Thursday, February 26, 2009


It is true, some houses are selling. Some people are buying. In fact, more than in January. Some people seem to think that this heralds the end of the troubles.

I don't think so.

Look at KopyrightKlepto's projections taken from PaulB's daily numbers:
Projection from 23-Feb-2009 : 16 of 20 days Complete

Listings: 4016 (-24% yoy) (+9% mom)
Sales: 1505 (-44% yoy) (+98% mom)
Sell/List: 37% (-13 pp yoy) (+17 pp mom)
MOI: 10.4 (+143% yoy) (-47% mom)
Actives: 15,620 (+37% yoy) (+4% mom)
Sales in February are on pace for a 44% drop from 2008. But you must remember that 2008 was not a good February--the slowdown had already started. Here are the February numbers from the past few years, all taken from the REBGV releases:

Year Sales Listings sell/list
2009 1505 4016 37% (projected)
2008 2676 5260 50.9%
2007 2859 4167 68.6%
2006 2941 4340 67.8%
2005 3068 4055 75.7%

So, we'll be off roughly 50% from a typical 'good' February, in terms of sales.

What about prices? We saw an uptick on benchmark prices in January. Was this the start of a big upward bounce or a seasonal effect?

Here is a graph of the montly average price increase (MoM) from 2004-2008.

(Note: This graph is not endorsed by the REBGV.)

February was the month with the highest average month-over-month increase in the REBGV benchmark price for detached houses.

I think this is because of the seasonal patterns of RE. February is not the month many people get desperate and lower their price to sell. In February, dreams of the 'spring selling season' dance in sellers' heads. Maybe the buyers will come! It is at the end of the 'spring selling season' that reality starts to hit. People either cut prices or pull listings and wait till next year.

If you are thinking about buying at some point, what month would make the most sense? Well, in a market that is trending down, it seems like the best deals are likely to be had in the summer, when those who listed with optimism in the spring are starting to think about the reality of going unsold. Were I a buyer, I'd be ready with my lowball offers in a July or better yet a November, not a February. (And, it goes without saying, not in 2009!!!)

Wednesday, February 25, 2009

Home-price declines in three of six cities in 2008

Canadian home prices in December were down 0.6% from a year earlier, according to the Teranet–National Bank National Composite House Price Index™. As the chart below shows, this reading extends and deepens the home-price disinflation that began a year ago. It confirms that by year end, after more than five years of seller’s-market conditions, Canadian housing as a whole had become a buyer’s market. Moreover, December was the fourth straight month in which the composite index declined, extending the first run of consecutive monthly declines since March 2007.

Within the Canadian composite picture, conditions varied widely from region to region. The indices for three of the six cities in the composite index were down from a year earlier. Vancouver (−1.5%) and Toronto (−0.6%) showed 12-month deflation for the first time, joining Calgary (−7.6%), where 12-month deflation prevailed throughout the second half of 2008. Meanwhile, December prices were up from a year earlier in Montreal (5.4%), Halifax (4.6%) and Ottawa (4.2%).

In every region, however, the more recent trend is downward. For the first time since the six-city index was launched in February 1999, prices in all six cities were down from the previous month. For Calgary and Vancouver, December was the sixth consecutive month of decline, for Toronto the fourth, for Montreal the third, for Ottawa the second. The Halifax index has been down from the previous month in four of the last six months, though only two of the declines were consecutive. The Calgary index has shown monthly declines in 13 of the last 16 months, since it also declined in each of the seven months from September 2007 through March 2008.

The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at
The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

By: Marc Pinsonneault, Senior Economist Economic & Strategy Team, National Bank Financial Group

Teranet - National Bank House Price Index™ thanks the author for his special collaboration on this report.

Monday, February 23, 2009

A Deception so Great

" We are never deceived; we deceive ourselves."
- Johann Wolfgang Von Goethe

An old adage is that if two people tell you you’re drunk, you’re drunk. After repeated conversations with friends, co-workers, and family, I can safely say that I am nicely and completely hosed. Most of my social circle does not believe as I do Vancouver house prices are going to drop at least 40% from their peaks in 2008. From this, being a humble sort, it would be incredibly arrogant of me to think them collectively wrong.

