Friday, November 30, 2007

Statistical Speculation

It is the end of the month and you know what that means for data addicts like me . . . the local real estate boards will release their statistics package outlining inventory, sales, and prices for our local real estate market early next week - probably Tuesday.

So let us speculate, unscientifically of course, on what the data will be.

Last month saw 6 months of inventory in the Fraser Valley Real Estate Board area with no significant price changes. Prices have not risen in the Fraser Valley since the July / August period and seem to be stuck at that level for the time being. We need more inventory and/or lower sales to see further price declines. Will we see that this month?

Last month also saw 4 months of inventory in the Greater Vancouver Real Estate Board area with modest price appreciation. Price growth is still robust in the GVREB area, although some areas are showing weakness, especially in the outlying areas. Inventory and sales are still bullish in the Greater Vancouver area and we need to see inventory grow and sales shrink before any price correction can materialize. When will we see this happen?

41 comments:

Drachen said...

I won't speculate month to month, it's just too volatile.

My best guess is that in the spring there will be a large increase in inventory, I have noticed a lot of anecdotal evidence that many homeowners who are not selling are pulling their listing after 90 days this fall with the intent to re-list in the spring (writing off the lack of interest on the season).

That surge in inventory coupled with worsening US and global economic factors beginning to hit home, simple lack of affordability etc. will coincide to push us over the peak.

It may peak sooner but I expect the real slide to begin in the spring.

jesse said...

Speculation isn't as much fun without skin in the game. November won't tell you much -- we saw slight price weakness last year too.

I wonder how many investors will try the rental route first, instead of the flip. My prediction is a very messy Spring -- lots of confusion as investors waffle between renting below carrying cost and bailing. I think the cap gains will look too good to pass up in '08.

Funshine said...

I think there are many signs of buyer exhaustion from the recent pullout by Eden corp from two condo projects to the increasing supply of over 90 day listings to the slower sales volume and increasing inventory in the outer burbs.

All that said I project that while there may be slight price declines this fall/winter as we have seen in recent years that there will be no immediate crash when the buyers don't show up next spring. I don't think they will show up. My feeling is that the buyers are catching on to the US trend, which is also apparent in parts of western Canada, that the boom days are over.

The reason I don't think there will be a major price decline until at least the fall of 2008 is because I expect that sellers will be more reluctant than the buyers to admit that the game is up. Just as many of those sellers were recent buyers (showing that they were unaware or oblivious to general real estate trends) they will be slow to appreciate that they can't wait until next spring again to see the mania continue. They are slow learners because they bought too late and/or decided to sell too late and they will be reluctant to admit it until they have no choice due to real financial constraints resulting from interest rate increases, job loss, or the final realization that they are not going to recoup their carrying costs when the next spring comes.

Paul said...

I begun tracking daily numbers for the REBGV 3 weeks ago. Tons of stats for us number junkies. Anyways. like you said inventory is still normal for this time of year.

I can give you the last 3 weeks median and average prices for REBGV some time this weekend when I work out the weekly portion.(I also have monthly going back over 1 year) I also created a inventory chart for every sub area in the REBGV for the last 3 years. This helps us see the cracks in specific areas when the whole area smooths out the lines.

This is for my new improved real estate website which should be rolling in a couple weeks. It will be updated DAILY!! ( cough rob cough) and it will be for the REBGV not some ever changing mish mash of Fraser Vally and REBGV.

I love all these sites and the raw data does not lie. I will provide it for all.

later.

Paul said...

So soon you will know exactly what the "stats report" will tell you before it comes out. Then you can just enjoy the spin over a latte.

Clarke said...

I suspect the peak has finally passed, and the panic may start to kick in spring. While a lot of owners will be denial and want to ride it out, a lot of people are leveraged to the gills, and will have additional worries as this coincides with an economic slowdown.

freako said...

While a lot of owners will be denial and want to ride it out, a lot of people are leveraged to the gills, and will have additional worries as this coincides with an economic slowdown.


Indeed. Anybody who think we will get off easy because we have a strong economy and don't have subprime blah blah blah will be in for rude awakening.

BBY said...

I am 60% confident that spring 2008 will show a gradual decline as buyers just can't get in the market 'cuz prices are already too high, credit will tighten, job growth will stagnate and wages will continue to freeze. Seller reluctance and relatively low mortgage rates will fend of a drastic decline. For a while. (I say 60% 'cuz I've been constantly wrong about the sky falling for the past 5 years, and 'cuz this was a stats blog entry...)

