Bob Haber at Forbes has a short and sweet column warning about crazy conditions in the Vancouver real estate market. Prices for single-family detached homes have more than tripled just since 2002 in Canadian dollars, even with a Bank of Canada that has been far more circumspect in expanding its balance sheet than the Fed.
But this time will be different! Just ask a Realtor.™ The Chinese are buying up everything with cash! It’s a beautiful city!
So why does the majority of the local population believe that this time is different? They refer to Vancouver as geographically constrained (ocean to the west, border to the south, and mountains to the north) and believe that housing will only go higher and higher. However, the same can be said about many coastal cities (including NYC) that have experienced boom and busts through typical real estate cycles over the years. This time is NOT different and investors should be aware of the possible knock-on effects of a large Canadian real estate correction.
Huber also points to the huge disparity between the cost to “own” and rent the same housing unit, a ratio which was particularly out of whack during the late years of the US housing boom in the mid-2000s. Taxes, mortgage interest rates, and personal debt to income ratios are all trending higher in Canada, which signal trouble for real-estate “investors.”
Also, there are new catalysts that can’t be ignored. Taxation and interest rates are going higher. Cap rates on rentals or commercial properties are shockingly low (think 1% to 3% in most circumstances). In fact, Canada’s price-to-rent ratios are now well above what they were in the U.S. during the 2006 housing debacle. According to the Bank of Canada, 47% of Canada’s mortgages will reset in the next 12 months. To put that in perspective, a five-year fixed mortgage rate in Canada averages approximately 5.14%. This is 11% higher versus the 4.64% that it averaged for most of the past 2 years.
The specious idea that Vancouver is an international city, and thus blessed with an endless supply of foreign home buyers, seemingly applies to New York, London, and Dubai as well. Should we assume real estate prices will never fall in these cities? As for the influx of Chinese immigrants into Vancouver since the reversion of Hong Kong, that’s been nearly two decades now. There are always limits to the number of cash buyers, the number of creditworthy buyers, and the amount either type will pay. And I’m reminded of when it seemed like “the Japanese” were snapping up high profile real estate across the US during the 1980s, including Rockefeller Center, Columbia Studios, and the famed Pebble Beach Golf Links.
Just a few years later, in 1993, a Japanese consortium sold Pebble Beach for a $340 million loss.