Here I offer the wildly arrogant possibility that maybe -- just maybe -- “they” are wrong.

Vancouver is a city obsessed with real estate. Many cultures immigrating here cherish it above little else; prices have risen significantly in inflation-adjusted terms for a generation; the majority of homeowners have huge swaths of equity tied up in property. It is hard to make the case for why the real estate party is closing down for a long time. I have tried, of course, citing low immigration, low median incomes, flat rents, huge looming inventory, dependency upon construction employment, a global recession, negative savings rates, significant similarities to US markets now crashing hard, arguments with which real estate “bears” are familiar. All my arguments, it is rebutted, are short term phenomena which will pass in a few short years and Vancouver will continue with its price appreciation as it has done since it was founded.

I believe Vancouver is in a bubble. Not a house price bubble (though we are), but a bubble of collective dissonance when it comes to how to value real estate. The 800 pound gorilla in the room is the simple question: why are properties worth what they are?

There are several ways to answer the question. The first most obvious answer is simply that properties are worth what someone else is willing to pay. Fine, but that doesn’t get to the heart of “why”. Why is that someone else willing to pay? Who cares, we say. Who are we to second guess motives of buyers? Maybe there is a new batch of rich buyers who care not whether an investment produces a reasonable income stream, maybe population growth is forcing land prices up, or maybe future income growth will more than compensate for the prices we pay today.

Maybe so but the analysis of the data suggests we should care a great deal why others are willing to pay and not just stop at our whimsical assumptions about what Vancouver is. Rich immigrants? Not too many. Population growth? Not that high. Income and rent growth? In real terms, try the opposite. Running out of land? The number of residential projects under construction is near all-time highs. It is clear to me that the image of Vancouver being a playground of the rich with high immigration, rising wages, and a limited land supply is for the most part illusory.

If we go back to the question, why is property worth what it is, using the actual data, the results are all the more concerning for real estate bulls.

There is a strong case that Vancouver real estate, like other cities around the world, has been riding a generational bubble. It has fostered a “can’t lose” attitude, where stomach-churning drops are assumed to quickly recover to new highs. In the past 25 years Vancouver has spent relatively short periods in the price valleys with relatively long periods of over-valuation. This is classic speculation with a twist. The length of speculation and perpetual volatility has perversely led to survivorship bias and, due to the relatively slow movement of property markets, deification of successful real estate investors embedded in local social circles. The speculation has not been the flash in the pan we all connote with other booms but a slow and seemingly secular trend to permanently high prices. It has fostered an air of invincibility around real estate investing, still heavily present today. How about those stories we hear of flippers losing their shirts on presale assignments? They are merely unfortunate and limited casualties in the machinations of the city’s real estate juggernaut. It has been a mistake to count out the Vancouver real estate owner, say the successful surviving real estate gurus.

We are now in the throes of another wave of high volatility with a decided trend downwards. At first glance it looks the perfect storm: oversupply, low sales, high prices, a global recession, and tighter lending, all point to prices falling more. Even with these insurmountable odds speculators will still be playing in the market, ever aware of Vancouver’s amazing ability to rebound from previous crashes. I hear it constantly: prices have dipped and will stabilise in 2010, the recession will be over by the end of the year, in-migration of rich families will eat up the excess inventory quickly, et cetera. Almost certainly there will be people buying this spring anticipating new highs within a decade. The same will happen in 2010, 2011, 2012, and on, all the way down and up again. This does not mean these buyers would support prices from falling but it does mean there are still bulls in any active market (by definition, in fact).

I have heard several comments from those bearish on local real estate that prices supported by rents and incomes will happen in but a few years, amounting to a truly meteoric, though not unprecedented, fall from grace. I am not so sure. The mood of Vancouver is so tilted towards the sanctity of real estate investing I find it only convenient to think a handful of years of a bear market changes this thinking. If anything I see years of pain to change how people value real estate, likely more than five or even ten: the “stickiness” of prices we hear so much about. This does not preclude significant price drops in the next few years -- I personally think it likely -- but to really get to a point where affordability is restored could take much longer.

