Hi all, M- speaking.
I've just posted this as a comment on the Vancouvercondoinfo blog, but I figured I'd post it here as well, to ensure there's some rational discussion, and that it doesn't get lost among the flames. Looking at the stats below, what do you think? How does it play into prices, population, etc? Where's population going from here? Where are housing starts going from here?
BC Population Data from BCStats:
YEAR: Population: Households: Housing Starts:
1991:.... 3,373K ............ 1,280K ........... n/a
2001:... 4,076K ............ 1,593K ........... 275K (since 1991)
2006:... 4,243K ............ 1,677K ........... 152K (since 2001)
2009:... 4,455K ............ 1,778K ............ 90K (since 2006).
What are some numbers that we can extract from this bare data?
1991-2001:
Population rose by 70K per year, and 27K units were built per year, which implies 2.6 people per housing unit. A little more than Vancouver, but that's about the norm for the province. So we can conclude that population growth roughly matched the amount of construction. Household growth was a little higher than construction, but within a reasonable range.
2001-2006:
Population rose by 33K per year, and 30K of housing units were started each year. Huh, that implies 1.1 people per housing unit, which implies that there was lots of surplus housing constructed. Household formation suggests only 17K of households were "formed this year, which implies that *half* of the housing units built weren't occupied.
2006-2009:
Population rose by 70K per year (1990s growth levels!), and 30K of housing units were started each year. That's about 2.3 people per dwelling, which is about normal, if a touch on the low side. Household formation was 30K per year, which matches the level of construction, so that's about right.
Can we conclude anything from the above data? To me, it looks like construction matched population growth and household formation in the 1990s, suggesting that construction and growth were balanced. From 2001 to 2006, there was massive overconstruction going on (mainly due to low population growth). Since 2006, construction and population growth have been balanced.
Since 1991, unit construction has been fairly flat-- sure there have been some strong years and some weak years, but overall the rate of construction has been constant for each of the multi-year chunks that I've picked. The biggest aberration was in the 2001-2006 period, where population growth was abysmal, and so there was a lot more construction going on than we actually needed.
Some questions:
Have the imbalances been wrung out of the system?
How will prices (rising/stable/falling) play into this?
Sources:
http://www.bcstats.gov.bc.ca/data/pop/pop/BCPop.asp
http://www.bcstats.gov.bc.ca/data/pop/pop/dynamic/Households/Query.asp?type=RD
http://www.bcstats.gov.bc.ca/data/dd/handout/HSTART.pdf
If there is a housing shortage then WHY AREN'T RENTS HIGHER?
ReplyDeleteThanks, its nice to have all those numbers (plus the analysis) in one place.
ReplyDeleteA couple of comments:
1) I wonder how many secondary suites have been created over this time period and I wonder how many of those are counted in housing starts
2) Is housing starts net of any demolitions?
3) Up to 2006, the figures are probably tied back to the census and likely to be pretty accurate, but from 2007-current I'd guess they are being estimated using some statistical methodology and will be corrected once we get the 2011 census numbers.
Actually, the cumulative numbers suggest that demand and supply are finally in balance. From 1991 to 2009, @500k households were formed vs. 517k housing starts. To be more accurate. You should strip out the recreational properties. There must be a number of summer homes in the Okanagan?
ReplyDeleteMoreover, you need to recognize that there is a regional mismatch between population growth and housing starts. Most of the population growth is in metro Vancouver and surrounds, while land is most readily available elsewhere. As a result, the vacancy rate may be higher outside metro Vancouver?
The housing mix is also changing. The ratio of condo to landed property is rising in Vancouver. The bed capacity of condos (typical two bedroom) is lower than landed property (typical three bedroom).
Finally, note that household formation exceeded housing starts by 40k in 1991-2001. That coincides with the housing squeeze in 2001. The really interesting statistic is that ownership dropped from 65% in 1991 to 50% in 2001. So, there was a tremendous squeeze on renters.
As a result, there was a tremendous pressure to buy in the early 2000s. As a result of the building program in 2001-6, balance between households and housing stock was restored by 2009. We need to recognize the signal victory of the investors over the renters.
In 1991-2001, investors were heavy buyers as many homeowners became renters. After 2001, investors took profit as prices doubled.
I'm not sure why you'd have a regional mismatch in housing starts - developers aren't stupid, and Vancouver starts are a higher percentage of total BC starts than they used to be suggesting developers aren't suffering from a lack of land here and building excess houses in Prince Rupert to make up for it.
