Vancouver real estate is some of the priciest in the world, and people are struggling to figure out why. The Canada Mortgage And Housing Corporation (CMHC) studied major urban markets, and modeled where they should be. The government owned organization concludes that a quarter of Vancouver’s real estate price increases can’t actually be explained.
Models Aren’t Perfect, But They’re Way Better Than Guessing
Models are never 100% accurate, but a well planned model is much better than saying “it always goes up.” Or you know “immigrants.” CMHC analysts breakdown their model into three major characteristics – personal disposable income, young adult population, and mortgage rates. All three of those are “real” measurements, meaning they’re adjusted for inflation.
A Quarter of Vancouver Real Estate Price Increases Are “Unexplained”
Greater Vancouver real estate prices have been soaring for quite some time. Prices increased 47.88% in real terms, from 2010 to 2016 according to the CMHC. Real disposable income accounted for 16.36 of those points. The young adult population (a.k.a. population growth), accounted for 10.85 of those points. Real mortgage rates represented 8.52 points. That leaves 12.15 points to the unexplained – or 25.19% of the price increases.
Basically, the CMHC thinks that in a perfect market, without any emotions, price increases would be about 25% lower. They estimate the compound annual growth rate (CAGR) to be at 5.22%, vs the 6.74% the city received. For context, they calculate Toronto’s gap at almost twice that size. Yes, the CMHC just gave us data saying Vancouver is only half as bubbly as Toronto.
Source: CMHC. Better Dwelling.
Explaining The Unexplained
Pretty spooky that a quarter of Vancouver’s price gains can’t be explained, right? The CMHC actually addresses this as unmeasurable demand side factors. To those that don’t deal with assets on a regular basis, this usually means a shortage of supply, perceived shortage of supply, and/or plain ole’ exuberance. Before the developer bros start high fiving about the shortage of supply, and housing activists start crying foul – let’s quickly touch on supply shortage.
A shortage of supply doesn’t mean that there wasn’t enough housing for the number of families in the city. It means there wasn’t housing for everyone who wanted to buy at the same time. There are several types of buyers, which range from millennials looking for a starter homes and families looking to upgrade, to speculators and urban landbankers looking to chase yields. Increasingly a number of the city’s “immigrants” have been accused of buying and not occupying them, for the purposes of getting a second passport. Even though that’s controversial, that would be considered “real” demand. That’s not a provincial or municipal issue, however. That’s an issue people would need to address in the next Federal election.
Not all of these buyers are permanent demand. Speculators and yield chasers are only in the market, for as long as the market accepts exuberance, which the US Federal reserve has been quietly observing in Canada. Once exuberance dies down, speculators tend to release a lot of the pricing pressure. Once that pressure is released, we typically see prices “walk” closer to fundamentals.
Note: There’s a different school of thought on these types of economic models. Many of the world’s most noted economists links prices to credit expansion and contraction. We’ll touch on that next week.
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