Monday, September 10, 2007

Really Long Term CMHC Data

In the effort to provide excellent analysis here I purchased data on Vancouver CMHC Housing Starts, Completions, and Under Construction. I wanted to see what relationships exist in our local housing market between these different data sets.

As one would expect, starts lead, under construction follows and finally completions follow approximately 6 months later. Some interesting observations here are that the number of units under construction has never exceeded either the number of starts or completions but we find ourselves in a situation now where the number of units under construction is far exceeding the number of starts and completions. This could be due to a variety of factors such as a skills shortage or the nature of the projects under construction. The result of so many units under construction is that it is taking longer than in the past to see supply in reaction to demand thus giving the illusion of a hotter real estate market than perhaps is warranted by fundamental supply and demand.



An interesting note on this graph is the uptick in housing starts I notice in 2001. The question I have is how did developers make money with your average single family home selling for under $400,000. What was motivating them to build more starting in 2001 and sell homes for under $400,000? What has changed over the past 6 years? Have materials (lumber, steel, concrete, fixtures) costs risen that much? Has labour become doubly expensive in the past 6 years?



The number of persons per household in the GVRD has remained fairly stable at 2.6 persons over the past 20 years. When starts / completions exceed the number demanded by population growth one would expect it to be in reaction to previous undersupply or an expectation of further population growth. During our most recent construction boom we have seen no such growth in population and population is not expected to grow at a faster rate than currently evidenced. The question here being - who is living in all of the new homes being built?

The answer to this question could be complicated and no statistics exist (to my knowledge) that quantifies who is buying new or existing homes. I have heard myths about rich foreign buyers and the illegal drug trade but neither of those explanations should account for such a dramatic change in prices which are set by the typical home buyer who buys their home by qualifying for a mortgage which they intend to pay off over a number of years.

14 comments:

freako said...

A little OT. I presume that you have rental data for the entire data set. I was wondering how good a predictor PE is of future price movements.

mohican said...

Rental data from CANSIM only goes back to 1992 and was the subject of the previous post.

Royal Lepage has longer term rental data and I would love to get my hands on it. I have sent several inquiries but no response so far.

jesse said...

One crude way of getting rental data is to go to Vancouver Sun or UBC archives and find rental classifieds going back to the '60s. It would be an evening's work, with the help of a dedicated librarian.

jesse said...

To rich foreigners and gangs I would add boomers' children leaving home and foreign students.

Also so-called "dark units" are around (I know people who own some). In the cases I specifically know, one is waiting to re-rent after kicking out a problem tenant, the other is waiting to avoid paying GST before selling. I am guessing others are keeping the property empty for capital gains tax reasons (i.e. primary residence exemption). I have heard anecdotal reports of landlords wanting to rent out their property and still claim primary residence and I'm sure it happens not infrequently.

freako said...

1. It is clear that construction correlates with prices. Presumable it is construction reaction to demand/prices.

2. An interesting note on this graph is the uptick in housing starts I notice in 2001.

Yes that is intersting, but the numbers aren't huge. Could it simply be a result of Concorde Pacific's first Yaletown buildout? If so think they were more lucky than prescient. In fact, if they were prescient, they would have sat on the land until now. The prices they got on those are less than half of what a developer gets now.

patriotz said...

Every bubble brings out the rationalizations. It was pretty much the same in 1981, except you didn't hear much about drug trade/grow op buyers. The fact is that prices are seriously out of whack with earnings (rents), and the market is going to bring them back into whack, and there is no plausible scenario where rents can grow faster than incomes. The source of capital is irrelevant.

And people were saying almost exactly the same things about Miami a couple of years ago. Well where was the demand really coming from? Surprise!

Luc said...

I appreciate that you're paying for data sets and take the time to analyze them and publish for free!

For a while I'm thinking that pure, rational metrics are not an indicator for predicting the real estate market. I believe that 80% is sentiment, while only 20% is "it makes sense". Maybe we could correlate the "confidence level" of the public to the prices?

patriotz said...

For a while I'm thinking that pure, rational metrics are not an indicator for predicting the real estate market.

Sure they are - in the long term. All asset prices must adjust to earnings in the long term. If they are out of whack, supply will grow faster than demand (or slower, if underpriced).

In the short term - well no, you can't predict the stock market, so why should anyone think they can predict real estate.

But the gyrations of RE are more bizarre, because you'd expect the stock market to be volatile because earnings are volatile. RE earnings (rents) aren't volatile at all. Buyers are just plain irrational. And that's an opportunity for rational people (and that includes builders) to clean up.

I don't care whether the metrics are useful for predicting when others will buy or sell. I use them to predict when I will buy or sell.

freako said...

For a while I'm thinking that pure, rational metrics are not an indicator for predicting the real estate market.

As Patriotz suggest, markets are chaotic. As an analogy, think about the market as untrained dog, and fundamentals as the owner. The dog will run and pull in every which direction, but is constrained by the leash. He will never be far from the owner, as sure as the sun sets.

freako said...

Expanding the dog analogy, access to financing extends the length of the lease, but the final outcome is the same. Where the owner goes, the dog will follow.

Second, having run to far away, the owner will jerk the dog back. This can be painful, and he won't do it again, for say a couple of minutes (which corresponds to a couple of decades in boom bust terms).

mohican said...

Luc: I agree with you that the market is driven by psychology but I see a couple problems with using sentiment as an indicator: 1) What data will we use? No data source exists. 2) Would that data even be accurate? If it was accurate, how would we know?

I would prefer to look at inventory and sales numbers to give us direction on the market since it is representative of a significant human action in relation to the real estate market - buying and selling desires.

Human behaviour is a bit like the untrained dog analogy that freako gave and predicting those movements is a crap shoot. However, we do know that the fundamentals must prevail eventually - reversion to the mean.

rentah said...

mohican -> many thanks for the work, it is much appreciated.

Paul said...

This is an excellend answer to your question from Robert Shiller's HISTORIC TURNING POINTS IN REAL ESTATE:

According to the simple “Tobin’s Q”
model of investment, whenever home prices are high relative to construction costs,
construction will proceed at a relatively high rate, until the gap between home prices and
construction costs is closed off by new construction. If construction could be done
instantaneously, it would not matter whether prices are rising or falling, builders would
look only at the current price and build whenever price is high relative to construction
costs. Since there are lags on the order of a year between decision to build and
completion of a housing unit, builders will tend to pull back in a period of declining
prices even if prices are high relative to construction costs, but will continue to build at a
high rate if housing prices are still expected to be high by the time the construction can be
completed.

freako said...

Since there are lags on the order of a year between decision to build and
completion of a housing unit, builders will tend to pull back in a period of declining
prices even if prices are high relative to construction costs,


Yes, but with presales, they can offload most of the risk as much as year before the shovel hits the ground.