Economic analysis

Vancouver’s real estate paradox

Real estate helped Vancouver’s economy outperform, yet astronomical prices will make it extremely hard to lure young, skilled workers to the city
For sale sign in Vancouver, May 3, 2016. (Photograph by Jimmy Jeong)
For sale sign in Vancouver, May 3, 2016. (Photograph by Jimmy Jeong)
For sale sign in Vancouver, May 3, 2016. (Photograph by Jimmy Jeong)

Can a city’s greatest strength also be its biggest weakness?

That contradiction lies at the heart of a new study by the Conference Board of Canada and the Greater Vancouver Board of Trade that ranks Vancouver against 19 other global cities on a number of economic and social metrics. Put simply, the same force that has enabled Vancouver’s economy to outperform the rest of the country in recent years is also a reason its future looks so shaky: Vancouver’s red-hot real estate market.

In four of the past five years Vancouver enjoyed real GDP growth of more than 3 per cent, a pace that put it well ahead of the national average. Indeed, since 2005 Vancouver’s real per capita GDP growth has topped the rest of the country. Over that time frame the two biggest contributors to growth in Vancouver have been the construction sector and what’s often referred to as the FIRE industry—finance, insurance and real estate.

Real estate has always been central to Vancouver’s identity and affordability is by no means a new concern. However, the surge in home prices in recent years has brought about an affordability crisis that poses what the report’s authors describe as a “clear and present danger” to the city’s economic future.

As the report notes Vancouver is in a class by itself when it comes to housing affordability in Canada—in the region the ratio of house prices to per capita incomes was 19.5 in 2014, compared to 13.4 in Toronto and 6.9 in Halifax. Meanwhile, internationally only Shanghai and Hong Kong had housing markets that were more out of reach for those of average means. (It’s worth noting, too, that since the end of 2014, house prices in the city have only risen further, with the Teranet-National Bank house price index for Vancouver up another 23 per cent in a year and a half.)

“Anyone contemplating a move to the region faces exorbitant housing costs,” the report states. “This limits Greater Vancouver’s attraction to younger people who could represent its future.”  Yet Vancouver needs to keep on attracting people—specifically the young and skilled—to replace retiring boomers and take full advantage of the shift to a knowledge economy. While Vancouver has a larger share of its population in the key demographic of 25 to 34 than other Canadian cities examined in the study (18.7 per cent in Vancouver, according to the report, compared to Montreal’s 17 per cent or Halifax’s 13.9 for example) it is well back from other international cities like Seattle (20.7), San Francisco (21) and Sydney (33.2).

It’s already common to hear the heads of technology companies in Vancouver complain that outrageous house prices make it difficult to lure workers to the city. Such complaints will only become more frequent in the future unless the affordability question can be addressed.

And that’s the challenge—there simply is no easy fix to Vancouver’s affordability woes. As the study notes, Vancouver is gripped by debate over the role of foreign buyers, namely from China, in driving up house prices. While echoing calls from economists for more foreign investment data, the authors of the report said there is clear evidence that a stronger Chinese economy has lead to higher prices in the city.  “[China’s] moderating growth rate may ultimately prompt an easing of Greater Vancouver’s red-hot housing price advances,” they said. “Just not this year.”

One possible solution, if foreign buyers are driving the housing market, would be to impose restrictions on the purchase of homes by non-residents, which is what governments in Australia and Denmark have attempted. Another option would be to increase the supply of homes by encouraging more density or changing land use rules to restrict construction on agricultural land to the east of the city. A third ideal solution to the problem of affordability would involve a huge jump in incomes.

All easier said than done. In order for Vancouver’s house price-to-income ratio to come in line with other Canadian cities—and thus enable it to lure the workers needed to continue transforming its economy—home prices would have to fall by half or local incomes would need to double. It’s a reminder of the daunting task facing the city as it grapples with the fallout from its housing boom and bubble.

How do Canadian cities compare to their international counterparts?