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RBC Estimates 7-12% Decline In Metro Vancouver Home Prices

House prices in the Vancouver area could see a modest decline of seven to 12 per cent over the next two to five years, an RBC Economics report says.

“The market is slowing down in Vancouver, and has been since about this time last year, but concerns of an imminent collapse are probably overblown,” said Robert Hogue, senior economist at RBC. “We do recognize that Vancouver is a more volatile market, but there are still some fundamental factors supporting the market. At this point we do expect a modest price decline over the medium term, but not a wholesale collapse.”

But because of the high prices and the dependence on foreign wealth, “the Vancouver-area market is more vulnerable to a significant downturn than other Canadian markets if an unfavourable economic scenario or unforeseen shock (e.g., a change in China’s policy regarding capital outflow) were to unfold,” Hogue wrote in his report.

He cited two key reasons for his forecast of declining prices: Lack of affordability and the Vancouver-area market’s dependence on wealthy foreign buyers.

“ ... Much of the Vancouver-area market’s high valuation hangs on the strong and constant flow of wealthy buyers coming from abroad — a phenomenon that is poorly documented. Unless we get better measurement of this phenomenon, the dynamics of the Vancouver-area market will remain rather opaque, putting any assessment at risk of missing critical market developments,” Hogue wrote. “For this reason, and the fact that the extremely poor affordability levels, quite frankly, make us uncomfortable, we urge caution.”

The disconnect in Vancouver’s housing market between people buying as an investment with their wealth and those who are reliant on their income to purchase a home creates a very different dynamic, said Tsur Somerville, director at the University of B.C.’s Centre for Urban Economics and Real Estate at the Sauder School of Business.

“The inflow of capital by immigrants and investors has helped drive housing prices in a number of neighbourhoods in the Lower Mainland. Were that to dry up or be reduced, that would put downward pressure on housing prices,” Somerville said.

But just how much prices could come down, he would not predict.

“I have no idea and given what we don’t know, you can’t really model the market,” Somerville said. “It’s very hard to figure out what’s going on in Vancouver because there are all kinds of don’t knows. We don’t know how many of those buyers are foreign buyers, you don’t know how many are strict investment, you don’t know how many are permanent residents, and you don’t know how many are occupying their units.”

Although Vancouver house prices have had much larger swings — both up and down — in the past, RBC’s Hogue said he’s not calling for a wholesale collapse such as that seen in the United States in 2008. In the early 1980s, Vancouver saw house prices drop 36 per cent, but by later that same decade prices were up 77 per cent.

“The main reason for our guarded view is that other key factors — sustained economic growth, employment gains, low interest rates and strong immigration — will provide a broadly supportive environment, helping to offset most of the stress caused by poor affordability,” Hogue wrote in the report. “Also, we see few confirming signs of imbalance currently that would forewarn a disorderly decline in the short term.”

Hogue wrote that the market is subject to “extreme unaffordability,” and noted a typical Vancouver-area homebuyer would need to spend 92 per cent of their income to carry the costs of a two-storey home, and as much as 45 per cent of their income for a condo.

When interest rates go up — and Hogue said they inevitably will, likely by 2013 — affordability will be even worse, particularly in Vancouver.

“Vancouver is more vulnerable to interest rate increases, just because of the height of the housing prices,” Hogue said. “When you work that out on a monthly mortgage payment, those interest rates will show up more in Vancouver.”

Data released earlier this month by the Real Estate Board of Greater Vancouver found that prices of homes in the Lower Mainland area continue to climb while home sales have dropped to some of the lowest levels seen in a decade.

In Greater Vancouver, sales of residential properties were down 29.6 per cent in March compared with a year earlier, the second-slowest March since 2002. Yet the price for a benchmark or typical home went up 5.3 per cent to $679,000 from last year.