The Christies Real Estate Team

With Metro Vancouver past the peak of its current real-estate market cycle, more discussion is emerging about what the cycle's downside will look like.

The latest discussion points lean towards a price correction in the double digits, with one study showing current Vancouver house prices overvalued by 11 per cent on a particular measure and an economist observing that prices are falling at a rate of 10 per cent or more this year.

University of B.C. real-estate economist Tsur Somerville was lead author of a study that evaluated the cost to rent a detached, mid-market home in nine Canadian cities, versus the cost to own, to find a balanced price.

The study's conclusion was that in the second quarter of this year, Metro Vancouver's average house price, $754,500, was 11 per cent higher than the balance point.

However, Regina, Winnipeg, Ottawa and Montreal are 25 per cent out of equilibrium, considering prices and rents in those markets. Halifax house prices are 20 per cent out of balance.

Titled Are Canadian Housing Markets Overpriced? the study observes that housing affordability is a severe problem in some Canadian cities, limiting the ability of markets to continue to rise.

Calgary prices showed as being seven-per-cent higher than balance.

Only Toronto showed prices in balance with rents, and Edmonton, which has already seen price declines, would need to see prices climb again by eight per cent to be in balance.

"I was surprised the Vancouver number is as low as it was," Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at UBC, said in an interview.

He added that the rent-versus-own measure is a narrow observation that treats homes like a financial asset and does not take other measures of affordability or valuation into account.

And what eventually happens in the Vancouver market, Somerville said, will depend on a host of variables ranging from changes in mortgage rates to changes in the long-term average appreciation of housing prices and economic conditions.

"What you can identify is where the pressures are," Somerville added. "How the market plays out is very different."

Prices do not have to fall for the market to correct, Somerville said. Prices can simply stagnate over a period of time, like Vancouver experienced through the mid-1990s until 2001.

However, Somerville added that Vancouver has built new homes at a much higher rate than household formation in the city during the up-cycle, and the inventory of unsold homes in the market has ballooned rapidly, which make Vancouver more susceptible to price declines.

"Those are two big warning signs," he said.

Somerville said another unknown in the declining market is what the buyers of pre-sale condominiums that are now under construction will do once the units are complete.

If a significant number of investor-buyers of those condominiums decide to sell them right away, that would put more downward pressure on prices.

However, at this point there is little evidence of "calamity in the housing market," said Helmut Pastrick, chief economist for Central 1 Credit Union, formerly known as Credit Union Central B.C.

Pastrick said the reversal in the housing market was caused because of affordability. Too many first-time buyers were squeezed out of the market for prices to rise higher.

However, "it would take nastier economic conditions," such as a recession or sudden spike in mortgage rates to cause a more serious decline in Vancouver's markets, he said.

Pastrick said Vancouver's housing price index has declined four per cent since its peak in February, and in his latest weekly economic briefing, he noted that prices are on pace to drop 10 to 15 per cent this year.

"I think [the decline] will be closer to 10 per cent by the end of the year," Pastrick added in an interview. "And the [decline] will be at least 10 per cent from top to bottom [of the cycle]."

The inventory of unsold homes, which had grown dramatically over the summer, dropped a bit in August and Pastrick expected that trend to continue over the next several months. At some point in 2009, he believes, the real estate market will find a new balance "and we could see housing prices tread water."

"I'm not suggesting [prices will be] flat," he said. "There's going to be some movement, but it could be a period of time where prices don't make large moves up or down -- perhaps plus or minus five per cent a year."

© The Vancouver Sun 2008