tag:blogger.com,1999:blog-31427364.post2459939991356238669..comments2024-03-26T03:52:23.395-07:00Comments on Housing Analysis: Greater Vancouver - Inflation Adjusted House Price Indexmohicanhttp://www.blogger.com/profile/06094213357140749289noreply@blogger.comBlogger44125tag:blogger.com,1999:blog-31427364.post-20746523684493946182022-03-11T07:10:28.866-08:002022-03-11T07:10:28.866-08:00Nice Post
Check Me Out
Mortgage consultantNice Post<br />Check Me Out<br /><a href="https://gurbirsandhu.ca/best-consultant-in-surrey/" rel="nofollow">Mortgage consultant</a><br />Gurbir Sandhuhttps://www.blogger.com/profile/12974343620136442907noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-55539004453472792952009-07-06T20:09:05.481-07:002009-07-06T20:09:05.481-07:00“So if we get 1990s' level unemployment (>9...“So if we get 1990s' level unemployment (>9%) with same 2009Q1 5-Y mortgage rate (5%), we should see prices deflate back to 2003 levels... according to the model.”<br /><br />Michael,<br /><br />Let's bookmark this forecast. Interesting to see whether it works out by December.JimTanhttps://www.blogger.com/profile/13480972517925246528noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-80112043466285835772009-07-06T14:50:12.093-07:002009-07-06T14:50:12.093-07:00Looks good Michael.
Would you like to do a guest ...Looks good Michael.<br /><br />Would you like to do a guest post explaining your model and post the three scenarios?<br /><br />Just email langley_financial_planning at yahoo dot ca with your google account and I can invite you to do a post.mohicanhttps://www.blogger.com/profile/06094213357140749289noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-48976222266610572862009-07-06T14:39:03.032-07:002009-07-06T14:39:03.032-07:00So if we get 1990s' level unemployment (>9%...So if we get 1990s' level unemployment (>9%) with same 2009Q1 5-Y mortgage rate (5%), we should see prices deflate back to 2003 levels... according to the model.mikehttps://www.blogger.com/profile/00118603546135838855noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-85331453896597634482009-07-06T14:36:43.342-07:002009-07-06T14:36:43.342-07:00This comment has been removed by the author.mikehttps://www.blogger.com/profile/00118603546135838855noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-46628325843438319792009-07-06T14:31:31.000-07:002009-07-06T14:31:31.000-07:00"If I read it correctly, your model predicts ...<i>"If I read it correctly, your model predicts a ~40% drop in RE prices by 2011, assuming ~10% unemployment and ~7% 5-year mortgage rates?"</i><br /><br />Not quite..... Prices are negatively correlated to the 5-year rate, so that forecast has the 5-year rate (based on BoC's average of all 5-year mortgages) going to 2.5%, and unemployment going to 9.1% by end of 2011. eg. I am already calling for continued deflation with higher unemployment.<br /><br />As I said before:<br />1) 1% <b>increase</b> in the unemployment rate roughly <b>decreases</b> housing prices by 10%<br />2) 1% <b>increase</b> in 5-year mortage rate, <b>decreases</b> housing prices by 8%<br />3) every 1000 interprovincial migrants into BC causes housing prices to go up by 1.8%, and<br />4) every 1000 international migrants causes housing prices to increase by 1.7%<br />5) Unemployment is the most significant contributor (pvalue=2.8E-19), then 5-year mortgage rate (5.9E-13), Provincial Migration (8.0E-7) and least significant is International migration (1.6E-2).<br /><br /><br />3 more cases (I threw in stagflation into the mix too):<br />http://docs.google.com/Presentation?id=dghbwhpz_87rrf55q5h<br /><br /><b>NOTES: <br />a) I changed the Y-axis to normal prices<br />b) Unemployment was 6.1% in 2009Q1<br />c) BoC's average 5-Y mortgage rate was 5% in 2009Q1</b>mikehttps://www.blogger.com/profile/00118603546135838855noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-36107622360477895092009-07-04T16:35:24.409-07:002009-07-04T16:35:24.409-07:00Nice model, Michael.