Panic won't set in until late 2008 to mid 2009. Prices will noticeably slide until 2010.

Then the Olympics caravan will leave town, freeing up additional rental units.

What's ironic about this scenario is that Without the Olympics, the prices may have bottomed out in 2010 (Of course they probably would not have climbed as high either). But the Olympics could actually work to prolong a devaluation period, when they've been hyped as a psychological reason for increased property value. I wonder if the US economy/RE market would have recovered enough by that time for US RE investors to start looking to buy bargains in Vancouver after 2010?

Clarke said...

"Panic won't set in until late 2008 to mid 2009. Prices will noticeably slide until 2010."

I do not believe the Olympics are going to have a big impact on when things deflate or the rate of the deflation. We have likely peaked already, so a two week period two years from now is not going to do much to the long term rental market. The Olympics helped contribute to RE marketing spin, and was part of the larger construction boom. It cannot do much for an overall economic slowdown, tightening credit market, affordability issues, and the growing inventory of RE in the GVRD.

Deb said...

I have a question, not so much real estate concerned. When I look at the little chart of the stock market on this site I notice it goes up and down and all day. Now forgive my ignorance, but could someone tell me why it does that? What makes it suddenly go up or down?

Thanks

freako said...

Now forgive my ignorance, but could someone tell me why it does that? What makes it suddenly go up or down?

It fluctuates because the market is dynamic. The circumstances related to the individual companies change. The macro factors related to the whole economy changes. From hour to hour. If Bernanke hints at a rate cut when one was not expected, the market reacts to this. Maybe an hour later, a negative housing report comes out and the market is down. An hour after that, Walmart has stellar earnings and a great outlook, and the market reacts to that. And so on.

Note the sensitivity. There is a lot of implicit "leverage" in the market. Small changes can have huge consequences for future earnings. Also, most companies carry debt, which is internal leverage. This amplifies the impact of small changes even more.

In summary, news trickle out constantly, and the market reacts. Real estate is normally not nearly as volatile, because the earnings (rents) are much more stable. Also, it is not "traded" on an exchange, so numbers only come in monthly.

BBY said...

Clarke

You said
"I do not believe the Olympics are going to have a big impact on when things deflate or the rate of the deflation. We have likely peaked already..."

Not sure if you misinterpreted my quote of "Prices will noticeably slide until 2010."

I believe the Olympics could have a noticeable affect on RE AFTER the games. Currently the Olympics contributes to the construction boom, which brings in workers who pay rent to RE investors. There will be additional olympics staff and media who are moving into Vancouver who will be paying rent as well. Both residentially and commercially. It takes a lot of people to build, plan and run the games. They want 25K volunteers alone! When the games are over, those people will leave at a faster rate than when they came in.
And this will leave alot of RE investors without rent paying tenants. The number of vacant properties will surge within a few months, and that squeezes just a bit more air out of a deflating/bursting bubble.

Deliverator said...

http://tinyurl.com/2o23d9

Interesting remark attributed to HSBC:

"Britain's largest bank said it is 'nervous about how the housing bubble will unwind'. HSBC believes the Bank of England may have to lower interest rates far more aggressively than has been expected if Britain is to avoid a house prices crash."

Doesn't seem to be a question in their minds if there's a housing bubble in the UK... but of course, Vancouver is different.

freako said...

Here is some statistics from elsewhere, that I am sure we will see here sooner or later:

I have long held that real prices in Vancouver will go back to at least (if that never happens, I will have indeed been "wrong". Earlier I posted on RETalks that San Diego real prices were back to 2003.

Well that was last month. Piggington has charted September Case-Shiller for San Diego. Some scary numbers.

1. Price decompression. Low tier (sub 475K) is down 16.4% since September peak. 19.9% in real terms.

2. It is just getting started. The Case-Shiller are sort of rolling three month numbers, so September includes sales from July and August. Furthermore, there are completion lags, so even June sales are in the mix. This will get worse in the coming months. The drops are accelerating. The low tier dropped 3.6% month over month. That is faster than even the most roaring month on the way up.

3. Decompression or not, the low end is the first step in the trade up market. The pain will clearly spread to the mid and high tiers. The high tiers are only down 7.2% since peak.

freako said...

Sorry, should say:

I have long held that real prices in Vancouver will go back to at 2003.

freako said...

