Making sense of home prices in Vancouver

Home prices in Vancouver earned the distinction of being amongst the highest in the world. I come across some interesting information comparing the Global & Canadian supply of money, crude oil and real estate prices.

Canadian real estate prices and money supply

Real estate prices in Vancouver when compared to the supply of money in Canada and the world, showed a direct relationship in growth over the past 20 years. Similarly, the gain in crude oil prices appeared to follow the growth in the global supply of money.

The following table summarizes the prices for real estate, oil and the supply of money as recorded for January of 1990, 2000 and 2010 - for a period of 20 years.

First 10 years - 1990 to 2000

During the above period, home prices for single family homes and townhomes in Greater Vancouver made moderate gains of 27% and 16% respectvely. The increase in crude oil price and the supply of money were 2 to 3 times higher.

The gain in home prices from 1990 to 1994 was reversed after 1995 when some Chinese homw owners sold their homes and capitals back to Hongkong and Taiwan. The collapse in real estate prices was partly due to the exodus of capitals from Vancouver when the political situation in Hongkong stabalized.

Second 10 years period - 2000 to 2010

As you can see from the table above, the gain in Vancouver single family home prices followed the global supply of money closely. Although the Canadian money supply was increasing at half the rate of global money supply, some of the global money could have been recycled and ended in Canadian.

This may be the case as during this period China was growing at a rapid pace, and home prices continued to gain in values. Real estate prices all over the world, especially the developed countries, all experienced double digit gains.

New money and old money

The rapid rise in home prices, easy money policy from CMHC and low interest rates all helped to fuel the real estate boom in Canada. Liberal lending by Canadian banks through “home equity lines of credit” to home owners added fuel to the housing market.

Home owners who could tapped into their home equities through their LOC started to invest their money on 2nd, 3rd or even 4th homes. With rapidly increasing values, real estate proved to be a sure winner to the public.

Will real estate prices collapse?

This may not look likely if the gain in real estate prices has a direct relationship with the supply of money globally.

As can be seen above, real estate prices have a positive co-relation with the supply of money. Similarly, crude oil prices appeared to be affected to the same extend by the increase in global supply of money around the world. Money from China has a strong influence on Canadian real estate prices, and for many years the flow of money from China has not slowed down. This is not expected to slow down in the near future.

Home owners had enjoyed the price ride in the past. The factors affecting home prices are complex. If money supply is an important component in the whole scheme of thing, we may not see real estate prices coming down anytime soon.