Thursday, February 28, 2008

Bubblier than the Bubbliest



Well why not celebrate. Vancouver is the number 2 bubbliest of the bubbly cities in North America and the only one that is yet to pop. At an index value of 276 versus the peak index value for Miami of 279 why not celebrate since Vancouver real estate values will never fall and we will surely have rising prices for another 100 years thus taking over the top spot in short order and retaining that spot for eternity. Champagne will flow in the streets and we will pave them with gold because our real estate will be so precious that the very wealthiest of the wealthy will be the only ones to afford homes in Vancouver.

The fact that Miami prices have fallen 20% since that peak should in no way concern us because you know Vancouver has invincibility to financial turmoil and is a safe haven from all of those messy recessions and credit problems. Just ignore the developments going into receivership and the rampant speculation on pre-sale condos. Just ignore the rapidly growing inventory of unsold existing and new homes. Just ignore the collapse of the forestry, tourism and film industries. Don't worry . . . nothing to see here.


The index is normalized for the US$ / CAN$ exchange rate and is set to an index value of 100 in the year 2000. US prices are from the Case Shiller index values and Vancouver prices are from the REBGV Nominal House Price Index. Click on the chart to make it bigger.

18 comments:

exvancouverite said...

I liked our #1 position much better.

Prof. Shiller says that "Vancouver is the most bubbly city in the world."

http://tinyurl.com/ys76wt

Going for a mere #2 spot in North America is so, I don't know, underachieving?

JMK said...

Fair enough. Of course, by that logic, most Canadians got a 30% US$ pay raise since 2000 as well.

Sam said...

The USD has been plunging since then - better to compare our pay against how much of a basket of currencies we can buy, e.g. Yen, Euros, USD, GBP...or how many ounces of gold we make per year.

Against real inflation, we have hardly had a 30% pay rise since 2000 in Canada.

Newcomer said...

Nice graph!

jmk,
Before making assumptions on what a virtual 30% pay rise does to fundamentals, don't forget that all the rich foreigners (who are used to explain the ridiculous income to price multiplier in Vancouver) got a 30% cut in purchasing power.

JMK said...

Against real inflation, we have hardly had a 30% pay rise since 2000 in Canada.

That's the point. If you put Vancouver on that graph in $CDN it would be at 215 or so.

I guess how you do this comparison it depends on what you are trying to get at. If it is affordability, then I'd argue you need to use the local currency. If it is investment returns for a cross-border investor, then it makes sense to normalize to whatever currency they are going to buy their basket of goods at if they were to cash out.

Mathematical said...

Well put, being #2 sucks, I was hoping to be #1. Why can't my 450 sq apartment be worth a $500,000 in two years? My plans to rent it out for $3,500 are going to waste.

I'm mean sure we have a stronger dollar, less people have visited us in 2007 then in 2006, real estate is cheaper up north, east, south and west (just buy a boat and live in it) and the rich foreigners seem to be depleting. Waiting to buy south in a year I assume. Why buy one house in Vancouver when you can buy 6 in US. Serious, the money has been already made. If you where rich and want to get richer, wait a year, buy some places in the US, sell in 5-6 years. By low, sell high. Don't buy high and hope to sell higher that’s a recipe for disaster.


I believe many people lack the knowledge of economics in this city. All you have to do is ask around to people who are trying to sell. How many people in the last month have visited their open house??? Not many with the exception of downtown Vancouver.

If you gone to this site you should to get a better understanding of where we stand

http://piggington.com/bubble

Igor said...

Mohican,

I was inspired by your post to use alexa.com analysis of mls.ca traffic to gauge people's interest in buying the property in Canada.

I did the same with with Google Trends for mls.ca for BC and compared this with realtor.com traffic in the US where the bubble has already poped.

Check out GT for mls.ca in BC:

GT mls.ca for BC

Do you see what I see? IMO, the trend has changed, there are less buyers in 2008 then 2007 for Jan-Feb. The same thing happened in the US in 2007.

GT for realtor.com

Igor

patriotz said...

That's the point. If you put Vancouver on that graph in $CDN it would be at 215 or so.

Oh, so the CAD price has only a bit more than doubled since 2000?

How have salaries and rents (in CAD, of course) done during that period?

