Naturally, the first thought is that house prices are unsustainably high. You can read this (pdf) report
from RBC and see that affordability levels in Vancouver are back up where they were last time prices tanked and didn't recover for a decade. Or you can compare house prices to rents and see that the ratio between these is way out of whack (check out this real estate trends document
from Scotiaback which explained that you saved $1,200 a month renting instead of owning in Vancouver.) Or you can consider the standard bubble spotting wisdom that the time to sell is when even people you would least expect to be interested start telling you about how they've started investing in x (in this case speculating in condos).
Whatever measure you look at, the message is the same: bat time to buy, good time to sell or wait.
The second thought is that, on previous occasions when affordability levels were this poor, they were brought down by a combination of two things: Price decreases and interest rate cuts. In fact if you look at the historical spikes on the affordability curve, they were caused by sudden run-ups in interest rates which triggered recessions and then were (relatively) quickly brought back down. But this time, affordability levels have reached the same painful levels despite interest rates that are pretty low. So without the possibility of deep interest rate cuts to improve affordability, price cuts are all that is left.
Here's a chart of the bank rate, from 1976 to Q1, 2007 so you can get the picture.
The big spike on the left is what triggered the recession of early 80's. The spike in the centre is what triggered the recession of the early 90's.
But then look what happens as we move forward from the early 90's. Interest rates just go further and further down until a mild increase in the last year or two. But if you check back with the affordability chart in the RBC document, affordability actually deteriorates in this period of low interest rates. Just the small rise of rates we've seen in the last couple of years is enough to drive unaffordability up to where it was back when the bank rate was at 14% (as compared to the current 4.75%.)
The third thought is that ultimately it comes down to supply and demand: The supply
is plenty high, as a glance around at all the cranes would tell you. Meanwhile, what about demand. Migration to the province is below historical norms and home ownership rates in Canada have already climbed from around 60% in the 80's to around 70% so you wouldn't think it could go a lot higher.
On the other hand, inspired by the success of looser mortgage lending standards in the U.S., lots of changes have been made in the last year to loosen lending standards here as well, allowing a down-payment of 20% instead of 25% to avoid needing to buy insurance, and allowing 0 down payment for insured loans, and extending the amortization period from 25 to 40 years for both insured and uninsured mortgages - so all that may push things a little higher.
Another question is how much demand is true demand (i.e. people who want to live somewhere) and how much is speculative (people investing in real estate because it always goes up).
I'd say the combination of speculative demand, demand borrowed from the future as people buy "before it's too late," year after year of high housing starts and low population growth will all lead eventually to too much supply, not enough demand. Which again means that prices will go down.
Of course, saying that the market is overpriced and will come back down - eventually - is easy. The hard part is saying when. If I had to guess (and that's all it would be, a guess), I'd say prices will peak in Vancouver before end of 2008, but only time will tell. In the meantime, I'm certainly no financial expert and you don't want to follow my advice, but in any event, the only advice I might offer right now is to be careful.
Now, I suppose you might say that it's always good advice to be careful, but there are particular times when it is much more important than usual, and this is one of those times, in my opinion.