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.
Update:
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?
17 comments:
Brilliant work. I have thought about crunching similar numbers, who needs to when you got Mohican? Since you are on a roll, how about SFH versus apartment? I consider compression as tangible "proof" of overexuberance
Price compression will necessarily occur. A working slog in East Vancouver may have no qualms about living on KD and sticking 62% of pre-tax income into an SFH. However, a Westside senior partner in a lawfirm will think twice about sinking $620K of his hard earned million into housing. Soon enoug, the relative valuation between housing breaks down. Which is obviously a market anamoly, because relative pricing exists for a reason, namely tangible quality differences.
You might get more telling ratios if you look at specific sub markets, such as Vanwest versus Vaneast. Within FV and GV aggregate there are a lot of similar areas which mask some of the compression. Still, you clearly found a relationship. Again, for apples to apples, SFH versus townhome versus apartment for the same area would be interesting.
As well a detatched vs. attached graph would be quite telling as well. Attached prices have been moving closer and closer to detached because it's the only step up people moving from condos can afford now.
I ran the numbers for FV Detached versus FV Apartments and FV Attached and I did not find any evidence of compression from 2005 to 2007. That is as far back as I have data.
This would lead me to believe compression is a purely geographical affair or that I need more data.
I feel like Johnny Number 5 here - MORE INPUT!
Okay, I got more data and my first judgement was wrong. The compression phenomenon is also a housing type price compression. At least that is what the Greater Vancouver data tells me.
"Okay, I got more data and my first judgement was wrong. The compression phenomenon is also a housing type price compression. "
And that is a double whammy, as in normal times (efficient market), one would expect apartments to gain less (depreciation, less risk). Apartments are normally a slow, reasonable safe, plodding of investment. Now it is apparently a vehicle for speculation. That will not end well.
apropos:
Condomania in the burbs
Now that the condominium craze has changed the Vancouver landscape and used up virtually all available space, condo fever is sweeping the suburbs and it's there we're finding the biggest percentage increases in condo prices.
Condo benchmark price, % change January to January:
New Westminster: +24.8
M. Ridge/P. Meadows: +21.5
Port Coquitlam: +18.8
North Vancouver: +17.6
Richmond: +17.5
Coquitlam: +17.3
Burnaby: +15.5
West Vancouver: +14.7
Vancouver East: +14.3
Vancouver West: +12.7
Port Moody: +10.6
South Delta: +6.7
...
Interesting, I think VHB noted that SFHs are down 1% yoy in New West.
Great work mohican. Your graphs speak volumes. I posted on that yesterday, before I had a chance to visit here. I was about 7 hours behind you.
As I have watched condo prices approach the prices of SFH (and in many cases, surpass), it has made me more and more dismissive about the "shortage of buildable land" argument. As I mentioned at a few days ago, it will be 100 years or more before Vancouver becomes a city of high-rises a la Hong Kong. I don't think anybody has any intention of turning Kitsilano, or Marpole, or Renfrew into a new Yaletown anytime soon, so in my mind, future density is a very small part of the price phenomenon at present.
What remains, in my view, is marketing. Specifically, the selling of life style. That's what drove droves of drones down to skid row to buy The "W". I hope that when they top that mess with the W again, they add TF? to it.
Hmm. I just gave myself a photoshop idea...
Dang - I just did a Randomblabber html. Chinga!
Great post mohican, there's definately compression showing up all over: The benchmark SFH has lost more value over the last five months than condos or townhomes, and condos in more expensive areas have dropped in value since september while those in lower priced areas have seen their prices go up over the same time period. The one that astounded me is Westvan with a benchmark price drop of more than $50k! Thats a decent car.
It would be interesting to see the compression effect graphed over a long term and how they looked in the eighties and nineties.
"It would be interesting to see the compression effect graphed over a long term and how they looked in the eighties and nineties. "
My guess is that compression charts would be a fairly good predictor of future price movements, especially in the extremes. Of course, we could just use affordability, but then people may argue that the market is forward looking with regards to future growth. But when it comes to compression, there is absolutely no valid reason why relative pricing should break down. If the future is rosy (population growth), SFH would have the most to gain, so I would expect "decompression".
Thanks for the data and the charts, mohican, and for all the discussion, folks.
freako said:
If the future is rosy (population growth), SFH would have the most to gain, so I would expect "decompression".
We've discussed how we ultimately expect similar % pullbacks across geography and price strata, when the pullback plays out.
But will the 'shapes' of the pullbacks differ across geography and price strata?
Do we expect "decompression" on the way down?
I would expect price decompression. As shown on another blog there are many examples of prices of Houses in East Van approaching those in Van West. As the prices drop people who can afford it will be more likely to jump back in at a smaller percentage drop as they will see value in the Van West house long before the East Van one.
Freako, Master of All Things Oil, said:
But when it comes to compression, there is absolutely no valid reason why relative pricing should break down.
Could the quality of new apartments have some bearing on this? Most condos built in the '80s and '90s didn't have high-end appliances, granite countertops, sophisticated electronic security, etc. I'm not saying it can account for all of the price compression, but it's something to think about.
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