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The bloom is still on the real estate rose

Despite collapsing markets elsewhere, Metro Vancouver is less vulnerable to normal economic forces

Vancouver Sun

Published: Tuesday, October 09, 2007

Vancouver's housing prices continue to defy the laws of gravity, but they won't be able to indefinitely thwart the laws of economics.

All markets -- from tulips to tech stocks -- are subject to supply and demand and the housing market is no exception. The question then is not if prices will eventually be subdued but whether that re-alignment will come abruptly, and painfully -- or gradually and gently.

While we await the inevitable, however, sales of residential real estate in British Columbia are expected to reach the second-highest level in history this year, about 5,000 transactions shy of the record 106,310 sales set in 2005. The average home price in the province will be up 12 per cent this year to $437,000. After that, if the B.C. Real Estate Association has it right, the number of sales will drop to 96,671 and the pace of price increases will subside to about eight per cent.

Of course, Metro Vancouver is in a league of its own, with an average price of $589,916 and forecasts calling for it to rise to $620,000 next year. In the City of Vancouver, prices are higher still: $787,500 for the average bungalow and $879,000 for the average two-storey home, according to realty firm Royal Lepage.

Home ownership costs would consume more than 70 per cent of the typical household's pre-tax income, based on an affordability index devised by the RBC Financial Group. Forbes magazine declared last month that Vancouver real estate was the second most over-priced in North America, after Los Angeles, and sixth most over-priced in the world. As such, analysts agree, house prices are out of sync with local incomes and are unsustainable.

Population growth, baby-boomer affluence and a robust economy are often cited as reasons for the relentless rise in real estate prices. Low interest rates and mortgages with 10 per cent down, extended amortization, and interest-only payments (not to mention subprime loans), are attracting buyers who otherwise would not qualify.

But just as the typical wage earner cannot afford the Lotus, Ferrari, Lamborghini and Mercedes-Benz SL automobiles parked in so many driveways, the ordinary household cannot spend nearly three-quarters of its pre-tax income on housing.

So who's buying? Theories abound about their identity. Some say offshore buyers from Europe and Asia are scooping up property, particularly downtown condominiums, while wealthy foreign buyers, especially from China and Iran, are buying homes to house their families, many paying in hard, cold cash. Another theory has it that drug dealers are buying property to turn their illicit gains into hard assets.

That might help explain why Vancouver real estate prices seem less vulnerable to normal economic forces, but sooner or later the gorilla in the room will makes its presence known.

Vancouver's real estate market may be influenced by unique circumstances, but it cannot remain immune from the credit crisis spilling over from the United States. Sales of new homes in the U.S. dropped by an annualized rate of 8.3 per cent in August. That was more than forecast and the largest drop since 1970, bringing the number of transactions to 795,000, the lowest level in more than seven years. The median price dropped by 7.5 per cent from a year earlier.

If the U.S. credit malaise spreads -- and the Bank of Canada's injection of nearly $5 billion to shore up money markets over the past few weeks suggests it has -- real estate prices could either plateau or plummet. So far, the market's defiance has made fools of analysts predicting an end to the boom.

I agree. Fair. Balanced. Accurate. 'Nuff said. H/T to VG.