It would be nice to have acc...Nice model, Michael.<br /><br />It would be nice to have access (even if only read-only) to the spreadsheet that produced the graph.<br />Also, it would be nice if the left hand scale were normalized to the Vancouver benchmark price, so people could more easily envision what may develop.<br /><br />If I read it correctly, your model predicts a ~40% drop in RE prices by 2011, assuming ~10% unemployment and ~7% 5-year mortgage rates?<br /><br />How volatile is your model? What would happen in your model if the unemployment situation unfolded that same way, but mortgage rates remained low due to continuing deflation, say ~5% for a 5-year rate?Robertohttps://www.blogger.com/profile/03338787957419791384noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-80349421442647208682009-07-04T16:34:29.155-07:002009-07-04T16:34:29.155-07:00This comment has been removed by the author.Robertohttps://www.blogger.com/profile/03338787957419791384noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-51677119947268071502009-07-04T16:29:07.309-07:002009-07-04T16:29:07.309-07:00Those of us who do have to make investment decisio...<i>Those of us who do have to make investment decision operate within an actionable time horizon.</i><br /><br />What exactly is an 'actionable time horizon' for you? <br /><br />Are you saying that if you're looking at buying real estate, which almost always comes with borrowing money over a very long time, say, 20 years or more, you only want to know what is going to happen in the next 2 or 3 years?<br /><br />Really?Robertohttps://www.blogger.com/profile/03338787957419791384noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-35928204995181434992009-07-02T13:12:00.126-07:002009-07-02T13:12:00.126-07:00Jim,
I think a broad time horizon is completly re...Jim,<br /><br />I think a broad time horizon is completly reasonable for the current situation when it comes to real estate. Basically I believe at some point interest rates will rise and prices will drop. When this happens is not really that important to me.<br /><br />For the time being I can rent a place that I like but could not afford to buy a simmilar place at my current salary. As long as I continue working and saving more money for a down payment then I am not really that concerned when a place I like becomes affordable, just that it happens. <br /><br />Nero was saying that lower home prices will result if we have inflation OR deflation. I would agree that all it is going to take is time for a place I like to become affordable for me, how much time is very tough to tell though.<br /><br />I realise that not everyone is in my situation and need to make a decision soon due to a new family or something like that, but as far as I am concerned, I can wait years for prices to drop, so exact times are not that important to me.Unknownhttps://www.blogger.com/profile/16361217381016612518noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-63269624099790398262009-07-02T02:20:39.821-07:002009-07-02T02:20:39.821-07:00“I am pretty sure when nero said "There are t...“I am pretty sure when nero said "There are two things that are going to happen in the next 5-10 years, Inflation or Deflation." he meant there are 2 things that could happen, since they both cant really happen at the same time.”<br /><br />David,<br /><br />Why don't you let Nero speak for himself. He knows what he meant.<br /><br />Obviously, both deflation and inflation can't happen at the same time. The point I am making is that Nero is not working from a model. He is merely expressing an opinion based on ideology. Things have to go very wrong!<br /><br />He's giving himself a five (or ten) year safety margin. Eventually, he will be right?<br /><br />Ideology/bias is worthless for decision making in real-world markets. That's because critical decisions have yet to be made. The future is still unformed. <br /><br />Those of us who do have to make investment decision operate within an actionable time horizon. That is, we reach conclusions that must be useful within a reasonable period of time. Those conclusions must be specific and finite. <br /><br />Nero has to be specific (inflation or deflation) if he has a time horizon.JimTanhttps://www.blogger.com/profile/13480972517925246528noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-44946398059312798452009-07-01T22:12:28.970-07:002009-07-01T22:12:28.970-07:00Jim,
I am pretty sure when nero said "There ...Jim,<br /><br />I am pretty sure when nero said "There are two things that are going to happen in the next 5-10 years, Inflation or Deflation." he meant there are 2 things that could happen, since they both cant really happen at the same time. <br /><br />I also think it is a pretty fair assumption. Rates cant be kept this low for long periods of time without inflation taking place at some time. But deflation is also possible because if no one wants or can get the cheap credit then we could have deflation. <br /><br />You must agree that things cannot keep going the way they are right now for a long period of time. Interest rates cant stay this low forever because eventually this will cause inflation and the BOC will raise interest rates to combat this. When interest rates go up housing will become less affordable and prices will fall. The only way for this to not happen is if interest rates creep VERY slowly up for the next 5ish years. Even if they creep 0.25% a year someone with a 5 year mortgage will have a 1.25% interest rate change and see payments increase about $200 a month. That is manageable, but 5 year rates are already up almost 1% from their lows a couple months ago.