The Frothy Housing Market Of Vancouver : The Problem & Way Out

What was the costliest city in 2016 as far as real estate? No, it’s not the dashing LA or financial hub Hongkong. Rather it’s Vancouver which nobody so far counted as the top contender in UBS’s index. But what brought about such frothy housing market in Vancouver? Has the circumstance changed in 2017?

Possible explanations

Vancouver has been showing overvaluation in housing from last decade. The biggest driving force? In view of popular media and financial columnists, it’s the group forming Chinese immigrants-cum-investors. To counteract this trend, since August 2016, the foreign buyers have to shell out 15% extra tax to buy a property in British Columbia.

The housing bubble in Vancouver is still rising. So there must be other reasons such as

a) low rate of interests by national banks

b) bad debt practice among domestic buyers and

c) the influx of young professionals to Vancouver in search of jobs- thus soaring rents.

Why Seattle is better than Vancouver?

There are lots to compare between Seattle in USA and Vancouver. But why it’s better to be a landlord right now in Seattle than in Vancouver? The answer is- cap rate. The capitalization rate of a housing property is the outcome of- division of net revenue by the house cost. By mid-June 2016, it was an abysmal 2.32% in Vancouver while it was around 6.11% in Seattle. That’s three times more than the former!

The twisted mortgage system, as well as high expenses of living in Vancouver, makes it hazardous to purchase a residential property here, for anyone. If the chance arises, it’s cheaper to live in Seattle.

Renting is also bad option

Whether to rent or buy a property- it is heavily dependent on the price-to-rent metric. This is what you get after dividing the price of the property by yearly rental fee. The golden rules of price-to-rent ratio are- a) when ratio is 15 or less, it’s better to buy the house, b) when it is oscillating between 15 to 20, you are open to either rent it or purchase and live in the house itself and c) lastly, when the figure is more than 20, it’s wise to live as only a tenant.

The average price-to-rent ratio in Vancouver in 2016 was whopping 36.9%. Forget about buying, it’s not advisable to rent a property here at this moment.

Is the tide turning?

In the first quarter of 2017, the wheel is turning slowly. As indicated by Real Estate board of Greater Vancouver, the property sales dropped by 39.5% in January. The 15%extra tax for foreign nationals contributed most behind this opposite trend. Next, the precarious home loan policy implemented by the federal government, for first-time property purchasers also counts. Lastly, the natives of Vancouver’s are demonstrating the disinterest in putting up their houses for sale all of a sudden.

Though Vancouver is one of the most expensive cities in World, the real estate market is flagging slightly in recent months.  It appears, with more regulations, the housing market is finally steering into the right direction.