So why is real estate priced as it is? What would we say after a crash and the subsequent fallout? I can hear it now: real estate, in its essence, is but a utility, providing a service for a fee like a car. Affordable, not unaffordable, housing supports income and economic growth. Property is only worth what income it produces. Dare to dream, drunk jesse.

The past generation has done well from real estate investing and I believe its perpetual success has fostered a deception -- a cognitive dissonance -- about what real estate really is and how it is valued. The deception is so complete it is terrific. While high prices may continue, there is a real and plausible possibility of a slow and painful trudge towards lower prices for a long time.

Sunday, February 22, 2009

Vancouver CMA CMHC Data - January 2009

The illustrious Canada Mortgage and Housing Corporation released the housing market data for markets across the country last week and here is a synopsis of the Vancouver data.

Starts are falling off a cliff. Only 609 units were started in January 2009 compared to 1332 in 2008.

Completions are accelerating now with 1431 units completed in January compared to only 838 last year.

Units under construction are at near peak levels but falling rapidly as completions outpace starts.

All of the current completions are coming into an oversaturated market now and the number of unabsorbed (unsold) units is continuing to rise. The number of unabsorbed units finished January 2009 at 2401 compared to 1407 last January.

Vancouver real estate market = toast, getting blacker by the day.

Friday, February 20, 2009

BC Budget: Junky assumption

I didn't look at the BC Budget in too much detail, but something on the radio caught my ear. Sure enough, I confirmed it on this pdf on page 87.

The BC Budget hinges on the projected unemployment rate averaging 6.2% in 2009. Have a look at the January 2009 numbers here. The January number is 6.1%. Does anyone really think that we won't see that go higher in February and then farther up from there?

I think the budget projection is pie-in-the-sky. I would say a more realistic projection, given the construction sector dry-up, is 8.7% by the end of 2009, with an average of 7.5% for the year.

The 2010 projection is 6.0%. By then, most condos under construction will have completed. Construction employment will be back below historical averages. The Olympics will be over as well. Unless every other sector suddenly pulls up the slack, there is a serious risk of double digit unemployment rates. 6.0% is a total joke.

Tuesday, February 17, 2009

Is now a good time to invest in real estate? - NO, NO, NO!

With home sales — and prices — dropping in B.C., is now a good time to invest in real estate?

The B.C. Real Estate Association says it just might be, pointing to a large drop in carrying costs for an investment property today compared to a year ago.

“It doesn’t matter what the market is doing, I don’t say whether or not it’s a good time to buy,” association chief economist Cameron Muir said in an interview Monday. “That being said, I would suspect investors are actively looking in the marketplace for bargains. If you compare today vs. a year ago, investing in real estate is more attractive than it was then.”

Muir made the comment after the release of an association housing survey Monday that concluded the residential sales dollar volume on B.C.’s Multiple Listing Service declined 61 per cent to $873 million in January, compared to the same month in 2008 when sales totalled $2.25 billion. In the Metro Vancouver region, the sales volume was down 62 per cent over the same period, to $413 million from $1.09 billion in January 2008.

Muir — who said he also believes sales activity in the province will pick up in the spring because of improving affordability resulting from lower mortgage rates and home prices — cited a typical mortgage payment for a property in January 2009 compared to January 2008.

He said the benchmark price for a two-bedroom condo in Metro Vancouver was $334,602 in January, 11.5 per cent less than the $378,336 the same condo would have sold for 12 months earlier. A typical posted five-year fixed-term mortgage stood at 5.79 per cent in January, much lower than a similar mortgage rate of 7.39 per cent the previous January.

Therefore, he said, a condo with a 10-per-cent down payment (on a 25-year amortization) would have resulted in a monthly mortgage payment of $1,890 this January, nearly $600 less than the January 2008 mortgage payment of $2,468 (property taxes, maintenance fees and mortgage insurance fees not included).

Condos are still insanely expensive compared to rent.

On top of that, he said, there’s upward pressure on rents with the same two-bedroom condo renting in October 2008 for about $1,507 a month — a five-per-cent increase from October 2007.

“For both investors and home buyers, your mortgage payment would be several hundred dollars less than a year ago,” said Muir, who noted that investors have so far not been very active since the economic downturn started last year. “As an investor, the cash flow from the rent will more closely match your mortgage payment on the property.”