ReplyDeleteAlthough there is a trend towards more condos, there's also a trend towards bigger houses (I grew up in the 80's as part of a family of five living in a detached house < 1100 sq. ft and that was considered normal at the time), so these trends will offset to an unknown extent.
this (pdf) should help.
ReplyDeleteFrom the CMHC housing start survey methodology:
"The Starts and Completions Survey enumerates dwelling units in new structures only, designed for non-transient and year-round
occupancy.
Mobile homes are included in the surveys. A mobile home is a type of manufactured house that is completely assembled in a factory
and then moved to a foundation before it is occupied.
Trailers or any other movable dwelling (the larger often referred to as a mobile home) with no permanent foundation are excluded from
the survey.
Conversions and/or alterations within an existing structure are excluded from the surveys as are seasonal dwellings, such as: summer
cottages, hunting and ski cabins, trailers and boat houses; and hostel accommodations, such as: hospitals, nursing homes, penal
institutions,convents, monasteries, military and industrial camps, and collective types of accommodation such as: hotels, clubs, and lodging
homes."
So recreational housing out, secondary suites out, monster homes built on top of former shacks out, etc.
I think it's fair to say that if the starts figure is off, it's off on the low side, rather than the high side.
"Have the imbalances been wrung out of the system?"
ReplyDeleteI don't think theres any way to know for sure unless you could get specific usage statistics. There definitly is an issue in the rental market that seems to be brewing; this isn't localized to vancouver though. It would be interesting to compare these to say California.
Declan great find! I like how they felt the need to clarify hospitals :P
OK Jim, ill bite.
ReplyDeleteLets say you are right and BC hasnt been overbuilt. There was a shortage in the late 90s and as a result prices rose in the early 00s and more units were built.
After the mass building in 01-06 shouldnt price gains have slowed or even fallen as supply was coming back into line with demand?
Even if the price gains were justified in the early 00s then I think the only reason they continued was because people got caught up in real estate mania seeing all their friends making money hand over fist flipping condos.
Once people get the mentality that RE is a solid investment it is unlikely it will fall because everyone wants to own it. Eventually prices will get so high that the average family cannot afford anything close to what they can rent. Once the price gains stop investors will bail as the only way they make money on their "investment" is through rapid price gains.
With investors out of the game prices will fall back to a level where the average family can afford an average house again. This started to happen in 2008 and was only reversed by record low interest rates which caused an increase in affordability and would be buyers were told to "get in now before rates go up". This caused another rush to buy which surged prices. Some investors who didnt learn their lesson last time may pick up a few more places and spur further price gains.
Eventually through price gains or interest rate increases we will get back to where we were in 2008 and prices will head down to historically normal levels.
“I'm not sure why you'd have a regional mismatch in housing starts - developers aren't stupid, and Vancouver starts are a higher percentage of total BC starts than they used to be...”
ReplyDeleteI used M's link
http://www.bcstats.gov.bc.ca/data/dd/handout/HSTART.pdf
In 2001, housing starts were 17k in BC vs. 10k in Vancouver (60%). In 2008, housing starts were 34k for BC and 19k in Vancouver (55%). So, Vancouver's share of housing starts has fallen.
Here's the pattern, from 2000 to 2004, Vancouver's share was 57-61%. From 2005 to 2008, Vancouver's share fell to only 50-55%. It seems that at the beginning of the bull market, Vancouver has a larger share. At the end of the bull market, the rest of BC overbuild. Make sense?
Note that the housing starts in 2005-08 (35k) were on average much larger than 2000-04 (22k per year).
(Prepared by: BC Stats, March 2010)
I suppose that this is why Kelowna (pop. 160k) has a substantial glut of condo? Vancouver RE has recovered to peak levels. But, Kelowna is still down double digit?
I'm having trouble resolving the high level of starts indicated by CMHC shown here with M-'s calculations.
ReplyDelete“After the mass building in 01-06 shouldnt price gains have slowed or even fallen as supply was coming back into line with demand?... With investors out of the game prices will fall back to a level where the average family can afford an average house again.”
ReplyDeleteHere's a comment on micro-economic models of equilibrium pricing. Price changes as supply and demand curves change. A fundamental change in demand would change the curve and push price higher or lower if supply doesn't adjust acordingly.
Without a fundamental change in said curves, prices tend to stabilize. For example, a push to higher prices would result in fewer buyers and more sellers. An attempt to push prices lower would result in more buyers and fewer sellers. So, prices return to the equilibrium level.
