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Vancouver's housing bubble might not be one after all


Stop me if you've heard this before: There's a housing bubble in Vancouver.

The massive rise in Greater Vancouver home prices, which are up 30% year-on-year as of the end of May, has in many corners been attributed to rush of Chinese buyers coming into the market.

Buyers seeking a safe place to park assets outside of China, however, are likely to be far less price-sensitive than traditional homebuyers. This is how markets start to look bubbly: uneconomic buyers dominate.

Another factor potentially driving Vancouver prices higher, though, is that when priced in yuan rather than Canadian dollars, home prices in the region haven't risen nearly as aggressively over the last decade.

Screen Shot 2016 08 22 at 1.03.39 PM
Screen Shot 2016 08 22 at 1.03.39 PM

(RBC Capital Markets)

Seen this way, then, the rise in Vancouver home prices for the market's most aggressive buyers hasn't been, well, as aggressive.

And in a note to clients, Matthew Barasch at RBC Capital Markets argues that, amid broad warnings on the bubble-like nature of Vancouver's market, this foreign influx of capital pressing prices higher looks a lot like the dynamic we're seeing across other markets as well — think US Treasurys.

On the one hand, this might indicate that everything is a bubble. Alternatively, higher prices across the board don't necessarily mean that there is a bubble.

Here's Barasch (emphasis added):

"Now, we are not going to stick our necks out the window in the spirit of Howard Beale and proclaim 'we're mad as hell and there is no bubble!,' but we also do not believe that just because prices have risen a lot means that Vancouver home prices automatically meet the definition of a bubble that is set to burst, leaving bits and pieces in its wake. Further, we wonder if Vancouver is indeed a bubble, whether or not we are surrounded by bubbles worldwide as Vancouver is hardly an exception in terms of soaring prices brought about by significant foreign inflows and the lowest bond yields in a millennia."

The metaphor Barasch extends in his note — because this is a research note and all research notes must have metaphorical hooks — is that just because Vancouver's bubble-looking markets look like a duck and act like a duck doesn't mean they're not a platypus. Which, sure ...

But the reality is that consensus thinking right now would say there is a housing bubble in Canada, particularly after the Bank of Canada's commentary earlier this year.

Some analysts might be more hyperbolic than others — "Overall, we might be close to peak crazy in the housing market" — but any chart that looks like the following from RBC will get people excited.

Screen Shot 2016 08 22 at 1.23.16 PM
Screen Shot 2016 08 22 at 1.23.16 PM

(RBC Capital Markets)

Or as Fitch Ratings said in a note out on Monday, "Fitch currently estimates home prices to be more than 20% overvalued nationally in Canada when compared to growth in long-term economic fundamentals, leaving markets increasingly exposed to downside risk."

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