The BCREA survey also showed that residential unit sales fell 57 per cent to 2,115 units during the same period.

The average price on the MLS in B.C. was $412,934 in January, down nine per cent from the same month last year, the survey noted.

Muir said that home sales were sluggish in January, reflecting an overall malaise in consumer confidence and a weaker provincial economy.

Muir said that first-time buyers are especially affected by the economic news and are holding back because of a lack of confidence. “Demand from first-time buyers has been off significantly. First-time home buyers tend to be younger and not have years of experience in their occupations. Therefore, they have more concerns around job security. They’re more vulnerable to layoffs.”

Yes, those first time buyers would have to earn in excess of $100,000 per year to afford to buy very basic accomadations and I just don't see a lot of those people around right now.

Despite that, he said, the BCREA expects sales to rise this spring because of greater affordability and lower interest rates.

Muir noted that realtors are reporting increased activity from buyers over the past three weeks, but that it hasn’t yet materialized in sales statistics. “By all accounts, there’s increased interest. There’s more showings and more buyers kicking tires.”

Meanwhile, an Ipsos Reid poll released last week showed that a growing number of British Columbians think this is a good time to buy a home, though most say it isn’t a good time to sell.
The poll found that some 71 per cent of respondents said it is a somewhat good or very good time to buy real estate. In November, only 60 per cent of respondents told Ipsos Reid it was a good time to buy.

In the latest poll, though, 82 per cent said this is not a good time to sell a home. The poll also found that British Columbians’ expectations for falling prices are changing, with just 42 per cent of respondents saying they expected prices to be lower 12 months from now compared to 57 per cent in November.

The association represents 12 member real estate boards and about 18,000 realtors.

The last sentence is really all you need to read! The number of realtors declines each and every month right now.

Monday, February 16, 2009


Sorry for not posting much lately. I've been incredibly busy at work with Tax Free Savings Accounts and RRSP contributions for my clients. Additionally, there really hasn't been compelling things to write about in the Canadian housing market. The script has already been written and played out in the US and other International markets so I think those of us who have been watching for the past couple years know what to expect next. More price declines - - especially here in Southern BC.

Back to the grindstone for me. Have a great day.

Friday, February 13, 2009

Housing Sales Collapsing

LORI MCLEOD Globe and Mail Update February 13, 2009 at 12:47 PM EST

Sales of existing homes fell to the lowest level since the mid-1990s last month, with activity dropping by 41 per cent in January from a year ago.

Last month 16,343 resale homes changed sales across the country, according to a report Friday from the Canadian Real Estate Association (CREA). The average price fell by 11 per cent from the year before to $273,607.

“Canadian existing home sales turned in another brutal performance in January, sliding by more than 40 per cent from year-ago levels,” Mr. Porter said in a research report.

“While another particularly harsh winter may have played a small role in the dismal sales figures, there is little doubt that Canadians are hunkering down amid widespread job losses and sagging consumer confidence,” he added.

Each of the country's 25 major markets reported a drop in sales from year-ago levels, and all but four of these experienced declines of at least 20 per cent.

In these major markets the declines were the greatest in Vancouver, down 59 per cent, followed by Calgary at 49 per cent. Sales held up best in Winnipeg, down 4 per cent from the year before. Trois-Rivières, Que., which saw the biggest year-over-year decline in prices at 15 per cent, had the second lowest drop in sales activity at 8 per cent.

Other markets that experienced large price declines last month included Victoria (-15 per cent), Saint John (-14 per cent), and Calgary (-11 per cent). Prices were up the most in Newfoundland and Labrador (+20 per cent), and Halifax-Dartmouth and Quebec (+11 per cent).

The recession is hurting consumers, and that's translating into pain for both the new and resale housing markets, Mr. Porter said.

“The deepening recession, which began in earnest among exporters, is now more forcefully dragging down the domestic side of the economy. The ongoing sharp drop in home sales points to further declines in prices as well as a deeper pullback in new home building,” he said. There are still many buyers and sellers, but deals are taking longer in many markets, CREA president Calvin Lindberg said in a statement.

Recent measures in the federal budget including an increase in allowable RRSP withdrawals for first-time home buyers and a tax credit for closing costs are expected to have a positive impact on the market later in the year, Mr. Lindberg said.

