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As one of Canada’s — and the world’s — most expensive cities to live in, Greater Vancouver’s affordability challenges put the area at risk of a potential housing downturn, suggests RBC bank.

With stunted population growth and a risk of overbuilding beyond demand, the region shows signs of unhealthy conditions according to RBC’s July 2017 Canadian Housing Health Check, which looks at the Toronto, Vancouver, Montreal and Calgary markets.

The bank regularly determines if Canada’s major residential real estate markets are healthy by focusing on key indicators that have been correlated with housing crashes and declines in the past three decades.

Indicators include affordability, resale- and rental-market balance, interest rates, labour market, demographics, and supply levels of new housing and residential construction. .

“Despite further improvements this year, extremely poor affordability is still a major vulnerability,” write RBC Chief Economist Craig Wright and RBC Senior Economist Robert Hogue in the report.

In the first quarter of 2017, the region had an aggregate affordability measure of 79.7 per cent, almost surpassing the area’s worst level on record, according to RBC.

The bank’s affordability measure for a market is based on the average pre-tax household income required to cover mortgage payments (principal and interest), property taxes and utilities for a median-priced home.

In response to record-breaking price gains, the BC government introduced a foreign-homebuyer tax of 15 per cent in August 2016, leading to a cooling-off period.

RBC says that poor affordability of both single-family homes and condos probably contributed to the market cooling as well with many buyers simply priced out of the market

However, at the beginning of this year market activity started to rebound suggesting the tax’s effect may have been temporary.

With the market picking up steam, demand-supply conditions in the existing home market slightly tightened this year resulting in a sales-to-new listings ratio of 0.65 in June — indicating a seller’s market.

When the ratio is 0.60 or above, prices typically rise quickly and the market favours sellers, says RBC. Alternatively, when the market is 0.40 or below, downward pressure on prices occurs and the market favours buyers. A ratio in between is considered a balanced market.

Even though demand-supply conditions are easing in the homeownership market compared to a year ago, the same cannot be said for the city’s rental market.

In October 2016, the region’s rental vacancy rate reached an eight-year low of 0.7 per cent — one of the nation’s lowest vacancy rates.

Another vulnerability RBC named is Greater Vancouver’s slowing population growth.

In June, the region’s rate of population growth dropped to 1.4 per cent, down from 1.9 per cent year-over-year in March 2016.

According to the bank, this rate signals a concern for elevated risks. It has dropped below the 1.5 per cent threshold.

Slackening population growth could be an issue if it exacerbates overbuilding issues.

In response to a fiery of demand and a shortage of homes, construction of single-family homes in 2016 rose 12 per cent annually, reaching its highest level in 23 years this May.

Rapid housing starts can pose an increasing risk of oversupply in the future,RBC says But with a currently low inventory of unsold single-family homes the risk is minimal.

In its report, RBC also highlighted healthy indicators in Greater Vancouver’s market.

Currently, Greater Vancouver’s labour market is supporting the market, with the unemployment rate stabilizing around 5 per cent.

In addition, the region’s amount of new supply in the market is considered healthy.

According to RBC, the rate at which single and semi-detached homes as well as condo units are being absorbed is considered within the “safe zone.”

Currently, single-family home completions have slightly edged downwards and condo completions remain stable, suggesting little evidence of overbuilding in the region at this point or in the near term.

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