Vancouver flirting with ‘bubble-like’ house prices

Wednesday, May 31st, 2006

Conditions not in place yet to ‘pop the bubble,’ economist says

Derrick Penner

Canada’s made-in-the-West housing boom is heating up, “potentially dangerously so,” just as the United States’ boom is tailing off, a senior BMO Nesbitt Burns economist warned Tuesday.

Douglas Porter, the investment bank’s deputy chief economist said in a note that price increases in Canadian markets have surged ahead of the U.S. in recent months, led by Western markets.

U.S. housing sales peaked last year, Porter wrote, but in Canada, “there are signs that the Canadian housing market is actually heating up.”

“I think there are certain areas that are showing bubble-like conditions, and I think Vancouver is flirting with that territory,” he added.

A bubble can stay a bubble a long time, Porter said, but “I don’t believe the conditions are in place yet to pop the bubble.”

Employment growth has been stronger than in the U.S., consumer confidence remains high, and interest rates remain “very low,” Porter said.

Vancouver, and B.C., he added “have a lot going for [them] economically.”

Porter added that a sound economy “doesn’t justify even higher real estate prices.”

Porter’s concern is that “the bubble might inflate even more” over the next 18 months “because there’s nothing standing in the way of it getting even bigger.”

Almost every major city in Western Canada has posted double-digit percentage increases in home prices so far this year, “led by a jaw-dropping 28.9-per-cent spike in Calgary,” Porter said.

Vancouver is not far behind, posting an average price increase of 21.7 per cent and average house prices pushing above $500,000.

Vancouver is the least affordable housing market in the country.

The danger he sees is that “if prices get a bit divorced from reality,” coupled with an economic slowdown, “[the boom] could end suddenly.

“And when prices go in reverse, that can have a very nasty consequence for the economy.”

Porter said residential construction’s share of the total economy is approaching the level it reached at peaks of the past two major market cycles in the early 1970s and the late 1980s.

“While the first episode was largely justified by underlying labour force trends, the latter was not, and it ended in tears,” he concluded.

“The longer the current boom lasts and the higher it climbs, the greater the risks of an ugly end to this housing cycle.”

© The Vancouver Sun 2006

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