Stop dreaming Mr Lindberg, the recent measures in the federal budget will have a meaningless impact on the market. Houses are too expensive still and prices need to fall before people can afford them. In the past five years, people took out way too much debt in relation to their homes and they are now having trouble servicing that debt. They must pay it off before they step into the market again either as first time buyers or as upgraders. The pain has only begun.

Wednesday, February 11, 2009

New Home Prices Falling Across Canada

From the Financial Post:

OTTAWA - The selling price of new homes in Canada went down by 0.1% between November and December, the third consecutive monthly decrease, Statistics Canada said Wednesday.

Builders in Saskatoon cited reduced labour costs as new housing prices fell by 0.7% in that city, while prices went down by 1.3% in Calgary and 0.3% in Edmonton, the federal agency said. Monthly prices increased slightly by 0.2% in Ottawa–Gatineau in December, but remained unchanged in Toronto and Oshawa, Quebec, Montreal and Vancouver.

On a year-over-year basis, the new housing price index increased by 0.4% in December, a slower pace than the 0.7%t increase recorded in November.

The largest year-over-year increase in new housing prices was registered in St. John's at just over 24%, followed by Regina at 21.7%.

Compared with December 2007, Statistics Canada says contractors' selling prices were 4.5% higher in Ottawa–Gatineau and nearly 2% higher in Toronto and Oshawa.

New housing prices in Saskatoon rose by 0.9% year-over-year, confirming a continuing trend of deceleration in this city.

Vancouver and Victoria also posted year-over-year declines in new housing prices for the third consecutive month.

Canwest News Service

Monday, February 09, 2009

Relationship between Months of Inventory and Price Changes in GVREB

Here is an update on the refined half-over-half price changes to months of inventory (3 month moving average) relationship mohican and I optimised last year.

First the residual plots.

And the 95% CI fitted line.

We can see even with the deviation of last month we have high degree of confidence. It is easy to show a frequency component of seasonality so a high correlation is somewhat expected. Still, there ain't no purdy red dots on the bottom left and top right of the graph so it tells me a storm's a-brewin'.

And for completeness, the time plot.


Now, that was 30 seconds of your life you will never get back. Carry on.

CMHC Housing Starts for January 2009

I'm busy - charts to come later. From here.

VANCOUVER, February 9, 2009 – According to Canada Mortgage and Housing Corporation (CMHC), construction started on about half as many homes this January compared to the same month last year. Builders broke ground on fewer single detached homes and multiple unit projects.

“The January numbers are an indication of things to come” said Robyn Adamache, senior market analyst, CMHC. “The slowing trend that began in the last part of 2008 will continue, with fewer housing starts forecast for the year ahead. A well-supplied resale market and a growing stock of unsold new homes on the market, mean that developers are holding off on new projects until more of the existing inventories are absorbed.”

Moving east to Abbotsford, just 13 new homes were started in January, down from 101 units a year earlier. Home starts in Abbotsford are also expected to moderate from last year’s high levels in 2009.

Provincial home starts declined to 14,100 units, seasonally adjusted at annual rates (SAAR) from 19,900 units in December 2008. At the national level, housing starts moved lower in January to 153,500 units (SAAR) from 172,200 units (SAAR) in December.

As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable homes — homes that will continue to create vibrant and healthy communities and cities across the country.

I'm still a little confused about that last paragraph.

Friday, February 06, 2009

Labour Market Problems in BC

Just a few weeks ago, Helmut Pastrick told us:
British Columbia's economy will lose 42,500 jobs this year and another 6,500 in 2010, Central 1 Credit Union chief economist Helmut Pastrick forecasted this week. If his dire prediction comes true, it will be the first time the province will have seen successive years of declining employment in more than a quarter century. But keep in mind that those are reductions of just under two per cent and 0.3 per cent respectively, hardly the wholesale losses of about five per cent B.C. saw during the recession of '82, and Pastrick expects employment to recover to 2008 levels by 2011. In the meantime, however, Central 1 expects B.C.'s unemployment rate to rise from 4.5 per cent last year to 6.7 per cent in 2009, and climb even further to 7.5 per cent next year.
Well, we now have the January numbers and we're already down 35,000 jobs. Only 7,500 more to go to reach Helmut's 2009 prediction. Or, more likely, Mr. Pastrick will have to revise his prediction.

