Real estate bubble in Vancouver (Canada)?

On a bright, warm Saturday in late June, couples and families wandered through the empty village, which has been renamed Millenium Water. It opened for public tours last month and draws about 100 people a day. Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report. (A Canadian dollar is currently worth about U.S. 96 cents.)


Millenium Water isn't in downtown Manhattan, of course. It's not even in downtown Vancouver, which is across an inlet known as False Creek. It isn't really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that's Vancouver for you.

(source: "Vancouver's Real Estate Bubble Trouble" by Bryant Urstadt. June 24, 2010. Bloomberg Businessweek.)

It's not often that Canada gets a feature write-up in Bloomberg Businessweek. It is even more rare to see Vancouver, the 3rd largest city in Canada, being talked about. It's not all good news though. In what may become a classic in the future, Bloomberg Businessweek has a story on the potential real estate bubble in Vancouver. Eerily paralleling newspaper stories written 5 years ago on the American real estate bubble—strawberry picker in California buying a "mansion"; young couples in San Francisco with full-time jobs unable to afford homes—Bryant Urstadt's story details how ridiculous prices in Vancouver really are.
 
The story is quite insightful and I recommend it to anyone interested in Canadian economic matters. If there is indeed a bubble—bubbles are hard to tell in advance, let alone the degree of the bubble—the damage can be significant. It may portend the future of economic performance in several other Canadian cities with overvalued real estate (like Toronto and Calgary.)
 
I thought the author, Bryant Urstadt, did a good job on getting the street-level view of the situation. In particular, there are some insightful notes about factors that are driving the real estate prices. For instance, it appears that a big chunk of the high-end market is being driven by foreign capital in-flows from China:
 

Mainland China buyers are a fixture in conversations about Vancouver real estate, though reliable data on their numbers is elusive. "I'd say over half our high-end listings go to China buyers," says Connell. "Yesterday we did an open house for a $3.5 million home, and six groups came through. They were all Chinese."

Broker Andrew Hasman sees 70 to 80 percent of his high-end listings go to mainland Chinese. He oversaw an open house recently for a $1.8 million home. Of 100 visitors, 91 were from China. Spend enough time speaking with Rosenberg, Hasman, Muir, and others, and prices in Canada seem to make a kind of sense, a rational response to market forces that just so happens to have pushed prices way above the norm.

Generally in-flows of foreign capital can be good. In this scenario, it creates real-estate-related jobs and increases the value of real estate assets for existing owners. If the bubble bursts, assuming there is one, it also means a big chunk of the losses will be borne by foreigners (although banks, mortgage lenders, and the like, will suffer losses too, depending on debt usage.)
 
On the downside, excessive in-flows of foreign capital can distort the economy. For instance, a big chunk of the new jobs in Vancouver over the last decade has been in real-estate-related industries, such as construction (some of this was due to the Winter Olympics so it's hard to say how much was due to non-Olympics real estate.) Relying mostly on cyclical jobs may or may not be a good thing, depending on your point of view.
 
Furthermore, if foreigners bid up prices to high levels, it may make real estate unaffordable to a typical citizen. It will make the city very uncompetitive and unattractive for young workers. This often sows the seeds of future destruction because you need young workers to settle in the city for it to prosper.
 
Anyway, it's hard to tell what will materialize going forward. I have been bearish on real estate in Canada (particularly in places like Toronto, Calgary and Vancouver) and been completely wrong for years. I could very well be wrong. But the thing is, even if there is a bubble, real estate prices move very slowly. I would urge everyone to take a neutral or bearish stance with respect to housing in Vancouver (and a few other places.)