In May 2008, Rennie commented that deliveries matched demand. So, 2008 should have been a stable year. It was up to June. However, prices fell suddenly after September 2008 when the Great Panic (reverse of bull bubble) began. But, 2009 was a banner sales year as pent-up demand hit the market.
Why should prices return to 2001 level? As along as there are buyers at current price levels, prices will stabilize. That is why the CAAMP report is important. At low levels of affordability, buyers trade down to a price point they can afford. With improved affordability, buyers trade up or refinance to lower rates. As interest rates rise, owners accelerate principal repayment. Make sense?
The key is supply. Without a flood of new supply, there is no fear. Existing owners can hold on as long as cash flow isn't negative. Buyers have no reason to hold out for a big price drop. There is no momentum for a big spiral down. Ireland has a home vacancy rate of 20%. Las Vegas has a rental vacancy rate of 16%. Vancouver is only 2%.
Yes, unemployment is at 8% and interest rates will rise. However, we have a similar situation in 2002-4 when unemployment was 8% and the vacancy rate was 2% too. Didn't stop Vancouver RE from rising as interest rates rose and the unemployment rate dropped to 4%.
Demand is complicated because of the uncertainty of macro-economic relationships. That's why I emphasize the importance of market intelligence. At various points in time, consider the net effect of various factors. How does it look going forward the next year? The key is the supply response. Are the landowners signaling that the party is over?
Hi Jesse, I'm not sure exactly which data you're referring to, but it could be because the CMHC report from your Mar 7 post was covering the Vancouver CMA, while my BC Stats data covered the entire province.
ReplyDeleteDeclan: thanks for pointing that out, it's nice to have clarity on the definition of a "start".
"Yes, unemployment is at 8% and interest rates will rise. However, we have a similar situation in 2002-4 when unemployment was 8% and the vacancy rate was 2% too."
ReplyDeleteIf you look at the StatCan unemployment data, going back to the start of 1976 (as far back as the series goes) the average unemployment rate for B.C. is 8.9%
In 2004, the unemployment rate was descending (at the end of 2004, unemployment was 5.6%)into a period of unusually low unemployment rates over 2005-2008.
People think that the current unemployment is abnormally high and will come back down - but based on the history since 1976 the current unemployment rate is well below the norm.
As for the vacancy rate, that record goes back to 1971, and the only times it has ever gone above 2 before was after a housing downturn 84-85, 91 & 98-99.
Meanwhile the U.S. statistics suggest that no major U.S. city has ever been below 3 for any length of time on the rental vacancy rate (typical values are around 10%) so I'm not sure we're comparing apples to apples there.
"In 2004, the unemployment rate was descending (at the end of 2004, unemployment was 5.6%)into a period of unusually low unemployment rates over 2005-2008."
ReplyDeleteYou're right! There's no guarantee that unemployment will fall to 4% again. We'll just have to wait and see.
I didn't do a good job explaining the equilibrium model to David. Just to restate the point. Home ownership jumped back to 65% and the housing shortfall was erased.
In order for that to happen. prices had to double. Investors had to be persuaded to sell their inventory. Land owners had to be cajoled to unload their land bank.
Those willing to sell at lower prices have already sold (2001-8). Now, the remaining owners will only sell at current or higher prices (all other things unchanged). If prices drop, the selling tapers off and there is a shortage. If prices rise, the selling accelerates. Thereby satisfying demand.
Price is the clearing mechanism for buyers and sellers. The transaction price determines who buys and who sells.
Similarly, demand responds to price changes. If prices are too high, there will be fewer migrants to the province. Young people will leave the city in search of cheaper prices and better value. The buying drops. Prices weaken.
So supply and demand are interrelated and act together to create equilibrium/stability (all other things unchanged). Extreme and sudden price changes (like the creation and bursting of bubbles) are the exception, not the norm. Almost all the time, people act rationally.
The point is that prices tend to stabilize at this level unless something fundamental changes. With investor participation back at 35%, the risk of a panic is lower. Was there panic and a spiral in 2008-9?
Long term demand factors (like demographics) change direction slowly. So, supply factors tends to be more volatile.
I didn't do a good job explaining the equilibrium model to David. Just to restate the point. Home ownership jumped back to 65% and the housing shortfall was erased.
ReplyDeleteHome ownership increase does not increase net demand for housing as every person who buys vacates a rental house or a previous house. I just don't think this is a good demand indicator.
A general comment is that you seem to forget that prices are made at the margins which means just the people currently buying and selling will make or break prices. So currently there are obviously enough people that can afford the current prices for the amount of houses available. This is only because of of super low interest rates. Although most people will only accept the currently high prices it won't matter because the people that have to sell will have to sell at whatever pice the market can offer.
