Spike in housing prices raises risk of bubble

An eye-popping 22-per-cent jump in housing prices last year is raising the risk of a real estate bubble in Vancouver, a TD Bank economist said Tuesday.

But others cautioned that the price spike could be short-lived, and concerns about speculation remain limited to the condominium market.

"That's an eyebrow-raising price increase, but I would prefer to wait and see if it is an anomaly," said UBC real estate economist Tsur Somerville. "I for one would be concerned if prices in the second quarter showed an equally large increase."

Data on properties being resold within a year suggest that speculation in Greater Vancouver is far less rampant than at previous real estate market highs in 1981 and 1989.

Craig Alexander, deputy chief economist at TD Bank Financial Group, said Tuesday that booming economic conditions offer the perfect breeding ground for speculative price bubbles to form.

"That's because in such an environment, housing market participants are at greater risk of developing a case of irrational exuberance, especially if they expect that such exorbitant price gains will continue indefinitely."

He said the risks appear to be greatest in Vancouver, where average prices are rising at a 22-per-cent year-over-year pace and have now reached close to half a million dollars.

"This has deeply eroded affordability, and it has likely contributed to the decline in the B.C. personal savings rate deep into negative territory."

In an interview, Alexander said he was comparing average Vancouver area house prices in December, January and February with the same period last year. If he simply compared February's average price of $490,000 with last February's average of $387,000, he said the gain would be 26 per cent.

"All of our indicators are telling us that the Vancouver market is really hot and speculation is present in the market. But you still can't say it is a bubble. The only way you know you have a bubble is when the bubble bursts."

Elton Ash, regional director of Re/Max Western Canada, agreed that there is speculation in Vancouver, particularly in the downtown condo market where he said some people are buying two or three properties in the hope of flipping one or more for a profit.

"I would suggest they be careful," he said. "It is not a bubble. We are not going to see a drop in prices, but they are probably not going to see a big return on their investment."

Ash expects to see a more balanced housing market in Western Canada in the second half of this year, while Cameron Muir, senior market analyst with Canada Mortgage and Housing Corp. in Vancouver, is calling for prices to start levelling off early next year as more people are squeezed out of the market.

Muir noted that about 20 per cent of condos are being traded within a year, compared to 30 per cent in 1989 and about 50 per cent in 1981. The annual average over the past 25 years is 14 per cent.

"To date, the amount of speculation out there has not given us the kind of red-light indication that you would expect in a housing bubble," he said. "We would be in what I would term a yellow-light area if it gets above the 20-per-cent range. Obviously there would be increasing speculation in the marketplace."

Helmut Pastrick, chief economist at the Credit Union Central of B.C., said research by Landcor Data Corp. shows that "flippers" who buy and sell for a quick profit are most prevalent in the condo market, both downtown and in nearby suburbs, but are still far less active today than at previous market highs.

He said the annual average increase in the house price index for the Greater Vancouver and Fraser Valley Real Estate Boards was 13.4 per cent in 2005 compared to 17.1 per cent in 2004.

"So we are seeing some price moderation and I am calling for further moderation this year and again next year."

B.C.'s strong economy is providing solid support for the housing market and will limit any softening in prices but 20-per-cent-plus gains are not reasonable, Alexander said. "The question then is when it comes back down to earth, does it come crashing back down or is it a gradual moderation?

"In Toronto, there was a lot of concern that the market was overheating over the past couple of years and we have seen it cool down. The speculation seems to have disappeared and we've had what I would characterize as a soft landing because we haven't actually had falling prices and it doesn't look like we will. That tells you that you can moderate from really hot activity without it necessarily ending in tears."

(prepared by Michael Kane/Vancouver Sun)