Vancouver’s infamous real estate market is a bubble that could be ready to burst, according to the Canadian Centre for Policy Alternatives (CCPA).
In a report released Tuesday morning titled Canada’s Housing Bubble: An Accident Waiting to Happen, CCPA research associate David Macdonald said housing price increases in Canada’s top six real estate markets are outside of a historic “comfort level.”
The study looked at housing markets in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa, and found that, on average, inflation-adjusted house prices have historically held stable between $150,000 and $220,000 in today’s dollars.
Yet current prices in all six markets now exceed $300,000 on average.
“The steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” Macdonald said.
But what are the odds that the bubble will burst?
“The first major thing is bubbles in Canada have historically been burst by relatively small increases in interest in mortgage rates. All you need is a 1% increase in the mortgage rate above the two-year average in a given month and that’s what popped every single bubble in Canada [in the past], two in Vancouver and one in Toronto,” Macdonald told BIV.
But housing bubbles are rare in Canada, he said, and the two that occurred in Vancouver happened in 1981 and 1994.
The study simulated the conditions from recent bubbles to determine how bad a correction in the market might be should it happen again.
The CCPA predicts homeowners in Edmonton and Montreal would be hardest hit in terms of property value.
Macdonald said Vancouverites would be hardest hit in terms of a loss in dollar value, which is directly linked to Vancouver’s pricey real estate market.
If a worst-case scenario should occur in Vancouver homeowners could, on average, lose $200,000.
Despite the grim news, Macdonald said the so-called burst could still be a long way off.
“I don’t think it’s imminent, quite frankly, but it will happen at some point,” he said. “Mortgage rates can't stay at rock bottom forever.”