Saturday, February 17, 2007

Real House Prices

Just thought I'd add some flavour for the weekend food for thought with some dandy charts tracking house prices adjusted for inflation. First the chart tracking Greater Vancouver house prices since 1975. Hmmmm . . . . looks like Q2 2006 is an all time high. I know we are down from that high now.
Then the chart tracking US house prices. Hmmmm . . . . same thing here.
I wonder if we could see 'real' house price declines.

7 comments:

Freako said...

As mentioned in the past, I have some beefs with the Shiller chart. I don't know the exact methodology, but I think it understates housing returns, and lacks apples to apples.

I suspect that it suffers from reverse survivorship bias.

Survivorship bias occurs when somebody calculates stock market returns by looking at companies today, and then looking at past prices to find return. The flaw is obviously that any company that has gone bankrupt does not exist today, and will be exluded. A proper calculation would start in the past and then go to the present.

I think the flaw in Shiller's numbers is that it merely compares median houses over time. The methodology says "equivalent standard" house. I do know that the size and qualities of median houses have gone through the roof (no pun intended), so his numbers should adjust for this. Perhaps they do. But what I don't think they adjust for is the value increase in the land. You see, in 1890 there were SFH's very close to downtown. But as time went on, these became converted to higher density, and the land became much more valuable. Gradually, SFH were pushed farther and farther away. I don't think Shiller's chart captures this increase in land value, as the median house is less and less central as time goes on. In other words, SFH's are victims of their great location, and they get ripped down. Hence reverse survivorship bias, the good ones drop out of the pool.

mohican said...

I think all of that is fair criticism since his methodology neglects the land value portion which has a sizeable impact over the length of time his chart represents.

That aside, I think it adequately demonstrates the irrationality of today's real estate market.

bc_cele said...

Mohican,

please tell us you haven't bought a new house. ;-)

Strange day here, we just lost two of the Van housing blogs; both of them were of the analytical nature. Perhaps, we are seeing the collapse of a bubble of blogs?

Freako said...

"That aside, I think it adequately demonstrates the irrationality of today's real estate market. "

I am totally with you in that respect. I just think the chart is a little misleading that way. It is a little over the top, even for my bearish sentiment. Real SFH prices are most definitely up over time. Second, any price chart obviously ignores rental (or equivalent) yield. I view SFH as land banking with a structure thrown in for good measure.

No criticism intended toward you for posting it. I only commented because I have seen it abused and misused in the past.

OT I am going to try a little experiment today, something I just thought of. I love playing with the Sauder data, but I sorely lack absolute rent data. If we had that we could chart price rent multiple versus prices among many other things. I the past, I had intended to find absolute rent in 1972 and working forward using Sauder's rent increase data. For some reason, it didn't occur to me to use present rents and work backwards. Dusting off the concept of survivorship bias is cued me in to working in reverse. Could still be a garbage number as rounding errors compound.

rentah said...

mohican, I hope you're okay with this post reappearing here: If not, delete please.

---
I suspect VHB left for truly personal reasons: it's sounds to me like either a relationship or job-related issue; hopefully not illness.
Another possibility is that he was asked to move by his landlord. (I went through that recently, and believe me life does go on hold for a couple of months).
A very remote possibility is that he bought something and the issue is now moot for him (but that is not how his farewell sounds).

Some have interpreted the drop in 'bear' blogs today as bullish, but it's actually bearish: when the last bear that is destined to capitulate throws themselves on the pyre, the top is in.
(some may recall that I remarked that the prior surge in bear blogs was actually BULLISH, not bearish: the inverse is true of their demise).

We need a venue for discussion 'in the spirit of VHB'. The surviving blogs (condo, unreal, langley) are all indispensible and have their own character, but they don't fill that niche. RET definitely isn't the spot.

Is there an appetite for a blog to serve such a role?
Perhaps a group run discussion framework?
How about a simple blog with a Monday discussion topic and a Friday rainbarrel?
Perhaps regulars can rotate suggesting the weekly discussion theme.
We're unlikely to be able to easily replicate VHBs data presentations, but we could offer a forum.
Appetite?

(above posted on all related discussion threads).

OnTheIsle said...

I think mohican can fill VHB's boots quite nicely if you ask me.
I like the fact you can discuss investment stuff here without ruffling feathers that you are off topic.
Mohican, can you start a rain barrel post once a week to get the anecdotal stories on here to mix with your data and market charts and insight ?

rentah said...

I do think that mohican's site (this one!) could take over nicely, if you (mohican) have the stomach for it.

But, one would have to respect the fact that mohican started this as something more than a Vancouver bubblesitter-blog, it's a broader look at fin.planning, and the VHB orphans wouldn't want to hijack that. besides, it's got langley in the title ;) ...