Also, OCrenter at bubbletrackingblog.com has found individual listings that are now a hair above their 2002 sales prices. A 5 year nominal low in other words.

Patiently Waiting said...
This comment has been removed by the author.
Patiently Waiting said...

Someone recently told me that Vancouver "won't be as bad as California."

I said, "Yes, it will be worse."

On average, when compared to the whole state, we will fall further IMHO. We will be like the hardest hit parts of California (Sacremento etc.).

Warren said...

I think things will remain flat and boring this fall/winter. No major moves. Although I expect news to come out in the January time frame that Christmas retail sales were slow (at least in the US), as people don't have the money to spend down there, and sales of toys are off further due to all of the China/safety concerns.

The US may be in full economic shock by that point and we'll have more news about how the high dollar is hurting the BC economy. The beginning of the end.

freako said...

I think things will remain flat and boring this fall/winter. No major moves.

Well one thing is for certain. Vancouver RE market participants can't read between the line, nor can they take a hint. Like a house guest who can't take a hint and have to be physically thrown out the door.

Craig said...

"Although I expect news to come out in the January time frame that Christmas retail sales were slow (at least in the US), as people don't have the money to spend down there,"

So far online is up over 20% and Black Friday was up over 8%.

It's interesting too that you think they "don't have money to spend down there" when the last time I looked their disposable income was running about 35% ahead of ours, and their real income is up about 25% in the last ten years.

If they don't have any money what, pray tell, do we have? Apart from the paper value of property ...

freako said...

So far online is up over 20% and Black Friday was up over 8%.

But these were enticed by deep discounts. It could well be that the early birds were bargain hunters and spending will dry up.

goulash said...

If Harper's crime bill gets pushed through over the next couple months, it could have a rather large impact on re here immediately and for at least a couple of years.

The source of a lot of the money that's driving prices (and our economy) doesn't show up statistically. i.e drugs. And it's a huge economic variable here, as we all know.

Tougher sentencing/ actual consequences for drug crimes should get rid of a lot of the players, most of which are not hardened gangbangers or members of organized crime. They're just our neighbors.

And it's not just the prospect of imprisonment that'll be daunting. Anyone who doesn't want to have to explain a six month absence to the friends and family who don't already know what they're up to is gonna have to bow out.

If it has an impact on the drug trade here, the bill should have an impact on house prices.

Clarke said...

"If Harper's crime bill gets pushed through over the next couple months, it could have a rather large impact on re here immediately and for at least a couple of years."

I really doubt that drug money is a major factor in the real estate market. That being said, while I do not disagree with tougher sentencing for criminals, there is little to no evidence that this will reduce or deter criminal activity. Experiences south of the border provide considerable data on this.

freako said...

I really doubt that drug money is a major factor in the real estate market.

I think its simpler than that. Grow ops generally not lived in. Hydro estimated 18,000 grow ops in Vancouver. If it dropped by say 70%, that add 12600 units to the MLS inventor or rental pool.

And the indirect economic effects of these won't be small.

I do wonder who would blink first? Would these have to be physically taken down (and the jails filled), or would growers seize operating? There are few growops in the States. Saw a story about a man in Bellingham who got a 10 years+ sentence for a medium sized grow op. Ouch.

goulash said...

"A few experts have attached numbers to the illegal business. Forestry added $10 billion to B.C.'s GDP in 2005, the construction industry another $7.9 billion and according to police sources, the marijuana trade claims third spot, boasting annual sales of $7.5 billion."

The impact on real estate is because:

RE is used in the manufacture. Besides rentals, it is often purchased for the purpose.

It is also used to launder money on the back end. With 5% down, the clean money coming out has been more than twice the down pmt, per annum.

I suspect the drug game and speculation here are woking hand in glove. Meaning many of the speculators are in fact criminals and money launderers.

Anything that might level the playing field (i.e the crime bill) gives me hope.

goulash said...

Anyway, sorry to get off track once again, so I'll leave it alone.

I very much appreciate the sharing of analysis by the people who crunch the tangible numbers, and don't want to distract from it.

BBY said...

"I think its simpler than that. Grow ops generally not lived in. Hydro estimated 18,000 grow ops in Vancouver. If it dropped by say 70%, that add 12600 units to the MLS inventor or rental pool."

This is why I'm a huge supporter of the Civil forfeitures Act. If the property supports the distribution of illegal drugs, then it should be possessed by the government and auctioned off. Enough is enough of this grow op / meth lab crap in the province. The adverse effect on the economy is my biggest complaint against BC's bud industry. It's a loss of tax for the government (which they'll make up by shifting the tax to those earning legal money), and it's a loss of affordable housing for the people.

