A new report warns "frothy Vancouver" is vulnerable to a real estate market correction that could bring a significant price drop.
"Riding a wave of wealthy immigrants, Vancouver’s house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners," according to a report by Sal Guateri, a senior economist at BMO Capital Markets.
He cited strong demand from Chinese buyers, stoked by looser travel restrictions as well as stricter purchase rules and higher prices in China.
Guateri examined the ratio of average home prices to median family income – a key yardstick of real estate affordability.
Vancouver prices are now an "astounding" 11.2 times the median local income, he found, compared to 4.6 times the median income in the rest of Canada and 6.7 in Toronto, the highest level of a major Canadian city after Vancouver.
Ten years ago, Vancouver's ratio was only 5.4 and prices were running only modestly ahead of Toronto's. Now Vancouver's prices are 71 per cent higher.
"While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb," Guateri cautioned.
"How much could prices fall?" he asked. "Four corrections in the past three decades saw declines averaging 21 per cent and valuations are higher today.
"Still, if interest rates stay low and wealthy immigrants continue to pour into the city, prices could stabilize sooner than in past downturns."
The recent 2008-09 correction – a 13 per cent drop – was actually the mildest of the four.
The worst was 1981-82, when Vancouver home prices fell 36 per cent.
Even a modest increase in the current ultra-low interest rates would slow the market, the report said.
The Real Estate Board of Greater Vancouver's benchmark price for detached houses hit $890,800 in May, a 10 per cent increase from a year ago.
Apartments were up 2.2 per cent to $407,400 and attached units gained 3.5 per cent to $517,800.
The benchmark price for detached houses rose 2.8 per cent in the past year to $529,800 in the Fraser Valley, which includes Surrey, North Delta, White Rock and Langley.
Unlike the benchmark (which tracks typical properties), average prices have risen faster – the result of more sales of higher-end homes or houses on big acreages.
The average price for a detached house rose 11.6 per cent to $630,870 in May, according to the Fraser Valley Real Estate Board.
Townhouses in the valley actually dipped 1.1 per cent to $328,300 and apartments were down 0.5 per cent to $252,200.