Maybe I shouldn't pick on him too much. He's not alone in being rosy with the forecast. Then again, some people did mention a long time ago that our labour market boom was based on construction, and that this was not likely to be sustainable once the construction boom stopped.

I'm sure that the newspapers will tell us that such a change in employment came out of left field; 'no one' predicted it. Hoocoodanode?


The labour market in BC took a very sharp worse turn in January. Here are the pictures.

The unemployment rate shot up to 6.1%. The proportion of people with jobs fell under 62%.

This can be seen in clearer context by looking at this long run picture:
You might notice that the other times we've seen such sharp movements have been in deep recessions. One might therefore predict that we are starting a serious recession here. But time will tell for sure.

What I do know is this. If the labour market continues to spiral in this direction, the housing market is seriously toast.

When the bubble started to burst in Spring 2008 in the midst of a strong economy, it burst mostly because there was a psychological change--people stopped wanting to pay the inflated prices because they didn't have confidence that they could find a greater fool to whom to unload their property in the future. We've seen 15% or so come off prices, but the main effect really has been that properties have just sat around not getting sold. Aside from a few flips gone bad, there hasn't been a lot of urgency on the sell side. So it didn't sell in 2008--just rent it or try again in 2009.

What will be different going forward is this. As unemployment approaches double digits in BC (we'll get there shortly after the Olympics--if not earlier), there will be thousands of people who cannot make their mortgage payments on their primary residence--not to mention their inability to feed the monthly bleed from their condo 'investments.' These properties will be thrown back on the market first by themselves, and later by banks as foreclosures.

When will this happen? When people lose their job, it takes some time before they get irreversibly behind on their bills. It then takes some time for the bank to foreclose and get the thing on the market. So, the 'have to sells' are not going to seriously start hitting the market until late 2009. But in 2010, this will be a dominant part of the housing picture.

So, let's add this up. We have record new housing inventory on the way. We will have a cascade of 'have to sell' people driven by job losses. On the demand side, speculators are out of the market. As well, home ownership rates are at record level, which means we have borrowed a large part of demand from the future--how many 22 year olds were buying condos pre-boom? How many rushed to 'get in' before they were 'priced out'? And that's just the local stuff--not to mention the impact of a worldwide (including Asia) economic meltdown. This sums to one thing: 2009-10 are going to provide a tremendous amount of pain for those who are overexposed to Vancouver real estate.

Thursday, February 05, 2009

The Argument Against Value Analysis in Vancouver

Much has been made by me and other long-time commenters on this blog about what housing prices would be in the absence of a bubble, the market's so-called fundamental value. Yet Vancouver's housing market has rarely (not never) been at a "fundamental" valuation in the past generation. Does value investing have a place in Vancouver real estate if prices rarely agree with the theory? I will outline the case for why not and offer some commentary.

Here I have attempted to paraphrase many of this blog's comments into this post. The information is not new, only presented. I do hope that readers, if they have time, read some of the comments here and in the archives for more insights into the fascinating subject of real estate in Vancouver, the "most bubbly city in the world".

The simple way of determining fundamental value is to look at an asset's current and expected future cash flows, discount them at your cost of capital, and sum them up. mohican uses a simple formula that I crudely derived here. There are other simpler and more complex methods of course and there is always disagreement over assumptions. With Vancouver specifically the last time properties were valued at what I consider to be fundamental valuation was around 2000 and before that in the mid '80s. Others will say 2000 was never at fundamental valuation, a local minimum that never quite reached the trigger point for them to consider it a good value investment.

The question is, if fundamental valuations have not been present since, say, the mid '80s, do they still have merit? The argument for why fundamental analysis is flawed for Vancouver real estate goes as follows. Real estate consists of cash flows from rents and capital appreciation. The Vancouver market has had many boom-bust cycles in its past. Even if an investor buys when prices are above fundamental value (not necessarily at the peak, mind), a subsequent boom cycle will allow the investor to exit with a decent overall return. Booms and busts are inherent to Vancouver's psyche. Given enough time, typically 7-10 years, you will always be able to cash out positive, the caveat being of course you avoid buying near or at the peak. Fundamental valuation is therefore rarely, if ever, achieved because investors anticipate future bubbles to compensate for poor rental yields.