Drachen said...

Goulash

"The source of a lot of the money that's driving prices (and our economy) doesn't show up statistically. i.e drugs. And it's a huge economic variable here, as we all know."

Why do people keep bringing this up?

Drug money goes to organized crime. They learned in 1931 that if the police don't get you on real crimes they'll bust you for tax evasion. So came the invention of "money laundering" where the illegal money is channelled through legal businesses and therefore IS recorded statistically even if it's source is incorrectly attributed.

goulash said...

That's kinda what I'm trying to say.

The illicit proceeds are being put into property.

That is where a lot of the money is being recorded statistically, and where it is incorrectly attributed to a high demand housing market that hasn't made much sense the past four years.

Clarke said...

"Would these have to be physically taken down (and the jails filled), or would growers seize operating? There are few growops in the States. Saw a story about a man in Bellingham who got a 10 years+ sentence for a medium sized grow op. Ouch."

I assume everyone is referring to the new "Tacking Violent Crime Act" before parliament, which includes three measures for mandatory sentences for firearms offenses, one measure for drunk driving, and one for sex crimes. Stiffer trafficking penalties were not introduced, so ten year sentences for grow operators are not on the agenda at this point for Canada.

While these measures are not a bad idea, the notion that these will have a major deterrent on criminal activity is not supported by any evidence, and the idea that this will impact the real estate market due to people exiting criminal activity and thus not renting or buying property is stretching things to the point of absurdity.

To put it simply, if you are already heavily involved in the drug trade, you face a not insignificant risk of getting shot by one of your competitors. This does not seem to have cut down in the numbers of participants in the trade, and this is a lot more negative outcome than a couple of years in prison.

Aleks said...

I don't think Harper's crime bill will have any impact. What will have an impact is if they actually start cracking down on grow ops. Get the hydro usage data and start raiding likely targets.

It's not like grow ops are legal right now, so I don't see mandatory minimum sentences making a difference. The problem is a lack of enforcement, not a lack of laws.

Clarke said...

"I don't think Harper's crime bill will have any impact. What will have an impact is if they actually start cracking down on grow ops. Get the hydro usage data and start raiding likely targets."

The police do use hydro data for raids. Based on past history, a major crackdown on this is unlikely. Even when the police do raid a grow op, the operators will likely face no jail time. In terms of police priorities, this does not rank highly. Not as high as Meth labs anyway......In any event, it is pretty much an exercise in futility.

freako said...

Stiffer trafficking penalties were not introduced, so ten year sentences for grow operators are not on the agenda at this point for Canada.


A quick web search found the following:

"A two-year mandatory prison sentence will be imposed for the offense of running a large marijuana grow operation of at least 500 plants;"

"The maximum penalty for cannabis production would increase from 7 to 14 years imprisonment; "

" A one-year mandatory prison sentence will be imposed for dealing drugs such as marijuana when carried out for organized crime purposes, or when a weapon or violence is involved;"

Clearly there are jail sentences involved.


While these measures are not a bad idea, the notion that these will have a major deterrent on criminal activity is not supported by any evidence, ... To put it simply, if you are already heavily involved in the drug trade, you face a not insignificant risk of getting shot by one of your competitors.

I disagree.

1. While there are some heavies involved in the upper echelons of the marijuana trade, the people who do the actual growing are "normal" folks (mom & pop if you like) to whom the risks of bodily harm is extremely small.

2. Because of the chance of jail is nil to none for a first offence, it is strictly business for these people. I am fairly sure that a one or two year mandatory sentence would dissuade many individuals. As a result, the number of grow operations will decrease, and/or the compensation required by the growers to take on the risk will increase. I suspect the former because "normal" growers would not want to serve jail time at any price.

3. Since most of the product goes to the U.S., and the border can be a pain to cross, why not grow it on the other side? Because punishment is draconian. This is evidence that jailtime does matter.

the idea that this will impact the real estate market due to people exiting criminal activity and thus not renting or buying property is stretching things to the point of absurdity.


Well if the number of growops were to drop significantly, many of the properties would return to available housing stock, whether rental or owned. It probably makes up 1 to 2% of the housing stock. Second, if we presume that the economic activity surrounding each grow up is say $150,000 a year on average, that would be about $2.5 billion annually. Not peanuts.

freako said...

