Sunday, April 18, 2010

Making Sense Of Canadian Real Estate Prices

Is there are direct relationship between Canadian real estate prices and money supply?

Real estate is subject to supply and demand like any other goods that are in demand by people. The increase in Canadian home prices when compared to the increase in the prices of crude oil and gold, showed a close relationship with the supply of money (both in Canada and the global supply of money).

The table below clearly show the gain in prices for real estate, crude oil and gold are directly related to the supply of money over a 20 years period.

Time Period Jan/1990 Jan/2000 Inc. 1st 10 Yr Jan/2010 Inc. 2nd 10 Yr Inc. 20 Yr
Van SFH $300K $380K 27% $950K 150% 216%
Van Thse $190K $220K 16% $355K 61% 87%
Cdn $ Supply $18 Billion $33 Billion 83% $55 Billion 67% 205%
Global $ Supply US$17 Trillion US$26 Trillion 52% US$64 Trillion 146% 276%
Crude Oil/barrel US$20 US$27 35% US$68 152% 240%
Gold/oz US$380 US$280 -27% US$1100 293% 189%
Charts and data source: Real Estate Board of Greater Vancouver, and Kitco.


First 10 years - 1990 to 2000

The gain in home prices for single family homes and townhomes in Greater Vancouver were 27% and 16% respectively. The increase in crude oil price and the supply of money were 2 to 3 times more. During this period, there was a rapid gain in home prices from 1990 to 1994, followed by 5 years of price decline when capitals were moved back from Canada to China. Immigrants from Hongkong and Taiwan sold their homes and move money out of Canada after the hand over of Hongkong to China.


Second 10 years period - 2000 to 2010

The rise in Vancouver single family home prices, crude oil and gold followed closely with the global supply of money. Although the Canadian money supply was increasing at half the rate of global money supply, money from around the world and China could have been recycled and invested in Canadian real estates. The rapid expansion in liquidity around the world resulted in real estate prices all over the world, making double digit gains.

smallglobalmoneysupply.jpgNew money fueling home sales

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. Canadian banks were very liberal in granting “home equity lines of credit” to home owners whose homes had doubled in values. Home owners and investors made very handsome gains in their real estate purchases over the past 10 years.

image002.jpgWill real estate prices collapse?

After a huge run-up in prices since 2001, many are wondering when they will be a correction in home prices. There were time periods when the market appeared to crack and roll over. But, this has not happened.

kitco.gifThe above data showed that real estate prices seemed to co-relate with the global supply of money. The Chinese economy over the past 10 years had grown at just over 10% a year, and the momentum appears to be able to be sustained for the foreseeable future.

Money from China has a direct and significant impact on Canadian real estate prices. Canada is a favoured country for immigration by mainland Chinese families and immigrants from around the world. British Columbia will continue to enjoy positive inflow of money and new immigrants. Rich Chinese immigrants are making an impact on home prices in Vancouver Westside. Overall, real estate in BC will benefit from the demand for housing by new immigrants.

Read other Metro Vancouver real estate news here.