You have to also subtract how many homes are lost to demolition, which the numbers don't do. I would guess that about 1% of inventory is lost each year, assuming that buildings last 100 years, which is probably conservative. It also lines up with cities that are losing population.
ReplyDeleteBased on that, I am guessing we lose 15 to 20,000 units per year. Our population growth requires roughly 30,000 additional units per year. So on net, I think the balanced number is somewhere around 45 to 50,000 housing starts per year.
But how many units are created with the new construction?
ReplyDeleteIn the past year alone, I have seen four older houses in my neighbourhood torn down. All were strictly SFH with no suites inside. All four new houses have suites with one having an additional guest house.
So, with that said, the housing units actually more than doubled with the new construction.
"would guess that about 1% of inventory is lost each year"
ReplyDeleteWe should also include major constructions that modify an existing property by adding more dwelling space but do not trigger either a demolition or a housing start. This is a significant effect in the near-burbs where houses are not decrepit enough to warrant tearing down but are a bit too small for the current residents.
"So currently there are obviously enough people that can afford the current prices for the amount of houses available. This is only because of of super low interest rates. Although most people will only accept the currently high prices it won't matter because the people that have to sell will have to sell at whatever pice the market can offer."
ReplyDeleteYou don't seem to be aware of the supply situation. In January, there were only 15k units (see Jesse's chart) under construction (trailing 12 months). That's half the rate of 2008. That's equal to 2004.
It means that there may be enough for the population growth in 2010. But, the picture is bleak for 2011. There were only 9k housing starts in 2009, about 6k short. Moreover, the condo bulk of those starts won't be delivered till summer 2011 because of delays during the Great Panic.
So, spring 2011 should be interesting as the economy continues its recovery. Let's see how prices will be set at the margin.
JimTan said: "In 1991-2001, investors were heavy buyers as many homeowners became renters. After 2001, investors took profit as prices doubled."
ReplyDeleteIs there any evidence for that claim?
Haven't speculators become holders of a GREATER percentage of properties as the bubble has expanded?
"Those willing to sell at lower prices have already sold (2001-8). Now, the remaining owners will only sell at current or higher prices (all other things unchanged). If prices drop, the selling tapers off and there is a shortage. If prices rise, the selling accelerates. Thereby satisfying demand."
ReplyDeleteIdealy this is how it would work, but it doesnt happen like this in real life. Just because you wont sell for less than you paid doesnt mean others wont. How many investors are still holding Cali houses that they bought in 2005? They will have to wait a damn long time to ever sell it for more than they paid.
If prices rise, it spurs buyers as they scramble to get in before they are "priced out forever". The rush to buy pushes prices higher. If prices fall the rush stops, which allows prices to fall further as there are less bidding wars and buyers can drive a hard bargin. This accentuates the drop.
It's all very emotional. Price rises cause further price rises and drops cause further drops. If it was as simple as you state we would not see such large price changes (up or down), but this is not the case.
Of course desire or necessity to sell is very much a situational thing. It's not like the people who will sell at some given price comprise a diminishing cohort which can be exhausted, as the claim "Those willing to sell at lower prices have already sold (2001-8)" assumes.
ReplyDeletePeople die, get sick, get divorced, move, lose jobs or have other financial crises all the time. Builders keep building because that's the way they make a living. In other words there are always new entrants to the "must sell" cohort and they must accept what buyers are willing to pay.
Talk about obvious fallacies.
"Is there any evidence for that claim?
ReplyDeleteHaven't speculators become holders of a GREATER percentage of properties as the bubble has expanded?"
Powerful analytical technique. There is a bubble. So, the investor ownership rate must have increased!!!!
Fact (from CMHC): Vancouver home ownership rate 61% (2001) and 65.1% (2006). Blows vrea's bubble theory to pieces. It's not about the investors!
http://cmhc.ca/en/corp/about/cahoob/data/data_003.cfm
Here's my mistake. My 1991-2001-2006 conclusion is wrong because I was quoting from the Vancouver Sun. I finally checked the original Stats Canada document and the paragraph does not appear in it.
http://www2.canada.com/vancouversun/news/story.html?id=26d2d130-7190-4039-8f48-750c780f3b04&p=2
“Home ownership highest since 1971
debt soars; Canadians stretching loans over longer time, StatsCan says
Gillian Shaw
Vancouver Sun
Thursday, June 05, 2008
The dream of home ownership is a reality for more Canadians than in a generation, but so is the increasingly sober reality of soaring debt levels...