If you where rich and want to get richer, wait a year, buy some places in the US, sell in 5-6 years.

Do you have any clue what kind of long-term structural problems the US housing market faces?

Boombust said...

Vancouver is always the "last in" and the "last out". It;s already begun.

Clarke said...

While the 20% drop in US home prices is reason to give us pause, it seems like the market is nowhere near the bottom yet in these areas.

Still waiting for more hard data, but I think Vancouver's slide has begun as well.

Alpha_Bear said...

"Why buy one house in Vancouver when you can buy 6 in US."

Why only buy 6? Sell your apartment in Vancouver, and buy several hundred houses in Detroit.

Real estate never goes down, right?

J.Son said...

I believe many people lack the knowledge of economics in this city.

Here is something to try for all the bears - when you come across one of those stubborn bulls who says that prices only go up... wager $1000 with them that prices will not be higher than they are now in 2012. If they just bought a place, this is even better! Get it in writing, too. If they're so sure that prices are going up, they shouldn't hesitate to agree to the wager. After all, they risked a helluva lot more than $1000 that they're right. If they hesitate, then GOLLY GEE - why wouldn't you want to win $1000 on a SURE THING like real estate?

Sam said...

We were talking about this fallacy last night. I know this has been discussed, but I thought I'd try to state it in a novel way.

If a given sector can only go up and also beats inflation over time, then it is superior to virtually all other investments (let's leave risk-free real return bonds (Canada)/TIPS (US)/inflation-linked certificates (UK) out of this as it spoils the fun) and every investor should simply put all their money in the one sector (in this case RE) and be free and clear forever.

However, return is directly proportional to risk. If the common wisdom has been that RE beats inflation over time, etc, then it must have considerable risk built in. Or, if it is risk-free, the returns must be negligible.

What we have here in short is a logical fallacy. If RE was superior to other investments, everyone should move into it, thus rendering it oversubscribed and removing any premium performance. Of course this is exactly what has happened. The fallacy lies in assuming wrongly that the sector will still outperform, even after everyone has already agreed it is superior to all other investments, and that the risk is simultaneously low.

Put another way, the return was high over the past few years because the risk was ever-present that the market would crash back to earth. Without that risk, the returns could not have been so high. Claiming that risk has now been conveniently removed after the fact would seem to be putting the horse after the cart.

Sam said...

(to mangle the cart/horse metaphor)

mohican said...

well said sam - there is NO WAY to separate risk and return. This is a common misconception that risk can be eliminated while earning great returns.

If one wants outsized returns, one must take outsized risks. Average returns involve average risks and low returns involve lower risk.

JMK said...

There are two types of investments in real estate. One for your own home and one as a strictly investment vehicle. The former has a considerably better return than the latter.

Anyone who thinks real-estate is always going to go up is a crazy person. However, if you want to calculate the risk-adjusted return for your real estate investment, it makes sense to estimate the likelihood of a downturn and how severe it is likely to be. I assume that was the point of the chart for this blog entry. In my opinion, adjusting to American dollars is exaggerating the severity of the situation.

Sam said...


However, if you want to calculate the risk-adjusted return for your real estate investment, it makes sense to estimate the likelihood of a downturn and how severe it is likely to be.


I am arguing that the return you get will be better if the risk is higher. If the risk is low, the return will be low. So I am confused by your reference to calculating the "risk-adjusted return". If you consider that the risks are high, you should expect a high return. If you consider that the risks are low, you should expect a poor return.

That is, you don't estimate a high return and then adjust it downwards based on the risk of a collapse. It is the risk of collapse that will inflate your returns, until the downturn happens.

I must admit though that my head is starting to spin today. Too much financial news and watching stock tickers.

JMK said...

I am arguing that the return you get will be better if the risk is higher.

If you are arguing that, you must have a crystal ball (in which case why watch stock tickers?).

I think what you mean to say is that "the return you get is likely to be better if the risk is higher". If an investment class has an average growth of 5% a year, but in any given year the growth lies between -20% and +30% would you take that investment over one that payed out a garaunteed 4.5%? Kind of depends on how likely those -20% are and how long you can wait for the average return to be realized.

As I understand it, adjusting for risk is a somewhat qualitative way to compare investment outlets with very different risk profiles. You can read about it here.