“It has become fashionable to suggest that price levels in Lower Mainland-Southwest region of the province, and particularly Greater Vancouver, are set to correct substantially due to the significant price gains in recent years and a de-linking of home prices relative to income and rental rates. Central 1 does not subscribe to this view, but does expect price gains to slow considerably over the forecast horizon.
While price levels may turn lower in the near term, the annual Lower Mainland-Southwest median resale price level in 2012 is forecast to surpass 2011 by 1.4% to reach $497,000. A further gain of 3.6% is forecast in 2013.
Central 1 deems a significant price correction in the Lower Mainland-Southwest to be unlikely for various reasons. First, much of the price growth in the region has been attributed to disproportionately strong demand for higher priced single-detached product in localized regions such as the west side of the City of Vancouver and Richmond. In contrast, price gains have been less substantial in other markets and product types, meaning this has not been a regionwide price surge. Moving forward, demand will likely remain stable as economic growth, albeit slow, persists and mortgage rates remain low.
In addition, speculative demand in the region remains low. The proportion of units re-sold within six months of purchase can be used a proxy for speculative activity.
In theory, speculators look to gain through capital appreciation over a shorter time-frame relative to home-owner occupiers. In a period of higher speculation, which is generated by strong market activity and price gains, this proxy generally rises. However, this metric has exhibited a declining trend since early 2008, currently hovers near 2% and operates near normal levels. In contrast, this proxy surpassed 10% in the late 1980s, and was closer to 6% in 2006 when markets were overheated. The lack of excessive speculation suggests that we are unlikely to see a speculation-induced bust in pricing.
Meanwhile, price levels will be further supported by supply-side adjustments. Sales activity and the flow of new listings are positively correlated – when demand increases, new listings tend to follow in the months that follow. The opposite is also true. This reflects the tendency of sellers to capitalize on strong markets and rising prices, and sit tight when market conditions weaken. In the absence of any major shock in the economy such as a large and unexpected increase in interest rates or another recession, Central 1 expects the recent slowdown in demand to be met by declining listings activity, which will mitigate growth in standing inventory of resale product.”
– from Brian Yu, Economist, Central 1 Credit Union, Economic Analysis of British Columbia, p4-5, Vol 31 Issue 4, Sept 2011 [pdf]
“Fashionable” to suggest a “substantial price correction”? The only current prominent ‘fashion’ in Vancouver RE ‘circles’ is to debate the exact nature that the “Vanhattanization” of the City will take, or discussing whether foreign buyers are each bring in 10s of millions or 100s of millions.
It remains rare to find a Vancouverite who truly believes we’re in a bubble. Calling the bubble will only become “fashionable” in retrospect, and once we hit the trough everybody will know we were in a bubble (see US RE, still plumbing for a bottom).
This report grossly underestimates ‘speculative’ action in our market. Anybody who buys any property not simply for it’s utility as a home or as an investment, but also for expected future price gains above the rate of inflation, is speculating. The vast majority of RE purchases in Vancouver thus have a speculative component.
And another thing: Looking at the price chart, note how this Credit Union has simply extrapolated price gains forward in the channel from the early 2000’s. In other words, “We expect more of the same”. These guys are rear-mirror commentators disguised as forecasters, and their forecasts are consequently of questionable value.