There has been a lot of talk around the bubbleshere about the concept of 'price compression' which is the tendency of prices of real estate in the suburbs to compress up to the price level in urban areas. There are a few good analysis pieces on this phenomenon that I have read. The best of these articles is from iTulip.
I have now put together a cursory analysis on this topic by comparing the median detached benchmark prices in the Greater Vancouver area (urban) with the median detached benchmark prices in the Fraser Valley (suburban) from January 2005 to present.
What this limited data tells me is that the price compression phenomenon does occur and has occured substantially in the Greater Vancouver and Fraser Valley real estate markets over the past two years. The data is not perfect but I would expect that a higher volume of data would tell a similar story to what we seem to observe anecdotally. That is, potential home purchasers are rational in that the seek value for dollar spent on a home purchase and what $500,000 can buy in Langley is a far cry from what $500,000 can purchase in Van West. People seem to be willing to commute long distances to get more house for their dollar thus driving demand and prices up in the suburbs.
As affordability has worsened in the urban areas people sought out cheaper housing in the suburbs and drove up prices in the suburbs more than prices were driven up in the urban areas. In early 2005 you could hypothetically have traded your GV benchmark detached home for 1.6 simlar Fraser Valley properties. Now, in 2007, you would only get 1.4 FV detached properties in the same exchange.
Apparently price compression is not a purely geographical affair but also a housing type compression. This leads me to believe that as detached prices move out of affordability for people they choose the next best option and move down the housing food chain to attached dwellings or apartments. This chart demonstrates that change in the Greater Vancouver area over the past 6 years. Apartments have gained proportionally more in price versus detached housing types.
I think this is pretty profound stuff here. What are your thoughts?