Existing homes in the Greater Vancouver area lost a whopping third of their value between October 2008 ($658,000) and April 2009 ($436,000). To put this in historical context, note that prices doubled between 2003 and 2008. So while quite dramatic, the price correction still left prices nearly 40% higher than in 2003. As a result, prices had simply fallen back in line with the historical personal disposable income trend, marking a swift improvement in home affordability compared to when peak prices prevailed.

The adjustment proved to be fleeting, however. Home prices have since then staged a remarkable comeback to average $608,000 as of August, down only 8% from their peak. This retracement of a needed adjustment is most likely too much, too fast. Current market conditions certainly validate that the environment has quickly turned from buyer-friendly to seller-friendly, but we feel this is temporary. In the near-term, it looks unlikely that prices, which respond to market tightness and slack with a few months’ lag, will take a sustained dip. But the current sales rally will probably wane in the months ahead, and more listings have started to come on tap – a trend we expect to continue. By our estimate, the pent-up demand (roughly 4,000 foregone sales) that built up in the fall had already been absorbed as of June. Sales in August were more than triple their low of January and were the second highest ever recorded (the seasonally-adjusted data goes back to 1988).

As a result, the current momentum will be enough to restrain the annual price drop to around 3% this year. While monthly prices will continue to be choppy heading into next year, the base effect should provide an annual price gain of 2.6% next year. Then we expect prices to slip somewhat in 2011 (-1.7%) as supply increases and demand weakens in delayed response to deteriorating affordability. As prices have almost entirely recovered and incomes are not yet growing substantially, the currently improved affordability (when compared to a year ago) rests almost solely on low interest rates, which will start to reverse course in late 2010. In turn, this will depress sales. In such a volatile market as Vancouver has proven to be, one cannot rule another abrupt adjustment, especially if the current sales rally continues unabated. We forecast that demand will cool off and supply will provide the other relief valve before interest rates rise significantly. True to form, however, the Greater Vancouver market will definitely be one to continue to watch closely.