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The Vancouver housing market’s recovery is likely going to take longer than Toronto’s despite both being triggered by the same event, says an economic-research firm with a reputation for being somewhat of an outlier.

“After the stabilisation of the Toronto housing market this year, it’s tempting to think that the deterioration in the Vancouver market will end in a soft landing,” writes Stephen Brown, senior Canada economist for Capital Economics, in a Canada Economics Update published today.

“But Vancouver housing is more overvalued, and there are clear signs of excess supply coming to the market in the next couple of years,” Brown adds.

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Capital Economics says 42,000 homes are under construction in Vancouver, whereas in much larger Toronto there are 71,000 units in the works. This means contractors in Vancouver are building 1.2 units for each newcomer to the city this year, versus 0.5 in Toronto.

But supply is only one of several factors Capital Economics looked at. Also under the microscope were the causes of the downturns, possible overvaluation of homes in each city, and demand — or lack thereof.

While Capital Economics credits stricter federal lending regulations, introduced at the beginning of the year, with spurring housing downturns in Toronto and Vancouver, Brown suggests the latter is more overvalued and has weaker demand-side factors.

Chart: Capital Economics

In terms of overvaluation, one metric Capital Economics looked at was the ratio of home prices to median household incomes. In Vancouver, house prices were more than 12 times the median household income, above Toronto’s nine times.

Meantime, population growth, considered a fundamental contributor to housing demand, is slower in Vancouver than in Toronto. As of October, Vancouver’s population was growing at a rate of 1.6 percent annually, compared to Toronto’s more rapid rate of 2.5 percent.

“The upshot of all this is that there are numerous reasons to think that Vancouver house prices are more vulnerable to a correction than those in Toronto,” Brown notes, suggesting home prices could drop by 5 percent in 2019.

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