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WHY VANCOUVER HOME PRICES ARE SO EXPENSIVE?

by James / Tags Vancouver Real Estate,
June 29, 2014, 9:01 pm

In his latest Consumer Watch Canada report, Benjamin Tal, Deputy Chief Economist at CIBC, he notes that while the average house price in Canada rose 8.6 per cent on a year-over-year basis in May, that number slows to 5.6 per cent if you take Vancouver out of the picture.

While the average house price climbed 25.7 per cent on a year-over-year basis to more than $800,000 in May, he found that by removing properties that sold for more than a $1 million there was a much more moderate price appreciation in the market. Read the full report here.

"Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces," Tal says, adding, "But even a multi-dimensional market can overshoot and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation.

Tal feels the price correction in Canada will be gradual as the two key triggers for a price crash a significant and quick increase in interest rates and/or a high-risk mortgage market that is very sensitive to changes in economic factors are not at play in Canada.

He also believes that the country is in relatively good shape when assessing the two sub-segments of the mortgage market that traditionally account for most defaults: mortgage holders that carry a debt-service ratio of more than 40 per cent and those with less than 20 per cent equity in their house.

Just over six per cent of households have a debt service ratio of more than 40 per cent a number that has risen by a full percentage point since 2008.

A little more than 17 per cent of the Canadian residential real estate pool is in properties with less than a 20 per cent equity position, a number that has been rising over the past few years.

"Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 4.6 per cent of total mortgages a number that has been on an upward trend over the past few years," says Tal.
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