Vancouver

CMHC: A Quarter of Vancouver Real Estate Price Increases Can’t Be Explained

CMHC - A Quarter of Vancouver Real Estate Price Increases Can’t Be Explained

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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21 Comments

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  • Reply
    Ahmed 10 months ago

    CMHC isn’t factoring that our housing is used like a washing machine for drug dealers, and international criminals. The uncertainty is likely much higher when you factor that in.

  • Reply
    Daniel 10 months ago

    Like it or not, Vancouver is an attractive place to live and you have to compete with foreign money for nice things. Even with a 15% foreign buyer tax, the numbers are still ripping higher.

    If you can’t keep up, move out. Plain and simple. Housing in Saskatchewan is nice and cheap. Go start a career there. Oh right, because you can’t! That’s why you pay a 25% premium.

  • Reply
    Mike 10 months ago

    Where do second mortgages, HELOCs, and fraudulent loan documentation fit in? Another government fail, demonstrating they have no f-in clue.

  • Reply
    Roger Troutman 10 months ago

    Anyone who’s owned any property in the lower mainland in the past 3-4 years is potentially in a good position to add another rental property to their portfolio.

    Try convincing them that it’s not a good idea to buy in a city with less than 1% vacancy rate and rental rates through the roof. Then you might be able to stem some of that domestic demand that the xenophobes don’t want to admit is the primary issue.

  • Reply
    Tommy 10 months ago

    Population increase, exuberance, foreign buyers, number of people buying multiple properties for long term investment, speculators, and high employment created strong demand.

    Toronto’s record breaking streak in commercial real estate has last for 7 years straight. Why are companies investing in commercial property? Because lots of businesses are moving into Toronto, including large tech companies. This also goes hand in hand with the desirability of Toronto real estate on the residential side.

  • Reply
    Justin Thyme 10 months ago

    That tends to match the feedback from my contacts ‘on the ground’ in Vancouver – that by and large, the price escalation is justified by fundamentals. Buyers seem to actually have the money to support the price increases.

    • Reply
      vnm 10 months ago

      So “buyers seeming to have the money” is an economics fundamental.
      Gosh, with that kind of inside info, why waste money on silly things like StatsCan surveys and computer databases.

    • Reply
      bluetheimpala 10 months ago

      lol…the shadow banking captial North America…did you read your comment or just type wildly and hope to make sense?

      • Reply
        Justin Thyme 10 months ago

        Three quarters of the price increase can be justified by population, disposable income, and mortgage rates – fundamentals that typically drive prices up, irrespective of speculation and investment pressures. Buyers in Vancouver are not buying beyond their means, they are not stretching themselves thin. They would pass any stress test, no matter how stringent. Cash $250,000 down payments are not unusual. There is enough available money to sustain the price increases – there will be no panic selling forcing prices lower. It’s not FOMO, it’s just plain ‘I want, I can afford it, I will get.’ Absolutely no fear whatsoever. Toronto, on the other hand, does not look like it can neither support nor sustain the higher prices. I sense more fear and impulse in the Toronto market than the Vancouver market.

        • Reply
          Tommy 10 months ago

          The fundamentals in Vancouver are worse, far worse, than in Toronto.

        • Reply
          Dylan 6 months ago

          Justin,

          That picture you paint seems pretty rosy. Here are a few points to consider.

          1. $250k without context is meaningless. Here is a condo that just had $268k in price reductions since being listed earlier this year. Alternatively you could consider that $250k is 15% of an ‘average’ priced property in Vancouver. In Montreal, the equivalent would be boasting that people put down $48k on a typical $325k house. This means proportionately, corrections hit Vancouverites at a 5-to-1 leverage over Montreal. Unless the average salary is 500% of Montreal, this means higher risk.

          2. The average heloc (i.e. money borrowed against, read: withdrawn from equity) immediately erodes that $250k down. From lifestyle to taxes to renovations, there is counter debt hidden behind every homeowner. The heloc is loaned based on equity position, if this changes (i.e. house drops 10%, i.e. $160k) this can leave you in a very poor position on mortgage renewal. (Which BC has a TON of expiring soon; ALL of which are facing higher rates+stress tests now.)

          3. Ever consider that the profits being reaped and rolled into additional properties is predicated upon the price of real estate? Where people happily throw easy money at the next property? The typical rental investor treads a super fine line where they accumulate several properties, barely covered by rental income. (Or even, cashflow negative.) It all looks good on paper but can become an unsustainable position with a mild combination of 5-10% correction, 1% increased interest rates and say… one leaky roof.

          “Absolutely no fear whatsoever.”

          Perhaps misplaced?

  • Reply
    Yeah Right 10 months ago

    Reporting of the Vancouver market is laughable. Not a single news outlet has taken a moment to read the stats in full and put together a simple report for their readers. If you do look at the stats, you’ll see that the detached market there has fallen off a cliff with sale to active listing ratios currently in the 8% range. As low as 4% in some sub markets. Listings are languishing. This is all substantially on worse footing than the current situation in Toronto by several measures. The hot condo story in Vancouver is truly quite sad – I think prospective buyers in that market would probably want to know where the detached market eventually lands before making an truly uniformed purchase decision to get into a condo that is usually not a home for life.

  • Reply
    Ghostface 10 months ago

    In the words of da Wu, ya best protect ya neck!

    • Reply
      EO 10 months ago

      Cash Rules Everything Around Me. C.R.E.A.M. Get the money, dollar dollar bills ya’ll!

      The Wu knew all along the rules of the game.

  • Reply
    CJ Ray 10 months ago

    Too many stupid people in charge! That is the problem. Polititions are the farthest thing from experts and yet we think they can solve our problems. Most of us on these blogs know more than our elected officials. Painful but true!

    • Reply
      backwardsevolution 9 months ago

      CJ Ray – none of these problems happened as a result of “stupidity”. Sure, a lot of politicians are stupid (i.e. Justin Trudeau explaining trade deficits), but the people advising the politicians are NOT stupid. These are the lobby groups, the vested interests who bribe the politicians with campaign contributions.

      A lot of people looked the other way when they knew better not to. Laws were not enforced, laws were not enacted or bureaucrats feigned stupidity and ignorance in order to keep the real estate Ponzi alive.

      They KNEW what was happening. They just don’t want you to know that they knew.

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