<br /><br />Most of these things are assumptions, but they are assumptions based on history. Dont go writing off someone's opinion by saying they must have a crystal ball. <br /><br />Does this mean you don't look at stats and history in order to try to make predictions about the future? (real estate only goes up in the long term is a phrase constantly spouted by realtors).<br /><br />Just out of curiosity, what do you think will happen with interest rates and prices in the next few years based on some data? You seem to put down other peoples ideas but dont put fourth any of your own.Unknownhttps://www.blogger.com/profile/16361217381016612518noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-65735492678936224272009-07-01T12:46:54.582-07:002009-07-01T12:46:54.582-07:00"Generally the market self-regulates by raisi...<i>"Generally the market self-regulates by raising rates in booming times due to increased competition for a finite pool of capital. If you think inflation was high it's strange that AAA bond yields weren't into the double digits earlier in the decade."</i><br /><br />This is true to a degree, but I think the market is still heavily influence by the headline CPI numbers. In the US, CPI was altered in the Clinton's year, making inflation more favorable. Also, how can you remove energy and food? Just because they are volatile doesn't mean you should not be included. Finally, there's probably a lot of cheap money created in the last decade flooding the bond market (and all other asset markets), due to financial innovations (securitization of mortgages, more leverage from banks and hedge funds etc), the Yen carry trade, and lastly China (and other Asian creditor nations) needing to keep their "low" currency pegs against the USD. Currency markets made sure all this money went everywhere including Canada..... And most of this going away, if it hasn't already. The bond market knows this, but yet rates are low. Why? Like you said it, risky assets are deflating. The money is flowing into save havens like long government bonds, etc. I think we are in a period of dis-inflation (or right out deflation) especially compared to the last couple of decades.<br /><br /><i>"I use the analogy of an economy too heavily dependent upon construction is like trying to cool your house by opening the refrigerator door."</i><br /><br />I agree, going forward I think Vancouver's economy is sc***wed. I don't foresee any other sector to pick up the slack. Maybe just more of the same medicine that got all of us into this mess, more stimulus. Let's kick the can another time? At some point, demand for stuff will recover, but our taxes will have gone up a lot....mikehttps://www.blogger.com/profile/00118603546135838855noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-68865466388254575912009-06-30T22:08:26.032-07:002009-06-30T22:08:26.032-07:00"you have to agree that it is a major factor ...<i>"you have to agree that it is a major factor for economic activity, as it is used by governments to 'modulate' economic activity."</i><br /><br />The Bank of Canada has control over some rates but the stuff at the long end of the curve is pretty much up to market forces. Generally the market self-regulates by raising rates in booming times due to increased competition for a finite pool of capital. If you think inflation was high it's strange that AAA bond yields weren't into the double digits earlier in the decade.<br /><br />The US had massive asset price inflation and now has massive asset price deflation. Bond markets trudged along through this mess. I would infer from that the bond market doesn't put all its stock in asset price changes when determining yields, in which inflation expectations are embedded.<br /><br /><i>"Vancouver is different, as we all know, because I bet that a large portion of our economic activity is related to RE."</i><br /><br />Vancouver is different because it is not something else. The high level of real estate and construction employment is not in and of itself reason for a viable economy. I use the analogy of an economy too heavily dependent upon construction is like trying to cool your house by opening the refrigerator door.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-13440445729490839582009-06-30T21:50:11.670-07:002009-06-30T21:50:11.670-07:00"we all know that the CPI is an unreliable in...<i>"we all know that the CPI is an unreliable indicator of inflation."</i><br /><br />I think you will find that renters have found the CPI to be a very good measure of inflation.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-47105678987014311272009-06-30T21:31:32.236-07:002009-06-30T21:31:32.236-07:00"There are two things that are going to happe..."There are two things that are going to happen in the next 5-10 years, Inflation or Deflation."<br /><br />Wow! Nero, you must have a crystal ball. I wouldn't dare forecast 5 years ahead.<br /><br />BTW, make up your mind. Deflation or inflation?JimTanhttps://www.blogger.com/profile/13480972517925246528noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-49530506241001970282009-06-30T09:28:08.719-07:002009-06-30T09:28:08.719-07:00Nero -
Now that's a Wall of Worry !
