Photo: Leeann Cafferata/Flickr
British Columbia’s hottest housing markets, Greater Vancouver and Victoria, are showing early warning signs of imbalances, causing concern for the markets’ stability.
According to the Canada Mortgage and Housing Corporation’s (CMHC) quarterly Housing Market Assessment released yesterday, the presence of overvaluation and home price acceleration in both markets signal problematic conditions.
To analyze the states of the housing markets it tracks, CMHC considers four factors that may indicate early signs of concerning market conditions: overheating, home price acceleration, overvaluation and overbuilding.
The City of Victoria is facing a housing affordability crisis, with the average price of a home reaching $640,802 last month, up 11.3 per cent compared to March 2016.
In an effort to cool the market, last week Victoria’s city council voted in favour of implementing a foreign-buyer tax, similar to Metro Vancouver’s tax introduced last August.
In the first quarter of 2017, the average price for a single-detached home increased 19 per cent compared to the same quarter last year.
CMHC says with a shortage of supply, price growth has continued to be strong in Victoria.
Meanwhile, Victoria’s sales-to-new-listings ratio maintained a high level around 80 per cent, which is CMHC’s threshold for an overheated market in which demand outpaces supply.
“The last quarter of 2016 was dominated by strong sales and low supply which pushed house prices beyond levels that are supported by fundamentals such as income and population growth,” says CMHC Senior Market Analyst Eric Bond in the report.
“For these reasons, we detected increased evidence of overvaluation in the Victoria market,” he adds.
With an elevated sales-to-new-listings ratio, CMHC says there is moderate evidence to suggest overheating is a concern in Victoria.
The trend of low active housing inventory continued into the first quarter of 2017, after hitting a nearly 30-year low in the fourth quarter of 2016.
CMHC is not concerned about an overabundance of new homes in Victoria, as supply levels in the new home market reflect the low level of active listings in the existing home market.
Similar to Victoria, in the first quarter of 2017, Vancouver’s housing market showed signs of overvaluation and low supply, driving up home prices.
“Price acceleration and overvaluation continue to be detected and median home prices continue to increase in many parts of the market,” says CMHC Senior Market Analyst Braden Batch in the report.
“However, median single-detached home prices are down from an earlier peak,” he adds.
Despite the presence of strong market fundamentals like employment growth, increased population driven by younger demographics and low mortgage rates, the market’s price acceleration cannot be justified by these factors alone.
CMHC says house price growth is facilitated by Vancouver’s extremely low home supply.
In March 2017, Greater Vancouver saw a year-over-year home price growth of 12.7 per cent, which CMHC suggests signals moderate evidence of price acceleration in the market.
Compared to the beginning of 2016, average single-detached home prices were lower in the start of 2017 but other property types, such as row and apartment homes, remained elevated.
Despite overvaluation and price growth being a concern, Vancouver’s market shows weak evidence of housing demand significantly outpacing supply and overbuilding.
In the first quarter of 2017, Vancouver’s sales-to-new-listings ratio remained below CMHC’s 75 per cent threshold for overheating, at 73 per cent.
However, since 2016’s fourth quarter the sales-to-new-listings ratio overall has inclined towards the threshold, proof the market is no longer cooling off.
With a scarcity of homes available in the resale market along with low inventory of new and unsold homes, CMHC suggests there is weak evidence of overbuilding.
Vancouver continues to have low rental vacancy rates and, with a growth of younger demographics moving into the region, more pressure is put on the rental market.