Tuesday, April 29, 2008

Vancouver's Next - Watch Out!

This post is brought to you by a real estate crash near you and the letter "L" which stands for Losses, as in large equity losses in real estate.


Your average Sesame Street watcher could understand what the lines on this graph mean and why Vancouver is likely to folow the pattern set so clearly by cities like San Francisco, Los Angeles, Seattle, or Portland.



This chart is courtesy of Seattle Bubble Blog.

Let us, for argument's sake, say that the Vancouver House Price Index peaked in March 2008 and that our market will follow a similar trajectory to Los Angeles. One year from now house prices will be at 92% of their current value. This means that your average $500,000 townhouse will be worth $460,000. This is a potential savings of over $3,000 per month just for waiting on a very important purchase. Can you afford to lose $3,000 per month?

Let's go out another year from there and see where our $500,000 townhouse is now. 24 months from peak in a place like San Diego would mean that our $500,000 townhouse is now worth $420,000 which translates into a loss of $80,000 or just over $3,000 per month for two years straight and prices are not finished coming down yet.

I don't know about you but paying $3,000 per month in mortgage payments on a place that is losing value at a $3,000 per month clip means that you are 'spending' $6,000 per month for housing - that is an expensive house.

28 comments:

jesse said...

You can see that Seattle and Portland, both late to the party, are declining from peak at a much faster rate than some of the other cities. It is likely the prevalence of easy access to credit in the other cities, even after they peaked in 2005, that initially slowed down declines. It seems to me the speed of the decline, if we are to follow this model, will depend on how quickly lenders tighten up lending.

Shanghaithunder said...

That is a beautiful graph. It reminds me of tails of light after fireworks explode. Perhaps some symbolism of things to come!

Newcomer said...

I thought of those streamers that they throw from the sides of ships as they leave port.

3 K a month. That's a hundred dollars a day. A nice easy figure to remember.

Jade East said...

I thought of the flight path of lemmings.

johnnyrent said...

I thought of Wily Coyote, just after he's been chased off a cliff by the roadrunner.

Fencesitter said...

I see an opportunity developing...

Patiently Waiting said...

"3 K a month. That's a hundred dollars a day. A nice easy figure to remember."

For a lot of people, that equals their total net earnings.

Every day going to work, and losing your entire paycheck to depreciation.

Well, at least they'll enjoy the intangible benefits of home ownership.

JT said...

I don't know about you but paying $3,000 per month in mortgage payments on a place that is losing value at a $3,000 per month clip means that you are 'spending' $6,000 per month for housing - that is an expensive house.

$500,000 for a house. That's a cheap house in these parts. $6,000/month for a cheap house? Now that hurts.

I thought of peeing, right down the crapper.

rentah said...

Get ready for what will perhaps be the most profound sociological event of your entire life: The 2008-2012 Vancouver Housing Bust.
Imagine the BBQ chatter once this gets underway.

jesse said...

"Every day going to work, and losing your entire paycheck to depreciation."

I find it best not to think about it like that. In fact I find it best not think about it at all; it will only depress anyone that bought in the last 2-3 years and nobody likes that being rubbed in their face.

WoodenHorse said...

rentah said...
Imagine the BBQ chatter once this gets underway.


I will be there with bells on.

And like the many homeowners who use to casually drop hints at the money they've 'made' in their homes, I will mention the money that's piling up in my bank account due to renting.

rentah said...

"it will only depress anyone that bought in the last 2-3 years."

And it'll worsen, and then anybody who bought in the last 5 years, or even more, will be underwater.
Not to mention the effect on the far greater number of owners who have made future plans and altered their savings/spending based on their assumed paper wealth.
This is what we mean by sociological effect.
It'll be much bigger than the tech bust.

Patiently Waiting said...

And we haven't even discussed the speculators who own several condos. J6P homoaner may have get some sympathy from me, but not those clowns. I'd happily throw it in their faces.

patriotz said...

It seems to me the speed of the decline, if we are to follow this model, will depend on how quickly lenders tighten up lending.

