If you look at those factors, it does suggest that this market is at most risk in all of Canada of being in a bubble," Croft said.

However, Croft said steep increases and high prices are not enough to form a bubble in themselves, and on the more important factor of affordability, Greater Vancouver is also ahead of the national average, with people's ability to pay their mortgages remaining stable.

Affordability, she added, is the first place she looks to see if "there's a crack in the market."

"As I mentioned, [real estate] is a pyramid, and when first-time homebuyers get priced out of the market, that's a concern," she said.

Croft said that while price increases in the Lower Mainland do seem to be climbing higher than can be justified by factors such as population increase and constrained land supply alone, she added that they do make the market unique, as does the region's natural beauty, its status as a host city for the 2010 Olympics and its proximity to the Asia-Pacific region.

"So all of that means we're not necessarily in a bubble," she added.

And another key lesson Croft said she has learned about property markets is that "elevated real estate prices can go on a lot longer than we expect."

Generally speaking, Croft added that Canadian markets, including Vancouver, do not exhibit the bubble-like conditions that prevail in the United States.

American housing prices, she said, have risen steeply for the past five years on a graph line that "looks like a hockey stick."

It appears that everyone in the United States "wants to get in on the game," with home ownership in the U.S. hitting a record high of over 68 per cent.

There are also signs that U.S. housing values have climbed out of proportion with median incomes among Americans, which hits her checkpoint of prices bearing "little resemblance to reality."

Americans, Croft added, have been using their home equity to finance consumer spending, which is a concern as bank interest rates continue to increase.

A deflation of U.S. housing prices, she said, would create "a considerable headwind" for the economy since consumer spending accounts for some two-thirds of U.S. economic activity.

Croft said Canada is also vulnerable to rising interest rates with the Bank of Canada in recent months signalling that it is going to continue edging its key overnight lending rate up over the coming year.

However, she couldn't estimate what rate would cause people to worry about buying property.

"It's all about psychology," Croft said. "It's all about people believing that house prices are going to continue to rise at a strong pace forever and ever.

"If that gets shaken for whatever reason, then that can cause a correction, but it is very hard to predict."

Ultimately though, Croft said Vancouver's record high prices suggest "there will be some form of correction," because the steep price increases Vancouver has seen cannot go on forever.

(prepared by Derrick Penner/Vancouver Sun)