There’s no shortage of observers rubbing their hands together in anticipation with the recent turn in mortgage rates. Many have argued for years that the Vancouver (and, for that matter, Toronto) housing market is in a bubble. Now, with mortgage rates spiking to their highest level in a decade, they think it could finally pop.
But that’s not what Nicola Wealth Chairman and CEO John Nicola sees in a comparison of price increases over time and among various cities. In a June 22nd podcast with Investing Matters host and Wealth Advisor | Client Relationship Manager, Ethan Astaneh, Nicola pointed to data from the Economist Global Housing Price Resource Centre that show Canadian housing increasing in dollar value 13 times over between 1975 and 2021. That was more than the eightfold increase in the U.S. but only because our neighbours experienced a housing crash between 2007 and 2010 triggered by the subprime lending crisis while “basically Canada did not.”
The United Kingdom, Australia, New Zealand and Sweden, however, all saw higher home price appreciation over the period than Canada. The same goes for other investable assets. “You would have made more money by buying government bonds in 1975 than you would have buying the average Canadian home,” Nicola noted.
Even Vancouver real estate, which has seen the fastest price growth in Canada, does not look especially bubbly when you consider its average annual rate of return has been just 4.1% ahead of the pace of inflation since 1975—less than the S&P/TSX Composite, and less than gold.
Metro Vancouver has geographical constraints on three sides: mountains, ocean and the U.S. border. And yet it welcomed most of the 100,000-plus people who moved to B.C. last year, needing approximately 40,000 new housing units. “We have this population increase that needs to be housed. That requires a lot of construction and zoning changes to occur just to stay even,” Nicola noted.
All the while mortgage rates have been steadily falling since 1975, and “mortgage payments are what drive the demand for housing prices as much as anything,” Nicola said. Given all these factors, it’s perhaps surprising housing prices did not increase more than they did. While that may offer little comfort to young buyers, Vancouver home prices are approximately, per square foot, just 30% the price of Hong Kong apartments and half those in New York.
That said, this year’s jump in interest rates will affect home prices. Government five-year bond rates, which lead mortgage rates, are at their highest level since 2011. “I don’t think the rise in interest rates has stopped,” Nicola said. Say mortgage rates rise another percentage point or a point and a half. That will have a significant impact, he said.
But that impact will be felt in housing markets around the world, not just in Vancouver and Toronto. In China, where local government incentives drove the construction of an estimated 65 million empty homes and population has hit a plateau, home prices could soon fall precipitously, Nicola said. By contrast, the factors supporting home prices in Canada’s biggest cities are still mostly intact.
Nicola went on to suggest how young buyers can take advantage of these circumstances to gain a toehold in Canada’s big-city markets, which will be the subject of the next post in this series.
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