It's not like grow ops are legal right now, so I don't see mandatory minimum sentences making a difference. The problem is a lack of enforcement, not a lack of laws.

Not sure I understand your point. If I drive my car at 100 clicks down the street regularly, the chance of getting a ticket regularly is small, so I continue to speed. If enforcement stayed the same, but excessive speeding carried a mandatory jail term, I would stop speeding, enforcement be damned. It is not just the risk of getting caught, but the risk-reward analysis.

freako said...

Victoria is up, up and away from what I gather, so I doubt Vancouver will be any different, so the madness continues for yet another month.

goulash said...

The "modest" estimate of 7.5 billion per year is in reference to the annual value of crops.

That doesn't tell the whole story. It is merely the foundation of our drug economy here.

There's a lot of money that's pumped into the economy via ancillary occupations. "Jobs" that have been created as a result of the large manufacturing base (clippers, dealers, brokers, shippers, currency exchanges etc).

Add to that the money that's being made importing cocaine. We are the hub that provides the rest of Canada.

The total drug economy in BC was estimated at over 14 billion a few years ago by the RCMP. I haven't seen a recent estimate. Common sense would dictate that it's substantially more now.

I wonder what would happen to our employment figures if any of this were to change.

A great documentary/ case study is "Cocaine Cowboys" about the Miami drug trade in the 80's. Admittedly the dynamic is different. Vancouver is a lot more sophisticated and low key. But there seem to be many interesting parallels.

patriotz said...

The "modest" estimate of 7.5 billion per year is in reference to the annual value of crops.

As with all estimates of drug trafficking I've heard, this is most likely based on "retail" value. Before it gets to the end user, it has to go through many middlemen, including the smugglers who get a big cut. And of course the retail end of the network is south of the border. Just how much gets into the local economy is another question.

As for jailing people - don't waste my tax money locking up the small fry. Just seize the properties. That will put an end to grow-ups. Make a business unprofitable and nobody will get into it.

And finally, I don't think the drug trade, or any other of the legendary money-to-burn types, are responsible for Vancouver's high RE prices. There were just as many of them in 2001, and anyway, we all know that market prices are set at the margin - by the just-managing-to-scrape-together buyer, not the deep pockets.

goulash said...

Ok. For the sake of argument let's say the 7.5 billion is ridiculously high.

Let's assume that a new corporate player came to town with 20,000 new jobs.

Amazingly, each job pays $150,000 a year to start.

That's 3 billion a year. Is it possible that this new employment/ money would not have an impact on the local real estate market?

If there's 18,000 grow ops in the lower maninland alone, that's a minimum of 18,000 jobs.

There's probably at least 3 jobs per single grow because of the infrastructure required to get it across the border, where the big market exists.

The salaries earned are not taxed, making them more valuable to the individuals invoved than my hypothetical scenario. They also need to be cleaned. Real estate is a handy vehicle for that purpose.

As for asset forfeiture, that already happens. However, it's a lot more difficult to prove than the criminal act of growing.

Property can't be taken unless it's proved that there's no other means by which an individual could afford a property than the criminal operation discovered in it.

As for the scrape together buyer's determining market prices, the RE equation is more complicated than that one singular variable.

jesse said...

"I don't think the drug trade, or any other of the legendary money-to-burn types, are responsible for Vancouver's high RE prices."

Consumer spending also affects spending of the illegal kind. I think these guys are speculating along with the rest of us.

"Just seize the properties. That will put an end to grow-ups."

If only it were that simple! There are other tricks that can be used to marginalise the grow ops. One way is a lien on property taxes that fully funds the cleanup efforts by police, with the ability to repo and sell the property if liens are late. Give the cops incentive to staff the cleanup efforts properly and they'll be more than happy to do the rest.

condohype said...

Predictions are a crapshoot and I have no expertise, but I'd say things have peaked and we're in for a slow decline. Prices will hold through the winter and spring with drops happening by this time next year. The extent of the drops will depend on the economic situation. As much as it would benefit me to see a mass price decline, I don't see that happening. But could we hit 2004 prices? I don't think it's impossible.

I'm especially interested in the downtown condo market. I find it difficult to believe that all those 485 sq. ft. boxes will maintain high values. So many are owned as investment rental properties yet they derive ridiculously low rents relative to their market value.

Think there's big rental demand for downtown condos at $1400+/month? Just look up Spectrum in Craigslist.