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Why Some Cities Cost More to Live In (Ahem, Vancouver)

When we see real estate prices in the news, we often get a lumped valuation of a specific city or country as a whole. The reality is that no matter how the market is performing, there will always be neighbourhoods that are increasing and ones that are in decline. Why is that? Here are few factors that can affect local real estate prices in any city.
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If you've been living in Canada long enough, especially in a major city, you'll know that we've had a great run in appreciation of our real estate. From 2002 until now, homes in the GTA went from an average price of just over $250,000 to its current value of $509,000 at the end of June just over a decade later. In Vancouver, detached homes went from a value of approximately $400,000 to a staggering $1,060,000 over the same time period. These increases average out to just under 10 per cent a year in Toronto and just over 14 per cent per year in Vancouver.

When we see real estate prices in the news, we often get a lumped valuation of a specific city or country as a whole. The reality is that no matter how the market is performing, there will always be neighbourhoods that are increasing and ones that are in decline. Why is that? Here are few factors that can affect local real estate prices in any city.

Employment Rate

Employment in an area plays a major role in establishing real estate prices. Low unemployment increases the demand for homes and drives prices upwards. Average days on the market is also a trend that tends to be lower as well. Unemployment rate has stayed fairly low across Canada ranging between 6-8 per cent throughout the last decade which gives consumers confidence to purchase.

Interest Rates / Bank Regulations

These are the famous words we hear on the news every day. The explanation is simple: as interest rates go up, people have a more difficult time affording a mortgage. This in turn, decreases demand and lowers competition for houses allowing buyers to take their time while shopping and negotiate more with the seller. Recently, there have been modifications to the banking regulations with the main change being the amortization period of an insured mortgage (less than 20 per cent equity) decreasing from 30 to 25 years. Mathematically, this is the equivalent of a 0.9 per cent increase in interest rates and is a way to slow the housing market without affecting the economy as a whole.

A higher interest rate encourages people to save their money and not incur additional debt since it comes at a higher cost. When we want to speed up the economy, we lower the interest rate and loosen lending regulations.

Immigration

How many people come to or leave a city as a direct impact on real estate prices. We just have to look at Vancouver to see this. The massive immigration over the last number of years has driven prices to extreme highs. These buyers are increasing the competition for home buyers and driving prices upwards.

Infrastructure

With new infrastructure comes new jobs and money into a local economy. New projects such as the bridge linking Windsor to the U.S. will come at a cost of over a billion dollars and will create roughly 5,500 jobs a year while under construction as well as permanent jobs once the project is complete. Projects such as this cause an increase in demand for housing and should have a positive effect on both the resale and rental markets.

There are many, many more factors that affect real estate prices in any given city than I could mention in this article. Personally, I am confident in the Canadian economy and think that although our real estate market will slow down over the next few years (-2 to 2 per cent annual growth), that we won't see a major price correction or crash. Even if we do see a correction of 10-15 per cent, I think that Canadian home owners have done exceptionally well over the last decade. Do you think Canada is headed for a major price correction or are you confident on our economy going forward?

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