In a nutshell, that is the argument. And before commenters rip it apart I will say that many people over the past generation have made decent real (or paper…) returns in this fashion. Most I have had discussions with do not engage in "pure" speculation (i.e. flipping) but actually rely mostly on rents for their return; "mostly" because for the return to really make sense they require some form of capital appreciation above inflation. The speculative component (i.e. prices above fundamentals) is apparently omnipresent within a typical investor's time frame.

The Vancouver price graph is indeed "biased" above fundamental value. So the argument goes, as I can make it out, you may have to wait a long long time for true fundamental valuations to return. If this is true, that Vancouver has a propensity for speculation, prices may never retreat to fundamentals in one's lifetime. In fact this is effectively the argument I hear on local blogs and amongst my acquaintances and family. Really they are saying that Vancouver is full of greater fools who will inevitably compensate us for poor cash flows or that their still fruitless but eternal hope of real income growth will manifest itself. And maybe they are right.

Of course speculation is a zero sum game and many we know have done well in the past generation in their real estate investments, "others" not so much. Here though I lob a few words of caution into the hubris.

First the assumption that Vancouver will experience another boom-bust cycle in most investors' time horizons is just that -- an assumption. There are precedents in other cities, most notably Tokyo, where prices have fallen for twenty years and counting. The market there had the ability to absorb a significant amount of investors with speculative components to their business cases and not lead to a subsequent boom; in other words a lot of speculators got burned waiting for the recovery that was not. Indeed the Japanese property market remained rational longer than speculators could remain solvent. Not to say this will not happen in Vancouver, but convincing yourself it won't is a high stakes assumption nonetheless.

Second is that oversupply this time around may all but guarantee a return to fundamentals. There are just not enough people for the number of units being built and, worse, we have seen Vancouver's population "spread out" from past decades. That is, the ratio of occupied bedrooms to the total number of bedrooms has been decreasing for the past decade due to what I believe to be both a demographic shift, and historically low and lasting unemployment (due in significant part to the construction boom as it happens). What is to stop this trend from reversing when average wages are falling? If you think mohican's graph of CMHC units under construction is scary, wait until under-productive dwellings are brought back to more full productivity as people tighten their belts.

Third the past generation has seen a perpetual reduction in mortgage rates and mortgage qualification thresholds from their highs in the early '80s. This in turn has improved affordability for existing owners and pushed up prices for future ones who can still miraculously tap credit lines. That trend is unlikely to continue much further. If mortgage rates increase, it will be decidedly bad for affordability. If mortgage approvals are stricter, fewer can qualify to buy at all. And prices will suffer.

It comes down to one thing, that Vancouver real estate has had a lengthy CV of booms and busts with a distinct bias above what would be justified by fundamentals. As an investor, you may well be relying on Vancouver's house price volatility to ensure your overall returns are satisfactory. Food for thought, though, that THIS time, it may indeed be different, though not in a good way for your future savings. On the flipside, for families looking to buy a personal residence only at fundamental value, there is some chance you could be waiting a long time, though perhaps not.

Wednesday, February 04, 2009

Fraser Valley Real Estate Market - January 2009

From the Fraser Valley Real Estate Board:

"A total of 389 sales were processed through Fraser Valley’s MLS® in January, a decrease of 59 per cent compared to 956 sales in January 2008 and comparable to January sales figures last seen in the early 1980s, according to statistics from Fraser Valley Real Estate Board’s Multiple Listing Service." Wow!

Active listings are really high for January.

Months of inventory is sky high to begin the year.

Prices in the Fraser Valley have been dropping now since May 2008 and prices are now back at July 2006 levels.

The correlation between months of inventory and price changes is exceedingly strong through the bust so far.
Stay tuned, more price declines to come.

Greater Vancouver Real Estate Data - January 2009

Greater Vancouver was still witnessing an unseasonably high level of real estate inventory as the first month of 2009 wound down. In fact, active listings rose steadily throughout the month after the large amount of expirations traditionally associated with the beginning of the year.