Cheers, ...Nero - <br />Now that's a Wall of Worry !<br /><br />Cheers, VCvan_coffeehttps://www.blogger.com/profile/14738166821362446247noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-22506205888414581752009-06-30T08:54:53.677-07:002009-06-30T08:54:53.677-07:00I find it interesting that people can believe RE p...I find it interesting that people can believe RE prices have reached a trough and will recover from here.<br /><br />This is as good as it's going to get folks. <br /><br />There are two things that are going to happen in the next 5-10 years, Inflation or Deflation.<br /><br />If Inflation - interest rates will be jacked up so high you'd think you were wearing bell bottoms again. RE prices will drop and defaults will rise.<br /><br />If Deflation - asset prices will drop. Consumers will save, and spend less. Money gets sucked out of the system. <br /><br />There's no rocket science here folks. The party that went on in the last 25+ years, was a period of record wealth creation, due to dropping interest rates, greater debt (credit), globalization (cheaper goods), political stability - all that is over. <br /><br />There is literally a tsunami of bad economic data, demographic data, fiscal data, and environmental data that show the next 10+ years (if we are lucky, if not, will be longer) will be absolutely no picnic.<br /><br />People who are looking months ahead are missing the forest for the trees. Take a look at history. Every generation or so we have a huge financial shift. It happened in the 1930s, 1970s, and today. Paradigm shifts do happen. <br /><br />On the local front:<br />I recently moved to Surrey and all I see are new townhouse and detached developments. They are nuts. <br /><br />The reality is that anyone buying real estate (or buying and holding any other asset for that matter) is going to face much less ROI than they think (and I'm talking over the next 10+ years).Naveenhttps://www.blogger.com/profile/08076474752207960359noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-35768265421854001632009-06-29T23:35:53.694-07:002009-06-29T23:35:53.694-07:00"Jimtan: While prices did overshoot starting ..."Jimtan: While prices did overshoot starting in 2007, the model does not predict the bounce off 2006 prices, as the model's prices decay as much as the actual decay of housing prices. As mentioned by end of 2009 Q1, we are still 16% "overshot"."<br /><br />I think that there were some deals in 2nd Quarter about 5-10% lower. So, your valuation would be almost neutral at the bottom this spring.JimTanhttps://www.blogger.com/profile/13480972517925246528noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-23403408878240215312009-06-29T21:04:26.660-07:002009-06-29T21:04:26.660-07:00RE: R-Square Value
0.44 Rsq value may be on the lo...RE: R-Square Value<br />0.44 Rsq value may be on the low side, but BETA values of stocks have Rsq values much lower.<br /><br />RE: causality of interest rates<br />While I agree that the lower cost of capital may not have a full casual link to housing prices, you have to agree that it is a major factor for economic activity, as it is used by governments to "modulate" economic activity. Central banks adjust the bank rate according to the CPI, but we all know that the CPI is an unreliable indicator of inflation. For example, it does not monitor the amount of "hot money" flowing to speculate on assets like RE, stocks, commodities (like what's happening in China now, but I digress) causing inflation most of which not measured by the CPI. CPI is flawed in many other ways; it is suffice to say that it is unreliable if not flawed. Because of this, central banks' feedback is muddy and I would argue that they tend to overshoot allowing economies/markets to bubble up. The good news is that their hands are almost tied now, with rates at near 0. Lastly, for the same reason, I would not spend too much time looking at any inflation adjusted graphs.<br /><br />RE: long, mid or short term rates<br />I would agree that some investors look at long term rates for their RE investments, so maybe there is a better correlation to longer term mortgage rates or LT bond rates. Unfortunately I don't have that data to run. However, I did run a regression on a 1-year mortgage rate and separately on the bank rate, and I found that the 1-year rate has a better adjusted RSq (closer to 0.50) but the bank rate is much worst (closer to 0.30). Does this tells us that the average buyer of RE tend to look at the 1-year rate?<br /><br />RE: "natural rates". Building this model made me realize that perhaps there is no such thing. There may be secular trends, cyclical trends, and one time events that influence prices. Population growth could be a secular trend. The annual season, and monetary/fiscal policies could be cyclical. And the Olympics could be an one time event. I guess I was wrong to even ask about it initially... <br /><br />What drives Vancouver RE? The model provides some insights but like you said it is hard to determine causality. Vancouver is different, as we all know, because I bet that a large portion of our economic activity is related to RE. Your comment about causality clued me to think that employment (or the lack of employment) does not only drive housing prices, but these two can feed on themselves to build the bubble that we are in today. And certainly the Olympics adds fuel to the fire.