Friday, March 30, 2012

Vancouver Teranet HPI Trendline Analysis

The Teranet House Price Index provides a reasonable indication of market movements by tracking same property sales pairs, a technique first used by Case and Shiller formulating an index for US residential housing markets. I have plotted the Teranet HPI for Vancouver below and included four appreciation scenarios as follows:
  • "New Normal" - prices of the last 8 years are indicative of future gains. This is about 9% per annum.
  • "Trendline" - Appreciation follows a trendline based on data from 1990 to current (5.27% pa)
  • "Old Normal" - prices from about 2004 are considered extraneous and past trends from 1990 to 2003 are used to determine long-term growth trajectory. (3.0% pa based on trendline 1990-2004 inclusive)
  • "Old Normal Bottom" - same as "Old Normal" but shifting the trend to be based on price troughs and not middle. This would be the "bearish" scenario.

The results can be summarised, for what they are worth, as follows, assuming one purchases a $500,000 property at today's prices (170), looking at scenarios in 2015 and 2020 where prices re-align with the respective trendlines
  • "New Normal" price will appreciate to $670,000 (10.6% CAGR) in 2015 and $1,030,000 (9.5%) in 2020
  • "Trendline" price will appreciate to $508,000 (0.9%) in 2015 and $655,000 (3.6%) in 2020
  • "Old Normal" price will depreciate to $341,000 (-11.7%) in 2015 and $394,000 (-2.8%) in 2020
  • "Old Normal Bottom" price will depreciate to $302,000 (-15.0%) in 2015 and $350,000 (-4.2%) in 2020
If one believes the long-term appreciation in Vancouver real estate looking at the trendline from the past 20 years, there should be no rush to buy in the next few years. If one believes the last decade was one that mirrored experience in the US, where prices have reverted in real terms to those of the mid-1990s, this is not what I would characterise as a good time for purchasing residential real estate in Vancouver.

Monday, March 26, 2012

BC Population Growth to Q4 2011

BC Stats released its quarterly population estimates and BC continues sluggish growth through Q4 2011.

Population growth consists of the following bulk components:
  • Natural increase (births - deaths)
  • Net interprovincial migration
  • Net international migration (including permanent and non-permanent residents)
So let's look at how recent quarters look in a historical context (there is seasonality so quarters are best compared to each other):

The most recent Q4-2011 data indicate continued negative net interprovincial migration and dropping net international migration from 2010.

Below are graphs of NPR migration and annual population growth up to 2011. The drop off in 2010 is most likely due to changes in federal worker visa requirements, a one-time change. 2011 saw renewed NPR in-migration and gives some guidance as to what types of dwellings will need to be available to house such residents.
If we look back to CMHC housing data I highlighted here, there unsurprisingly appears to be some correlation between housing starts/completions and population growth. But of course the adage that correlation does not mean causality applies here; nonetheless we can look for cross-correlation and see if one leads the other. In other words, does rising population growth beget housing, or does simply building more houses bring in more people? Some evidence is below:
This graph states that the peak correlation occurs when completions are shifted backwards by about a year -- housing completions lag population growth; conversely, housing starts lead population growth. But does that mean "build it and they will come"? Yes, but perhaps not based on the intent of the original author. Starts leading population growth indicate the initial ground breaking will start drawing residents from other locales but, ultimately, once dwellings are built, that growth is to some degree ephemeral. Something to keep in mind.

Weak population growth has continued through 2011, including a drop off in international immigration, most notably in the investor and skilled worker classes. These recent population data are what I would characterise as a continuing bearish indicator for BC real estate, especially for owner-occupier dwelling formation.

Tuesday, March 20, 2012

February 2012 CMHC Data - Vancouver CMA

Here are mohican/VHB's charts for housing starts, housing completions, and under construction 
The last few months have seen a continued dearth of completions and an increasing amount of starts and under construction volume. Starts will typically lead completions by about 12 months so we should expect to see increased completion volumes heading into the second quarters of 2012. Given that completions are still low compared to pre-recession levels I expect this to provide some constraints on new supply for the first half of 2012. Completions will likely be increasing through the remainder of 2012. 

Here is a breakdown of the new persons per bedroom start and completion, assuming 4 bedrooms per detached and 1.6 bedrooms per multi. The higher the number the more population growth there is per start/completion and this would tend to lead to higher unit absorption. In contrast a lower value would mean less absorption. As we can see we are currently trending closer to the lower bound. But also notice how violently these measures can move, a chilling indication of how vulnerable BC's economy is to a slowdown in housing construction activity and population growth.
Below we can see the marked increase in multi-unit construction compared to detached construction and its effect on the change in housing mix over the past decade.
As Vancouver grows, not surprisingly, the mix of housing is switching to multifamily units.

Monday, March 19, 2012


I've been calling for changes in OSFI guidelines for close to a year now. This is no surprise, and it should not be a surprise if this is the type of tightening of credit the Bank of Canada has been lobbying.

OSFI is issuing for comment Draft Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures. Guideline B-20 sets out OSFI’s expectations for prudent residential mortgage underwriting, and is applicable to all federally-regulated financial institutions that are engaged in residential mortgage underwriting, the purchase of residential mortgage loan assets and, where appropriate, the issuance of mortgage insurance – in Canada and internationally. Interested parties may submit comments to OSFI regarding draft Guideline B-20 by May 1, 2012 through their industry associations or directly to OSFI. Comments concerning the draft Guideline should be sent by e mail to

Things just got interesting.

