Vancouver is my favorite city in North America. It’s my second favorite in the world, roughly tied with Capetown, South Africa.
The top spot goes to Sydney, Australia. Then San Francisco and Austin round out my top 5.
That said, I’m not the least bit surprised that Vancouver has become a prime example of the global real estate bubble, and one of the single most bubbly cities on the planet.
The argument is always this: They ain’t making any more real estate. And the people still want what’s there, so the best spots will go up, up, up. Oh, and we’re the best.
I’ve heard the same thing in any bubble city I’ve been to. New York, Miami, San Francisco, L.A., Singapore, Shanghai, Beijing, London, Paris – they all think they’re invincible. And I’m sure Tokyo’s residents said the same at the height of their boom in 1989. Now, 26 years later, their real estate is still down 60%. Commercial real estate, down 80%.
Make no mistake, Vancouver will pop just like all the others.
No bubble lasts forever. Whether it’s stocks or real estate, when it grows so exponentially that it outpaces more fundamental economic growth, there comes a point when almost no one can afford the higher prices.
That’s what’s happening in Vancouver and so many other bubbly cities. Tons of wealthy international immigrants and speculators – and even some national migrants – come in and jack the costs up. Then the locals start demanding that the government restrict these real estate purchases. As citizens, they increasingly demand the government represent them, not these “damn foreigners.”
These “damn foreigners” are primarily wealthy Chinese foreign buyers picking up the nicest real estate – in this case, downtown areas like Vancouver Island and the poshest suburb across the Bay in West Vancouver.
For a coastal city like Vancouver surrounded by water and mountains, there’s already limited land to begin with.
But when real estate gets so expensive that even hardworking, upper-middle-class residents can’t afford to live there? Let alone buy a house? It’s crazy!
I knew Vancouver had issues. I’ve been saying it’s in a bubble for years. But a recent report from Julie Gordon at Reuters tipped us off to the fact that its citizens are literally revolting.
She quotes a recent poll that says 67% of Vancouver’s residents believe foreign investing has caused their homes to become unaffordable, and 70% want the government to do something about it. We followed up and got some more refined numbers from her.
Vancouver West, the most expensive downtown area, has seen prices go up 88% from 2010 to 2015. In Canadian dollars, that’s from $1.58 million to about $2.97 million. Or in U.S. dollars, close to $2.26 million.
West Vancouver, a separate spot across the bay, is nearly as high at $2.37 million Canadian dollars ($1.825 million USD). And the somewhat more affordable east section of downtown has gone from $755,000 to $1.238 million ($953,000 USD). Is that ridiculous or what!?
But this doesn’t just affect the most expensive areas of Vancouver. The whole damn city is inflated! Look:
This chart shows the rise in prices for detached, single-family homes across the larger metro area, not just downtown.
You’ll notice by the red arrow that I measure that this bubble started at the beginning of 2002. Home prices have gone up 290%, or 3.9 times since then. This bubble has extended more than nine years after the bubble peak in the U.S.
Part of this is due to the city’s strong economic growth coupled with its limited supply of real estate. That’s fair. But the single biggest reason is this high level of foreign buying, especially affluent Chinese rushing to get their money out of China before the world’s greatest bubble bursts there. It’s gotten completely out of hand!
Compared to Vancouver’s 290%, Canada’s broader six-city index – which measures six of the nation’s wealthiest cities – has only risen 128%. Still a lot, but less than half of Vancouver!
Calgary is next at 133%. Then Montreal at 124%, and Toronto at 115%.
I don’t need to beat this horse to death, but anyone with eyeballs can see that what’s going on in Vancouver is a bubble, plain and simple.
Mind you – this is an issue that extends beyond Canada’s bubbliest city. People have been protesting in San Francisco, arguably the worst bubble in the U.S., for years. Its downtown area and Silicon Valley an hour south are the most expensive places in the entire country, with Manhattan just behind.
And whereas protests in Vancouver focus on affluent Chinese spoiling the party, protests in San Francisco target Google. They see the big tech company as a symbol of the high-earning tech workers coming in from other parts of the U.S. and around the world.
To most, we love Google. To more and more San Francisco residents, it’s a threat to their place of living and very lifestyle.
Elsewhere, there’s Singapore (which I covered back in February), whose citizens became so angry that its government finally slapped a 26% surcharge on all foreign buyers. It also mandated an extra 16% tax if those buyers flipped the property within one year. If within two years, an extra 12%.
And what happened? Real estate prices there are falling substantially!
On the one hand, it’s because citizens revolted. On the other, it’s because every bubble bursts. Always. Period. No question. Regardless of what caused it – be it high natural growth, excess demand, limited supply, government giveaways, absurdly low interest rates – they all end. The bubble eventually defeats itself and causes demand to ultimately fall when there few left that can afford it.
And Vancouver, as bubbly as it is, is just a piece of the global real estate bubble that will start to burst over the next year as more and more cities like Singapore start to crack.
I guarantee it.
Follow me on Twitter @harrydentjr
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