<br /><br /><br />Here are some more results from the model. Take it with a grain of salt, as models like this changes over time, we don't fully understand the causality of the factors or it's not linear, and there may be other factors (like income, inventory) that I don't have data for or didn't think of.<br /><br />1) 1% change in Unemployment rate roughly changes housing prices by 10%<br />2) 1% change in 5-year mortage rate, changes housing prices by 8%<br />3) every 1000 interprovincial migrants into BC causes housing prices to go up by 1.8%, and<br />4) every 1000 international migrants causes housing prices to increase by 1.7%<br />5) Unemployment is the most significant contributor (pvalue=2.8E-19), then 5-year mortgage rate (5.9E-13), Provincial Migration (8.0E-7) and least significant is International migration (1.6E-2).<br /><br />You can view the model here:<br />http://docs.google.com/Presentation?id=dghbwhpz_80dkj9zdg7<br />It also has a forecast, but not necessarily a good one. (low mortgage rates and high unemployment) Feedback/comments please.<br /><br /><br />Jimtan: While prices did overshoot starting in 2007, the model does not predict the bounce off 2006 prices, as the model's prices decay as much as the actual decay of housing prices. As mentioned by end of 2009 Q1, we are still 16% "overshot".<br /><br />Van_Coffee: I used the LOG of average prices (Royal Lepage survey of bungalow and 2 stories). Having said this, I also run the regression on Teranet's Index and the adjusted Rsq is similar but with different coefficients.mikehttps://www.blogger.com/profile/00118603546135838855noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-43898629943727403012009-06-29T16:20:05.799-07:002009-06-29T16:20:05.799-07:00"Anyway, according to this model, housing pri..."Anyway, according to this model, housing prices started to overshoot in 2007."<br /><br />Ah so, this is consistent with the current bounce off 2006 levels. Very interesting.<br /><br />Can you run some interest rate and employment inputs? That might give us some scenarios to work with!<br /><br />Very good.JimTanhttps://www.blogger.com/profile/13480972517925246528noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-64875424376979410112009-06-29T15:14:48.027-07:002009-06-29T15:14:48.027-07:00"Conclusion: Interest rates play a significan...<i>"Conclusion: Interest rates play a significant role in housing prices, as it explains roughly 40% of the changes in housing prices since the 1990s."</i><br /><br />I think you show correlation, though an Rsq of 0.44 is not that high. Rates have dropped and prices have risen so you will find a correlation almost by definition. It does not explain price rises per se though we can suppose.<br /><br />Your supposition is that a lower cost of capital is a fully causal link (or whatever the stats term is) to prices. I agree that to a degree lower rates would tend to increase asset values. What I am saying is that I don't think you can attribute the full 40% change in price to the drop in mortgage rates.<br /><br />The reason I say this is because many are looking at rates longer than 5 or even 10 years when making a decision to invest (or own). The property will be in service for decades and as such the asset price should account for varying interest rates over that entire period. <br /><br />Another question to ask is, while there may be a natural price appreciation, is there a natural rental yield as well? If real prices are flat, what would this yield be vis a vis other similar investments?jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-82497074203579954902009-06-29T14:45:53.351-07:002009-06-29T14:45:53.351-07:00chapmpnp,
You are clearly a complete tool and yo...chapmpnp, <br /><br />You are clearly a complete tool and you do not do your due diligenec because you are not aware that:<br /><br />#1 - Paul started the greatest daily stats site for real estate in Vancouver;<br /><br />#2 - Paul knows Mohican quite well;<br /><br />#3 - Paul moved to PEI from Vancouver.<br /><br />Chad - <br /><br />Go stick your fist up your a**<br /><br />Cheers, <br /><br />VCvan_coffeehttps://www.blogger.com/profile/14738166821362446247noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-71504447359586034592009-06-29T10:53:34.359-07:002009-06-29T10:53:34.359-07:00Michael, how can we see your charts?Michael, how can we see your charts?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-31427364.post-48901594054820352362009-06-29T10:53:06.607-07:002009-06-29T10:53:06.607-07:00Paul, there's no reason to pump your blog on h...Paul, there's no reason to pump your blog on here when you clearly haven't read anything on this site.Anonymousnoreply@blogger.com