Saturday, March 17, 2012

Rent or Buy, or Rent and Buy

Another rent vs buy comparison made the CBC website again.

The premise behind the standard buy vs rent calculation, as this one, is comparing two scenarios: buying now and holding for (say) 25 years, or renting now and renting for the same 25 years. Chop off the monthly outlay difference between the two (and putting aside the strangeness of any situation where buying a condo is more expensive than renting, but that's another post altogether!), invest the difference at a "conservative" 5%, extrapolate past appreciation (condos have been appreciating at 5% p.a.), assume current mortgage rates remain for the duration of the loan, and do a comparison. No problem.

The problem, notwithstanding the brazenness of some of the above assumptions, is that there is an embedded out-of-the-money option built into the renter scenario not considered in any of these calculations. That is, a renter need not rent for 25 years; instead he may rent for 5 years and, should prices drop, has the option of buying at lower prices. While lower prices are not an absolute certainty, the option still has value, especially if one calculates a high probability of price drops. (Of course these days landlords are in effect paying renters to hold this option, a bit bizarre when thought of in those terms.)

Wednesday, March 07, 2012

Greater Vancouver Market Snapshot February 2012

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to February 2012.

Commentary: February sales volumes are low compared to most years of the last decade. Total inventory was not growing as fast as in January, likely due to advanced listings being "borrowed" from February to hit the markets before Chinese New Year (my speculation).

Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation, and below that the scatter plot showing the raw actual data:

What this shows is the change in prices in a month from 6 months ago based on actual data and “predicting” the price based on months of inventory from that month based on linear regression of half-over-half price change to months of inventory (with 3 month moving average). With changes in the benchmark price I may adjust these graphs using the new figures in the months ahead.

February did see some enclaves of price strength, most notably in lower-priced detached properties, and some noted weakness in higher-priced newer homes and most of Richmond, the latter of which one can only opine had previous buyers looking at economics reflected in funny mirrors. March is usually the onset of the peak selling season and sales volumes will likely increase, as will inventory through the rest of the first half of the year. While tracking and comparing year-over-year data may be interesting it likely won't portend much for this year, at least initially; any retracing of conditions preceding the severe housing recession starting in about April of 2008 and lasting for about a year has little predictive power on future price movements. Now if months of inventory climbs over 10, that would be worrisome for those hoping to maintain their current equity positions in Vancouver real estate.

Thursday, March 01, 2012

Teranet House Price Index - February 2012


For a second consecutive month, Canadian home prices in December were down 0.2% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. The two monthly retreats follow two months in which prices had been flat from the month before. December prices were down in five of the 11 metropolitan markets surveyed: 0.8% in Victoria, 0.5% in Ottawa-Gatineau and Montreal and 0.3% in Toronto and Vancouver. For Ottawa-Gatineau, Vancouver and Victoria it was the third consecutive decline and for Toronto it was the second. Prices in Edmonton were flat. Prices were up 0.3% in Quebec City, 0.6% in Winnipeg, 0.7% in Hamilton and Calgary and 0.9% in Halifax. In Calgary the December rise ended a run of three monthly declines.

Teranet – National Bank National Composite House Price Index™

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The 12-month gain of the composite index in December was 6.8%. The slight deceleration from 7.1% in November was due to the end of a short run of monthly declines in November 2010. The December 12-month change varied widely from market to market. It was 9.9% in Toronto, 8.7% in Winnipeg, 8.2% in Vancouver, 7.7% in Hamilton and 7.2% in Quebec City - five markets in which the 12-month rise exceeded that of the composite index. It was 6.2% in Montreal and 4.6% in Ottawa-Gatineau. There were much smaller 12-month gains of 1.6% in Halifax, 1.0% in Edmonton, 0.9% in Calgary and 0.3% in Victoria. December was the first month since September 2010 in which all 11 metropolitan markets showed prices up from 12 months earlier.

For January 2012, the Canadian Real Estate Association reports seasonally adjusted ratios of new listings to sales that show market conditions generally balanced in the country as a whole. The exceptions were tight markets in Toronto, Hamilton, Winnipeg and (suddenly) Halifax, and buyer's markets in Vancouver and Victoria.

Teranet – National Bank House Price Index™

The historical data of the Teranet – National Bank House Price Index™ is available at
Metropolitan areaIndex level
% change m/m% change y/y
Calgary154.880.7 %0.9 %
Edmonton163.640.0 %1.0 %
Halifax132.480.9 %1.6 %
Hamilton131.280.7 %7.7 %
Montreal143.69-0.5 %6.2 %
Ottawa137.04-0.5 %4.6 %
Quebec166.180.3 %7.2 %
Toronto138.15-0.3 %9.9 %
Vancouver169.29-0.3 %8.2 %
Victoria139.51-0.8 %0.3 %
Winnipeg180.280.6 %8.7 %
National Composite 6147.82-0.2 %7.4 %
National Composite 11148.87-0.2 %6.8 %
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.
Marc Pinsonneault
Senior Economist
Economy & Strategy Group
National Bank
Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report.
1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.