Is Vancouver's housing market experiencing a bubble?

The people behind the latest Teranet-National Bank House Price Index believe that the continuing rise in real estate prices in both Vancouver and Toronto is clearly "bubble behaviour" and that a major price reversal is eventually on the way.

But as UBC business professor Tom Davidoff points out, analysts have been calling for the Vancouver bubble to burst for decades, and it has yet to happen — to the chagrin of many economists who thought they could outsmart the system.

"I'm renting. I've been hoping prices would fall for three years," he said. "Outsmarting this market is so hard, because you've got to forecast what people would be willing to pay to live here."

Here are five things to know about the latest bubble scare in Vancouver:

The numbers

Housing prices in Vancouver are rising at a rate of about one per cent per month, and surged by a whopping 9.7 per cent in the year leading up to August, according to the Teranet-National Bank Index. Compare that to Alberta, where falling oil prices are having a big impact on the economy. Housing prices there have actually decreased in the last year, dipping by 2.9 per cent in Calgary and 3.4 per cent in Edmonton.

On the supply side

A dwindling supply of real estate up for sale is likely a factor in rising prices here, but developers appear to be rushing to fill that hole. The value of all building permits issued for the Vancouver area increased by 38.1 per cent in the year leading up to July, according to Statistics Canada. The entire province saw a 36.9-per-cent increase in specifically residential permit values over the same time period.

The evidence for a bubble

In most Canadian cities, real estate markets are "responding logically to softening domestic economic conditions" with flattening or even declining prices, according to the creators of the index. Vancouver and Toronto's market, on the other hand, aren't displaying rational economic behaviour in response to tougher times. Foreign buyers are likely playing a role in Vancouver's continuing real estate boom, but the people behind the index describe their impact as "overblown" and say low interest rates and self-fulfilling expectations about skyrocketing prices are artificially inflating home prices.

Why Vancouver's market is special

According to Davidoff, it is impossible to judge Vancouver's real estate market on the same bases as that in other cities. In the Prairies and the U.S. Midwest, where space is plentiful, the value of a home is essentially what it costs to build. Vancouver, on the other hand, is almost out of new land to build on. "The house, that means, is worth whatever people are willing to pay," he said.

Safety in the housing market

A "flight to safety" might also be a factor in Vancouver housing prices. When the economy goes south and interest rates follow, there aren't very many safe investment opportunities apart from real estate. That's especially true right now, in a market that's thought to be heavily influenced by money from China. "Chinese people are worried about China now," Davidoff said. "People's concerns about China are making them less interested in Chinese assets and more interested in Vancouver assets."

blindsay@vancouversun.com

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