3 Signs That Vancouver’s Housing Market Could Be Cooling

Are Royal Bank of Canada (TSX:RY)(NYSE:RY) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) right to be concerned about the state of Vancouver’s housing market?

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You’ve heard it all before: Canada is caught in the midst of an epic housing bubble that is focused on the blisteringly hot residential real estate markets of Vancouver and Toronto. Despite fears of this bubble bursting in a catastrophic manner and the impact this would have on Canada’s banks, there are signs that one of the frothiest markets, Vancouver, is starting to cool. 

Now what?

Firstly, the volume of house sales for August 2016 fell to their lowest level in over three years.

August property sales for the Metro Vancouver area totaled 2,489 units, which was a massive 26% decline compared to a year earlier.

Admittedly, the new 15% property transfer tax is certainly having an impact. According to the Real Estate Board of Greater Vancouver, it has reduced the amount of foreign buying activity. It has also triggered some uncertainty among local buyers and sellers as they adjust to the new sales environment.

The Real Estate Board does admit that it will take some months before the full impact of the tax can be understood.

Secondly, the volume of properties listed for sale in August fell by 21.9% year over year.

This is an eye-watering decline in housing inventories and clearly indicates that the market is slowing.

Nonetheless, it is still characterized as a sellers’ market with a sales-to-active listings ratio of 29.3% for the month. According to the Real Estate Board, this figure needs to fall below 12% if there is to be any pressure brought to bear on housing prices.

Finally, despite indications of sales activity cooling, the average house price for August grew by a massive 31.4% year over year. This now sees an average house price of $933,100 for all types of dwellings.

Meanwhile, detached homes in the Greater Vancouver Area are fetching on average over $1.5 million, which represents a staggering 36% increase over one year.

The sharp increase is indicative of ongoing supply pressures, particularly when it is considered that detached properties, which are the most expensive housing class, experienced a sharp decline in sales over the last year. 

So what?

Even with the sudden slide in sales activity and listings, the average price continues to rise significantly, and there are clear signs that it remains a sellers’ market as demand still substantially outstrips supply. This can be attributed in part to a lack of housing inventory and shortage of land for new housing developments.

If anything, it could be conjectured that the sudden decline in sales can be attributed to a sharp drop in speculative activity and a decline in “hot foreign” money entering the market. If this type of activity is falling while the average price continues to rise, then it is possible to argue that prices are moving to a new point of equilibrium that reflects the true state of supply and demand.

Nevertheless, the numbers do indicate that that investors should be expecting a cooling of the market in coming months. Along with ever-higher prices, this is making investors and bank CEOs nervous.

Royal Bank of Canada (TSX:RY)(NYSE:RY) chief executive Dave McKay recently stated that the bank was watching Vancouver, despite the bank having less exposure there than its rivals. Canada’s third-largest lender by assets, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), has publicly stated that it had dialed down lending activity in Vancouver because of concerns over the state of the housing market.

However, Canada’s second-largest lender, Toronto-Dominion Bank (TSX:TD)(NYSE:TD), has not expressed any particular concern over the state of the market. It remains focused on managing risk across its mortgage portfolio and has trimmed its exposure to the riskiest market segments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

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