Here are all the caveats. All prices are adjusted for inflation, using Q1 2010 prices. The graph looks pretty much the same with a log scale or if you put the y-axis to zero. This is for Vancouver West condos--not because they are representative of the broader market but because this is ground zero for the bubble.
How far down to you expect this to go? How long? Why?
I think it will go back to around 350K. Because at that price, you get in the neighbourhood of rent-own comparability, depending on interest rates of course.
ReplyDeleteThanks VHB.
ReplyDelete50% drop seems plausible within 5 years.
Probably a quick drop of 30%+ and then a long tough slog down to rental equivalence or lower.
It really depends on the psychology of the buyers and sellers once the reality of the price drops set in. The idea that real estate ownership is the 'road to riches' in our society will change and only then will it be a GREAT time to buy. This may take a generation or more.
The bottom will be in when professional REITs are buying residential properties without government incentives.
ReplyDeleteI'll go with -40% by the end of 2012. I agree with what VHB has stated before that SFHs will lag by some years.
I agree with moh about the quick 30% drop, especially with rates starting to shoot up.
ReplyDeleteThe bottom will be in when all those sneaky realtors who are posing as innocent bystanders o "realestatetalks" have lost their horns.
If we get mortgage rates over 8% at any time I think that will put an end to the illusions in short order, and we will be at rent equivalence or lower.
ReplyDeleteBarring that I also think think we will see a quick drop for a couple years and then a long slog as the pent-up supply (aka underutilized houses) gets sold off by the boomers - this will affect all sectors.
The other factor is that I think condo supply will keep outpacing household growth, as the economy has become so addicted to it there is no option but to keep building. Look for the municipalities to pull out all stops to keep it going.
I can't wait to pick up a home for a 40% discount. I think it will take 2-3 years for the average to be down 30% or so but I will be looking for outliers :)
ReplyDeleteThe graph is still spectacular! Thanks for updating it.
ReplyDeletePaul are you moving back to N. Van from PEI?
ReplyDeleteLet's be realistic guys, prices are NOT falling 30% or 50% in nominal terms. In real terms, maybe.... so that begs the question, how out of control do you all think inflation is going to get?
ReplyDeletePaul,
ReplyDeleteIts not really a 40% discount since prices are about 40% higher than they should be. Its just getting a house for what it should cost :)
Anyway, I think it all depends on interest rates. Rates are by far the biggest factor in affordability, and you have about as good of a chance predicting those as you do predicting an earthquake.
I will tentatively place my bet at lower than 350K, because of these factors:
ReplyDelete1) borrowing from the future,
2) a *lot* of new condo/attached supply,
3) a lot of people in the market who will be suffering serious loss of wealth (including intergenerational)
4) psychology based on the bust.
Plus, if I'm right about actual supply, rents might also take a hit and move the rent-own target.
'Course, I'm spitballing. But I do think it was crazy enough here that the crash may look more like Miami than seems possible from the top of the bubble.
Alright now, comparing Vancouver to Miami is going way overboard. Vancouver in 5 years is up about 100%, Miami in the 5 years before the crash was up roughly 200%.. Don't be unrealistic people. Just as bulls can get stupid on the way up, bears can get very stupid on the way down.
ReplyDeleteVancouver in 5 years is up about 100%, Miami in the 5 years before the crash was up roughly 200%.
ReplyDeleteYou are moving the goal posts. You have to compare from the start of the bubble in both cities, e.g. circa 2001, How much is Vancouver up from then?
how out of control do you all think inflation is going to get?
ReplyDeleteI don't think inflation is going to get out of control, because interest rates would adjust upward (as we are already seeing), and given how indebted people are, they would have no spending power. If people don't have spending power you can't sustain price inflation.
I get the impression you think inflation is going to rescue nominal house prices. Well it isn't. Whether or not we see increased consumer price inflation, wages aren't going anywhere, and that's what counts.
@tradingedge
ReplyDeleteThis is one of those affordability problems where percentage misleads. I'll accept your "5 years before the crash" suggestion, but I find the *absolute* rise with respect to house prices rather more compelling than the percentage change, considering that "what FTB can afford" is also part of this scenario, as is the baseline price at the beginning of the time period.
Miami's total absolute rise in detached cost wasn't that great. The total for Miami-Dade all tiers and neighbourhoods in is about 350K according to The Bubble Blog - but I wasn't seeing the numbers so I checked Zillow's median sales price and am seeing detached up only by about 175K, in each seperated category and neighbourhood. (Of course, changing the mix of what's selling may account for the difference.) Plus, miami started with a Case-Shiller of 87, 5 years before their crash.
In comparison, Vancouver gained 250K in detached from the "bottom" in 2008. In Vancouver West, the rise between 2005 and today is in the neighbourhood of 700K.
So I don't think at all that Miami had it worse than us. What I don't know how to compare is the construction over the time of the bubble. We've both done a lot of building is the best I can say.
But since a smaller percentage on a larger number can indeed lead to a larger absolute change than a large percentage on a smaller number, I think comparisons in percentages are misleading.
Also, our newly minted homeowners will be dealing with this problem of percentages in a personal and butt kicking way! A super-sized mortgage makes for an unreasonable payment pretty darn quick as interest rates float upward. You can still be left bereft even if, in percentage terms, your income growth is outpacing your mortgage rate growth.
Ah, there's the discrepancy on Zillow - the higher end neighbourhoods did increase more. The top I've found seems to be a 500K differential.
ReplyDeleteThe bottom was put in last year. The peak is still being tested.
ReplyDelete20% is the best/worst case correction IMO.
Interest rates are going to rise more slowly than most think.
"Interest rates are going to rise more slowly than most think."
ReplyDelete... more slowly than most hope LOL! I tend to agree rates aren't going to levels seen in 2000 any time soon. Unemployment is high and wage inflation is minimal.
Payments are much more sensitive to rate rises from current levels. A couple 100bps rise is still well below historical levels but would be a significant drain on disposable income.
Here's an interesting thread at RET forum. Bank of Canada is right when they say that there is no bubble yet.
ReplyDeleteHow much of a bubble can there be in Vancouver if there is none in Canada?
http://www.realestatetalks.com/viewtopic.php?f=8&t=39582&p=175164#p175164
Wow, that makes about as much sense as asking: How can there be a bubble in Vancouver if there is none in Windsor, Ont.
ReplyDeleteWhatever you want to call it, it's starting to fizzle.
I am sure that there is no bubble in Windsor. In fact, Windsor RE could even fall!
ReplyDelete"WINDSOR, Ont. — Windsor's unemployment rate dropped marginally from 12.4 per cent in February to 12.2 per cent last month but remains the highest in the country, according to figures released Friday by Statistics Canada."
Not sure what yuor point is JT, but does this remotely have anything to do with affordability in Vancouver or the price of rice in China?
ReplyDeleteI'd like to see Ratio of Vancouver West housing price to average income and compare that to San Francisco or San Diego (which I think are comparable in geographic limitations)
ReplyDelete