It will also depend a lot on the recession which followed (and was a result of) the US bust, but will lead (and will increase the speed of) ours.

rentah said...

patiently: "homoaner"

Intentionally or not, I think you've coined a moniker that may be very useful these next few years!!

Tony Danza said...

HomeMoaner, Ben Jones' Bubble Bloggers coined the term long ago...

BBY said...

Best. Graph. Ever.
Note that the steepest initial depreciation rates correspond to the most recent cities to hit their peak. This would infer that the initial depreciation rate of Vancouver prices will be surprisingly steep.

patriotz said...

Get ready for what will perhaps be the most profound sociological event of your entire life:

Never thought I'd live to see an encore of the early 80's bust. But this will be worse:

- way more people have bought at bubble prices due to extended duration
- no US recovery in near future like in late 80's
- no downside on interest rates (I mean market rates, not central bank rates)
- no big inflow of HK money like late 80's
- BC economy (the whole province, not just Vancouver) far more dependent on RE than at any time before

This is going to get nasty. I think the Olympics are going to be a party with the house on fire.

VanTOVan said...

This would be more entertaining without the concern about the BoC pulling out the stops to hold up the market like the good old Fed.
Punish the savers--what a perverse society.
We'll all be knocking on Mohican's office door to find some decent yield on the powder we're keeping dry.

BBY said...

When you think about it, buying when interest rates are at their lowest is kinda dumb. RE prices tend to peak, and the chances are that when it comes time to refinance, the rates will be higher. And then there's equity loss due to a cyclical bust.

Wouldn't it be better to buy when rates are high. There's downward pressure on prices, and perhaps an influx of motivated sellars/foreclosures. And chances are better that when it comes time to refinance, the rates will be lower. And the likely appreciation will add equity.

RE is a market driven by affordability. Easy credit enabled buyers to "afford" overpriced RE. In order for a buyer to "afford" RE at high interest, the RE must be priced less.

[Sigh] Am I just weird for coming to this conclusion?

Patiently Waiting said...

Hee hee, yeah, "homoaner" was lifted from The Housing Bubble Blog. If I ever claimed ownership of it, I'd definitely deserve the JT Treatment. ;^)

patriotz said...

This would be more entertaining without the concern about the BoC pulling out the stops to hold up the market like the good old Fed

Uh huh. And how well is the Fed holding up the RE market south of the border?

There is SFA the BoC can do to prop up the RE market, even if they wanted to. Inflationary policies will lead, inevitably, to a bear market in Canadian bonds. Also CPI inflation with stagnant wages puts downward pressure on RE prices.

patriotz said...

J6P homoaner may have get some sympathy from me

I don't have any sympathy for anyone. RE should only be purchased for long term holding, and for value of use (i.e. rental income, cash or imputed), not expected capital gains.

No matter which way prices go, RE buyers have the same property they paid for and are making the same payments they have committed themselves to. Enjoy the next 40 years in your luxury prison cell, JoeCappucino - you got what you paid for.

rentah said...

tony danza, patiently: Thanks for the education; clearly I never frequented Ben Jones.

VanTOVan said...

"...you are 'spending' $6,000 per month for housing ."

Hey it could be worse. Take a look at what the BoE is saying:
http://preview.tinyurl.com/655vo9
Some are going to be getting the old right-left combo of dropping prices and rising monthly payments. I hope those with minimal equity have a good cut-man (we'll send them that krrsh guy) in their corner b/c it could be a real bloodbath.

/dev/null said...

This would be more entertaining without the concern about the BoC pulling out the stops to hold up the market like the good old Fed.

More likely they're trying to shove the dollar back down, no?

patriotz said...

Falling dollar -> inflation -> bond bear market

3mudds said...

fair enough, so anyone considering buying property in Vancouver in the current climate is either nuts or just has so much money that a a blip of a couple of hundred grand don't make them blink.

but what are you guys figuring on other areas of BC?, the comox valley for example. Some people in the know stuff circles of the community development world are saying that it's a region of boom. A 4 bed house still lurks as little as $300,000. and various major speculators are pouring money into large land purchases.

How does the development or population explosion factor against the trens of property value decline?

do the same rules apply?