The whole world might be in a property bubble, but Canada is the second riskiest. That’s the take from Oxford Economics in their latest housing report this morning. Adam Slater, the firm’s lead economist, broke down fundamentals for global markets. He found double-digit overvaluations are widely seen these days. The firm believes a correction is likely to take place, but the longer it’s put off, the worse it will be. Canada is the second riskiest property bubble, only beaten by the Netherlands.

Global Home Prices Are 10% Overvalued
The whole world is overvalued — at least the parts where people eat and sleep. Global property prices are 10% above the long-term trend, says Slater. Using price-to-rent, they estimate the overvaluation rises to 11% for the global index.

Not quite at the pre-Great Recession high in 2006, but getting pretty close. They estimate the price-to-rent ratio reached 13 to 15% back then. However, a different set of economies appear to be at greater risk this time around, such as Canada.

Canada didn’t experience much of a real estate price correction during the Great Recession. The legend is this was due to the prudential lending of their banks, and rock-solid valuations. That’s not entirely true.

Markets like Toronto hadn’t recovered from the previous housing correction by then. On an inflation-adjusted basis, it was cheaper to buy in 2006 than it was to buy in 1990. It didn’t crash because it hadn’t recovered yet. Toronto is about a fifth of the country’s economy, so the legend became that Canada is bulletproof. Even though that wasn’t the take of the current central bank governor back then…read more.

Greater Vancouver detached properties fails in the latest attempt to surpass the two million price barrier. Even as prices reach their highest point in history of $1.982M during June, the average sale price is barely above the aggressive uptrend. The pending break to the uptrend will result in a market reversal and the reemergence of price volatility. In addition to the pending trend reversal, the sales totals have greatly diminished from their recent all time highs experienced in March.

Another abating factor to future price increase is the rising inventory levels as homeowners look to reap the benefits of the sudden 24% increase to the average sales price over the past 12 months. Typically as home values increase, so do the listings.

As the current uptrend comes to a likely end, home values will begin to consolidate their recent gains. The obvious question becomes how low will values go? Eitel Insights anticipates a tepid 8% – 10% correction to occur. That implies values to peak around the $2M barrier and will backtrack to $1.830M the previous market peak. There is a possibility that values take a sharper downturn, as the market did not accrue the $363,000 year over year increase based on natural market behaviour. Instead values were artificially boosted by historically low interest rates, the BoC bailing out the secondary mortgage market which in turn supported the banks and CMHC. This allowed the banks to offer mortgages to the sudden monumental spike of demand for detached properties born out of the pandemic. Should the average sales price break back into the previous market cycle below $1.830M, values would very likely find their bottom around $1.725M (-13%).

Even though average sale prices increased out of “unnatural” market factors, there is no mandate that says values will come back to their “rightful” values, if there is such a thing. Instead of values tumbling back to affordable prices, home sale prices are likely to take a temporary pause before the next major push higher. As evidenced by the last sudden 22% increase during June 2013 ($1.120M) to February 2014 ($1.367M). The rapid uptrend was unable to sustain itself for a prolonged period of time. After values peaked in Feb 2014, there was a correction of 13% by July 2014 ($1.184M), and home values did not surpass the 2014 price peak until the following February ($1.402M). While the 2014 break out was a false break, the following year of a market consolidation was the last opportunity to purchase before another major increase to $1.816M in January 2016. The resulting growth phase from July 2014 ($1.184M) to January 2016 was a substantial 53% increase .

Similarly, Eitel Insights anticipates a major price injection after the pending market lull. A market driven growth phase typically ranges from 40 – 56% price increase over the past 16 years. The conservative side of the range implies values could reach as high as $2.8M (41% increase) during the next growth cycle. The next growth cycle is likely to occur as immigration returns in a big way, including international investors. Rising interest rates will spur on another phase of FOMO as interest rates increase, the buyers will be eager to purchase before further escalation occurs.

The reopening of interprovincial travel, and the lifting of covid restrictions undoubtedly had a negative effect on total inventory during June. June’s 4,781 active listings signalled the first decline since December 2020 with only 2,762 active listings, the lowest total on the chart. Equally important the current level of active listings is similar to the August 2020 peak inventory of 4,823.

Inventory levels have historically peaked during the summer months, however over the several years the trend has been for inventory to peak during August or September. This is likely to be the case for 2021, as potential sellers list with eyes towards selling their properties at peak values.

Sales have fallen back from their near term highs of 1,973 during March 2021, June finished with 1,272 completions. Well above the preceding three year sales channel of sub 950 sales in every month (2017 – 2020). With sales returning inside of the historical sales channel, the data will likely find support thanks to the upturned in the near term, as inventory levels have evolved to peak later in the year, so has the sales yearly peaks. As the inventory rises during the last summer and early fall, sales will likely take another leg higher, before dropping below the current uptrend during winter.

The supply demand metrics continued to narrow from the extreme demand driven market during March 2021. Demand has shrunk from a 2.296 level to 0.528 while the supply has risen from -1.357 to -0.680. Resulting in the demand driven gap to decrease 56% from 3.653 in March to 1.208 in June 2021.

Not all areas inside of Greater Vancouver will react equally during the upcoming months. For individual area market analysis, or to become and Eitel Insights client contact us.

Justin Smith of Hawkeye Wealth will be hosting a live webinar on Tuesday, July 13th @ 11:00am to expand on the opportunities for investing in real estate using limited partnerships, a structure that can generate higher returns, and offers access to custom and bespoke deals that meet your specific preferences.

To learn more about these type of opportunities, hear detailed examples and learn about upcoming deals CLICK HERE to register. Access is limited so reserve your spot now.

Greater Vancouver real estate prices have been on a tear, but that may be coming to an end. Real Estate Board of Greater Vancouver (REBGV) data shows prices generally climbed in June. Broken down by region though, the trend isn’t quite as positive. In parts of the City of Vancouver, home prices have seen 5-figure drops in just one month.

Home Prices In The City Are Weaker Than The Suburbs
The price of a typical home advanced last month, but it was a much smaller increase than seen in months prior. The composite benchmark hit $1,175,100 in June, up 0.2% ($2,346) from a month before. That made home prices 14.5% ($148,812) higher compared to the same month a year ago. Though most of these gains were made further from the city center.

In the City of Vancouver, the composite price was a little more mixed. In Vancouver East, the benchmark hit $1,207,500 in June, actually falling 0.2% ($2,420) from the month before. In Vancouver West, the typical home reached $1,373,000, up 0.2% ($2,741) over the same period. The latter sounds impressive, but those prices are still lower than they were three years ago.

Vancouver Detached Prices Are Falling In Half The City, But Soaring In The Suburbs

Breaking it down by segment, most of the weakness is observed in the detached homes. The detached benchmark price was $1,801,100 in June, flat from a month before, which is odd… but what happened. Prices are still 22% ($324,789) higher than last year, but only 13.3% higher over the past 3 years according to the board. That works out to ~4.25% compound annual growth (CAGR), which doesn’t have the same wow-impact, does it?

Detached prices in the City of Vancouver were a little more mixed once again. In Vancouver East, the detached benchmark hit $1,696,500 in June, down 0.8% ($13,681) from a month before…read more.