Sales were at the lowest levels not seen for over a decade. In fact, I do not have data going back far enough to see a lower sales month for January.

Consequently, the supply / demand metric that I like to focus on - Months of Inventory - is at an extremely elevated level to start the year. As you can plainly see, months of inventory typically rises from February/March through the fall. I think we can expect MOI to fall from this level during February and perhaps March as sales typically pick up, which changes the denominator of the MOI.

The correlation of quarterly price changes and months of inventory is still highly correlated.

The benchmark detached house price moved up by 1.7% during January compared to December and I must admit this seems a bit unusual given the extreme supply / demand pressure in the market. From month to month we can see deviations from the fairly solid relationship between Months of Inventory and price changes but on a quarterly basis there is much less deviation. I am looking for price changes to smooth out over a quarterly period.

I expect that the rise in the price attributed to January will be gone by the time we finish March. Over a three month period the correlation between Months of Inentory and Price Changes suggests that we will see a quarterly price change of -5% to -10% when MOI is around the 20 mark.

Tuesday, February 03, 2009

How to do a quality-adjusted housing index

The new REBGV numbers are in, and the benchmark value is up in January 2009 relative to December 2008. This seems very different from anecdotes and what I've seen around, so I'm sure many people will be wondering what the heck is going on.

I really doubt that they have been 'messing' with the numbers. I mean, it could be, but that's not the first conclusion I would jump to. Before everyone starts jumping to conspiracy theories, let's try to understand their methodology.

I just noticed that the REBGV has a page with some details on their HPI methodology. I was always a bit curious about this, and I'm glad to see this explanation. It's pretty much what I expected. They likely use a hedonic regression to adjust for quality.

Here's how it works. Say that you have data on the five units sold in a certain area/class--say downtown apartments. Say that the data you have on them is the sales price and the square footage. Now, you could know more than square footage--you could know # rooms, amenities, etc. But let's assume for simplicity that all you know is the sf and the price.

Here are the data

Price SF

250000 400
375000 550
400000 700
700000 1200
850000 1500

If you run a simple regression of price on SF, you get the following equation:

Price = 47552 + 537*SF

Now, imagine that you thought the typical benchmark for downtown condos that you are interested in valuing has 800sf. The way you figure out the benchmark price is to plug in SF=800 to the equation.

price = 47552 + 537*800=$477,389.

This is your benchmark value. Next month, you repeat the exercise given the sales that you see in that month. You then pump in SF=800 and compare the benchmark price to the previous month. Presto, you have your time series of benchmark values.

Now, how could this go wrong?

What if you had more high value (or low value) sales in a given month; a change in the sales mix? As we know, this can skew up or down the median or mean sales price.

In principle, the HPI can account for this. Even if there are only a few observations at the low end, we still can estimate the HPI. So long as the estimated relationship is truly linear, we are still good to go.

In fact, what if ALL we have is high end sales? We can still calculate the benchmark like this. Imagine that the first 3 sales in the dataset weren't there--all that sold was the two high end units. Our regression equation would now be estimated just based on those two observations. The equation is:

price = 100000 + 500*SF

We can still pump in our 800SF benchmark and we'll get a value of $500,000. Note that this is different than the 477,389 we got above. Why? Because the relationship between the characteristics (SF) and the price was not exactly the same among the high end units as among all the units. Note that this could go either way; it's not necessarily biased up or down.

So, a weird sales mix (like you have in the slowest sales month in the middle of the biggest housing bust evahhhh) can lead to a weird HPI value not because it is inherently biased when the sales mix is atypical. Instead, a bias can happen if the relationship between prices and characteristics is different among the observed characteristics and the characteristics of the benchmark unit. Subtle, perhaps.

But, at the end of the day, I expect the January HPI figure is not much more than an anomaly; we'll see the resumption of price declines over the rest of the Spring. With MOI at 20, I can't see anything else as likely.

Sunday, February 01, 2009

Price Drop = $130,000 from original List

HERITANCE - Single Family Homes in Clayton Village, Surrey
 (Previously priced at $550,000)

 2,652 sq ft
(Previously priced at $550,000)


 2,493 sq ft
2,652 sq ft