In Vancouver, 65 per cent of people own their own home, a 15-per-cent increase in the five years between the 2001 and 2006 census findings...”
No excuses! I hadn't double check the quote I was using. My apologies.
Glaringly obvious statement of the day:
ReplyDeleteIt's all very emotional. Price rises cause further price rises and drops cause further drops. If it was as simple as you state we would not see such large price changes (up or down), but this is not the case.
Clearly the emotional factor is nearly impossible to quantify but plays a huge role in price changes.
JimTan: Regarding increase in ownership rates from 61% to 65% from 2001 - 2006:
ReplyDeleteOkay, good point, so speculator share of the market can't have risen.
However, I'd add:
1. The numbers don't mean there is no bubble (owners blow up bubbles as well as speculators do)
2. There is 'speculation' in EVERY Vancouver RE purchase, in that almost every single buyer expects prices to rise. So the owners are also 'speculators'.
As I've asked elsewhere: How many current or recent buyers would have purchased at these price levels if they knew there would be no real appreciation in prices for 5 or 10 years?
I'd add a further thought:
ReplyDelete3. Isn't buying a home that is only affordable because of its secondary suite identical to buying a home for oneself AND a separate speculative property? In both cases the only reason for owning the extra property is that you believe it's price will increase (it certainly isn't for positive cash flow, we've established that).
Thus I'd argue that there is an immense amount of 'hidden speculation' in this market.
"How many current or recent buyers would have purchased at these price levels if they knew there would be no real appreciation in prices for 5 or 10 years?"
ReplyDeletevreaa: for owner-occupiers, I would bet close to 100% would still buy. The financial calculations are, from what I've seen, are not much more than rent-vs-buy at current interest rates. Little to no risk analysis comes into the decision; there would be significant pressure on current prices if it did.
The major "speculation" in recent buyers is on nothing bad ever happening. I wonder how many are planning far enough in advance to be true speculators from an investment POV. Listening to some of them, even permanently lower prices are of little concern because they can afford the monthly payments regardless.
I bet a few would think twice if convinced prices would drop in value by 20-30% in 3-5 years instead of staying flat. But only because they're greedy buggers.
"Clearly the emotional factor is nearly impossible to quantify but plays a huge role in price changes."
ReplyDeleteIt's not just about emotions. Look at the Sauders chart on inter-provincial migration.
http://cuer.sauder.ubc.ca/cma/index.html#
The province went through a bad time when net inbound migration (1993-4 5k-10k per quarter) became a net outflow during 1998-2001. The physical movement of people reflected the perception and reality that the province was on the skids.
But, the situation reversed itself after 2002. The early bulls were dead right. Employment fell to 4%, inter-provincial immigration recovered, and housing prices rose till 2007. There was euphoria. But, it was based on reality.
Bubbles always start with something real. It's even been posted on this blog that we underbuilt in the 90's and the first stage of the upswing was catching up to that. Now we're just way way beyond that. When you've got the highest prices at the lowest interest rates ever with dodgy employment it's just not going to end well. And you can't be at 9.3 times median income to median house price without a lot of people being right on the bleeding edge of variable interest rates and amortization. Yup some people might be taking the opportunity to pay down their debt but most likely not many of them live in Vancouver.
ReplyDeleteListening to some of them, even permanently lower prices are of little concern because they can afford the monthly payments regardless.
ReplyDeleteAha, but this means that the buyers are speculating on interest rates remaining at their present levels long term. Which is impossible barring a long-term deflationary recession.
The only buyers who can't be said to be speculating today are those paying cash with indifference to falling prices. Which I think includes just about nobody.
JimTan: "But, the situation reversed itself after 2002. The early bulls were dead right. Employment fell to 4%, inter-provincial immigration recovered, and housing prices rose till 2007. There was euphoria. But, it was based on reality."
ReplyDeleteInteresting-- we had good reasons for having such low unemployment during the last decade-- recovery after the tech boom, massive forestry industry improvement to sell to the US' housing construction bubble, massive public infrastructure projects to prepare for the Olympics, and a massive amount of residential construction. All good reasons for people to be moving here.
Now that the Olympic construction's over, I wonder if we'll see a reversal in provincial migration-- our forestry industry's going to be in the dumps for a few more years, Olympic construction's over, housing "under construction" has been plummeting, and the economy in general stinks right now for anyone looking for work; in the group of my 6 closest friends, two are looking for work in other provinces and one has been told by his boss that he's going to be let go in the next few weeks, when the boss shuts the company down due to no work.