Tuesday, September 04, 2007

The Best Real Estate Anywhere?

Here is a chart worthy of refrigerator rights. Get a magnet and stick it.



What do we see here? The quality and sales mix adjusted house price benchmark (adjusted for inflation too) is represented by the yellow line. It is really high right now (highest ever) and it has risen for 6 straight years.

The blue line represents the average individual Greater Vancouver Income adjusted for inflation. It has risen and fallen within a basic range for nearly 30 years and it is at its highest level since 1980.

The red line (IMPORTANT) represents the number of years of the average worker's income it would take to purchase the benchmark single family home in Greater Vancouver. This number is at the highest level (by a long shot) that it has ever been.

Let us take a lesson from history. In the past 30 years, every time the ratio of the benchmark house and the average income has exceeded 8.0 the ratio has fallen. House prices must fall or incomes must rise in order to bring the ratio within a historical normal range of 6.5 to 7.5.

18 comments:

JMK said...

Nice plot. The only relevant parameter I would argue is missing is percentage of people living in SFHs in the same area. That has dropped a lot in the last 30 years. That means the more-desirable SFHs are going to richer folks, explaining the longterm price growth.

No doubt 9.4 is a temporarily high price-to-income ratio, but I would be surprised to see it revert to 6.3, and very surprised to see it back to 4.6.

mohican said...

I agree jmk that because of increased density we should tend to see an overall increase in the price / income ratio for single family homes.

I see a retrenchment to 6.5 as a likely outcome during this cycle but I wouldn't hold out for that as anything below 7.5 would be decent.

JMK said...

Perhaps - I would tend to extrapolate from the last two retrenchments, during which there was an increase in the price-to-income from 4.6 to 6.3. If that trend continues, the next retrenchment will be closer to 8. Of course extrapolating from two points is probably not very robust! But it accounts for the observed trend of decreased affordability of SFHs.

The question for a prospective buyer is will this deflation happen quickly like in the 80s, in which case it would be a good idea to wait, or will it take a number of years, like the 90s, in which case the decision is not so clear.

freako said...

Not exactly sure how the benchmark is treated in the temporal domain, but it is possible that density increases are indirectly "neutralized". How so?

As Vancouver becomes denser, a greater proportion of SFH end up in less dense areas of GV. Not sure if benchmarks are adjusted for this, or if they are pure apples to apples.

Anyhow, great work. I vaguely remember musing about such a chart a few posts back. Why? Because guys like JC rant about how affordability is meaningless. I say show me one case where affordability has shot up that has not ended with double digit nominal price declines.

Fencesitter said...

Based on your findings, by what percentage YoY would the benchmark need to correct by over the next year to satisfy a 7.5 or 6.5 ratio?

Chris & Danielle said...
This comment has been removed by the author.
BC Buds said...

http://tinyurl.com/2gejsv

Danger: Steep drop ahead
Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.
By Jeremy Grantham, Fortune
September 5 2007: 5:43 AM EDT

rentah said...

from the Grantham article:

"First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.

House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began. "

Warren said...

Another great chart, thanks mohican.

Regarding the SFH question, I think its fair to say that in my neighbouhood (East Van), there are a lot of older people who've been living in their homes for 20+ years. Lets assume they are right around the average income level, but their homes are too high for them to afford. I can see a return to the 6 level for these homes when these people retire/pass away/etc. There won't be any density changes in the area and the buyers will have run out.

YMMV on the west side of course.

jesse said...

"There won't be any density changes in the area and the buyers will have run out."

Anecdotal evidence suggests density has been increasing in Van East by subdividing 2 50' lots into 3 33' ones and by tearing down 50+ year old houses and building new with 2 basement suites.

To be fair, if you are renting 2 basement suites you can handle about $1000/mo more mortgage. Not anywhere near enough to offset the building costs of course but the Mrs. will be pleased and who can put a price on that?

Chris said...

Hi. First time poster. I wanted to say that, as a home owner on the west side of Vancouver, I've finally decided to sell my home. With the value in the past 3 years growing by over $550,000, I cannot believe this is possibly based on any fundamentals. I'm selling, renting, and going to look at buying real estate in markets that have a decent rental return. This is scary for me and my family but I just don't believe the market will stay up at these levels. I lived through the dot com boom and bust and know the consequences of always following the optimists and losing site of reality. Wish me luck. This is the first time I'll be renting in 13 years! I hope we are right but am also prepared to re-enter the market in a few years and pony up a premium if required although I doubt it. Am I one of the first to get out at the top? Time will tell.

mohican said...

Congrats Chris and good luck.

I just sold my place as well, locking in nearly $100,000 of gains. We are renting in the meantime.

We are close enough to the top of the market that timing the exact top is really irrelevant at this point since the drop will erase at least two full years of appreciation and probably more.

Alpha_Bear said...

"Am I one of the first to get out at the top?"

While I commend your decision to realise the increase in your home's equity, I must remind you that you're not out until the house has sold, and the funds are in your bank account. Price your house competitively, and you'll sell soon.

I sold last year, and have only missed out on the 6% increase in prices (YOY) in the North Okanagan.

oh please said...

FVREB numbers are up. Zow, look at the price jump in Abbotsford.

patriotz said...

That means the more-desirable SFHs are going to richer folks, explaining the longterm price growth.

The problem with your theory is that it should result in higher real rents for SFH too, if they have become more desirable (utility and all that). In fact the price/rent ratio for SFH in the upscale areas is even more out of whack than the region as a whole.

No way out of it folks, it's a bubble.

Sam said...

hey Chris,

good luck with it. We did the same thing moving back from the UK, and sold our house. We don't regret a thing, even though we missed the absolute peak, because the UK is looking very shaky indeed right now. Unlike us, they have a well-developed, informed and critical media, and as you all know, the UK media is starting to get very bearish indeed. We can expect that with the execrable media here in Canada and especially BC, you won't get any support from the media until it is all over and the Canadian papers are mimicking the US with post-crash horror stories of overextended wannabe investors.

So in short, even though you have only yourself and your common sense to back you up, I am sure you will not regret your decision to follow your own gut and not the sheep.

Chris said...

Well, I'll let you all know when the money is in the bank. The sign is in the yard now and we start showing the house next Tuesday and accept offers the following Tuesday. I can't describe how anxious I am to get out of the market -- despite the major inconvenience it is to my family. All that said, out of about 30 other homeowners I've spoken to about our motives in selling, around 75% absolutely agree with the bubble and would get out if it wasn't such a personal inconvenience. The other 25% pretty much think the market will go up much more and/or see prices as relative. That is, they don't see ever exiting the market so they don't really care much if the market shoots up high or dips down low - or so they say at least.

Jordan Clark said...

I'm curious what the graph would look like if it was based on household income instead of individual income. I would say most families who own a home have 2 full time incomes, so wouldn't that mean the price/income ratio should be almost half of what is shown?