The debate is not only on, it’s raging: is Vancouver real estate in the midst of a housing bubble that will ultimately end in tears with a pop in the market bubble, or are things different this time around?

I am reminded of a time not that long ago when commentators assured us that technology had ushered in a “new economy,” where traditional yardsticks such as earnings and price were not relevant anymore. Today, while house prices in Vancouver have skyrocketed, we are told that these gains are sustainable because this time it really is different: the B.C. economy is strong, the location is desirable and – my favourite – Vancouver is really quite cheap compared to New York or Tokyo. In many markets, gains in house prices appear to have flaunted the laws of demand and supply. We’ve done some analysis of global housing markets using a “bubble checklist.” The typical signs of a bubble we look for include a parabolic (hockey-stick-shaped) price increase, broad-based participation, evidence of speculative activity and affordability, and the willingness to pay almost anything out of fear of missing out. In Vancouver, house prices stand at a record high. In April, according to data from the Canadian Real Estate Association, prices rose 4.6 per cent on the month and stood a whopping 22 per cent above last year’s level. The average price for homes listed on MLS in Vancouver stood at $509,769. In real terms (adjusted for the rate of inflation), Vancouver house prices hit a new record high in the first quarter of 2006, having increased 54 per cent over the past three years. A chart of this price rise looks an awful lot like a Canucks hockey stick. Even factoring in strong economic growth, limited supply of land, a growing population and the upcoming Olympics, judging from the “hockey stick” test, the market is still looking a little frothy. Broad-based participation and speculation are more difficult to gauge because these data are not available from public sources at the city level. But I’ve noticed that a sure-fire way to get a rise out of Vancouverites is to suggest that their real-estate market is looking rather bubblicious. People I talk to are more concerned about how to get into the market than how to plan an exit strategy. Next on the checklist is affordability, which is a function of growth in homeowner income and house prices, the cost of borrowing and the cost of owning a home (insurance, utilities, etc.). Affordability is deteriorating in the Vancouver market, not because interest rates are rising, but because the growth rate of house prices far exceeds the growth rate of personal income. About 42 per cent of a median income is now required to own an average home in the Vancouver area – the highest level in Canada. According to RBC, in the first quarter of this year, the qualifying income (the minimum annual income used by lenders to measure the ability of a borrower to make mortgage payments) rose to $118,600 – up 16 per cent in six months. To compare, median family income in Canada stands at $64,800. If affordability begins to shut out buyers, house prices may correct themselves. With the Canadian dollar at close to US$0.90, the appeal has lessened for American buyers in particular. The evidence isn’t conclusive, but on at least three out of four criteria, the current real-estate market meets our bubble test. With 2010 just around the corner, we also looked at the so-called Olympic effect on real-estate prices of host cities. In theory, upgrades to transportation infrastructure, the creation of world-class leisure facilities and positive media coverage will work to boost the price of real estate in host cities. The reality is that the impact is far more correlated to the real-estate cycle itself. In general, developing cities stand to gain more, whereas well-developed urban centres such as Vancouver stand to gain less. Indeed, some cities such as Montreal can suffer a negative impact if cost overruns result in higher taxes. Two factors bring about the end of a real-estate cycle: interest rates and psychology. Interest rates have increased, but for Vancouver, the psychological effect of deteriorating affordability due to soaring prices is a bigger issue. If commodity prices stay strong and Asian economic growth remains supercharged, B.C. will continue to enjoy a strong economy, a tight labour market and personal income gains that will support even higher real-estate prices. But history tells us that whenever commentators tell us things are different this time, they usually aren’t.