Friday, July 13, 2007

On crystal balls and market falls

I dug up this old post from the VHB archives from last January.

VHB Post from Saturday, January 14, 2006

The suggestions that the current situation is just a temporary slowdown could very well turn out to be correct. The market certainly did experience only a temporary slowdown in 2004, for example, before resuming high growth. Also, many of the typical indicators of a slowing market (skyrocketing inventory, for example) are just not happening right now. Maybe growth will soon take off again. However, before we take too much reassurance from the experts, let us take a look at the past. I have selected a series of quotes from our 'blasts from the past' series. As you read each quote, it is striking to see how easily it would fit right into a newspaper article in January 2006.It's not easy to predict the future.

The point of this post is not to make fun of some predictions that turned out to be wrong. Instead, I simply want to emphasize that we should not turn our brains off simply because some person quoted in the media reassures us that everything is A-OK.Here are 10 quotations. After each in italics you'll find the source, timing, and a link for the quote. Enjoy:

1. "Price stability, rather than decline, would be expected for most of the housing stock . . . since underlying home ownership demand remains strong due to continued high immigration." (Frank Clayton, January 18th 1981 in the Sun. link The market crashed by about 50% over the following year. )

2. Renaud said he thinks that the trend to prices for houses has been broken by a temporary lull and that by [next year] or so prices will be equal to or greater than peak prices. (Claude Renaud, VP of Mortgage Insurance Canada on April 14, 1982. link The market took 26 quarters (over 6 years) to regain its peak in real terms.)

3. "To those who are waiting for Vancouver house prices to collapse, I can only advise them not to hold their breath . . . Unless there is a major recession or significant depopulation, house prices are unlikely to drop significantly." (Jerry Jackman, VP Royal Lepage, November 18, 1988 in the Vancouver Sun. link In 1989, prices started to drop - with an eventual 30% or so drop. Real prices did not attain these heights again for 58 quarters, or around 15 years.)

4. "We are definitely in a transition market in areas such as the West Side, Vancouver East, and Burnaby . . . it is too early to tell if the market will stall." (Jerry Jackman, April 20th 1989 in the Province. link Prices did not recover in real terms until 15 years later.)

5. "It is unlikely that prices will decline significantly." (JJ again, July 18th 1989 in the Sun. link)

6. "The whole world wants Vancouver because everybody is moving here now and everything points up, up, up." (Realtor David Goodman, December, 1989 in the Sun. link The market did not reach these heights again for 15 years.)

7. " . . .no one is panicking over the west side housing market and he insists that it has simply 'normalized'." (Jerry Jackman, January 27th 1990 quoted in the Sun. link West-side prices fell by 40% in the next 2 years.)

8. "I can't see prices reversing themselves there [in the west side] because it is still a very desirable place to live." (Same as above.)

9. "The market is entering a more 'normal' phase." (REBGV president Brian Calder, Feb 2, 1990 in the Sun. link If normal means that it takes 15 years to recover, then 'normal' it was.)

10. "A BC Central Credit Union newsletter released Tuesday said BC's housing market is currently experiencing a contractionary phase but the worst of that phase should be over by late summer or early fall." (BC Credit Union economist Richard Allen quoted in the Sun, July 5th 1995. link The decline in the late 90s was slow, but it took 28 quarters to bottom out and 33 quarters to recover to the previous peak. Some 'phase', eh?)

posted by Van Housing Blogger at 9:55 PM


M- said...

Thanks for reposting those blasts-from-the-past!

It's always interesting to see today's experts claiming that all will be well, when yesterday's experts claimed the same, for the same reasons, and all was not well!

Nancy said...

My God that is good!

Thank you so much. It sounds just like today.

Great Work!

Anonymous said...

Why do people only point to 1981-1982 as crashes. No one ever talks about 90 or 95. How come?

freako said...

And a special thanks to Macciato/Bellagio who had the foresight to hang on these old newspaper clippings that help us put this upside down world into perspective. Are you still out there?

Fencesitter said...

Woudl it be possible to see what the non-inflation adjusted numbers are for the prior declines? With the inflation rate high in 81/82 it exagerates the scale of the crash greatly. What would be the actual decline needed at our current 3% inflation to produce a comparable crash?

mohican said...

Here are the nominal quarterly price changes for the period in question fencesitter.

1980.1 7.83%
1980.2 12.65%
1980.3 12.65%
1980.4 16.91%
1981.1 36.02%
1981.2 -1.63%
1981.3 -1.62%
1981.4 -7.65%
1982.1 -8.19%
1982.2 -4.33%
1982.3 -7.16%
1982.4 -11.42%
1983.1 5.70%
1983.2 3.87%
1983.3 3.10%
1983.4 0.39%
1984.1 -2.57%
1984.2 3.22%
1984.3 -2.48%
1984.4 -4.32%
1985.1 -3.96%
1985.2 0.75%
1985.3 0.35%
1985.4 2.56%

The inflation adjusted numbers are actually MORE severe than the nominal price changes because of the high inflation.

1980.1 5.82%
1980.2 10.15%
1980.3 9.98%
1980.4 13.55%
1981.1 32.47%
1981.2 -4.13%
1981.3 -5.24%
1981.4 -10.47%
1982.1 -10.32%
1982.2 -6.50%
1982.3 -10.08%
1982.4 -13.98%
1983.1 4.11%
1983.2 2.64%
1983.3 1.75%
1983.4 -0.92%
1984.1 -3.55%
1984.2 2.34%
1984.3 -3.71%
1984.4 -5.25%
1985.1 -4.49%
1985.2 -0.08%
1985.3 -1.00%
1985.4 1.33%

mohican said...

And here are the nominal numbers for the 1995 - 2000 correction:

1995.2 -3.25%
1995.3 0.62%
1995.4 0.22%
1996.1 -0.55%
1996.2 -1.43%
1996.3 -1.00%
1996.4 -2.36%
1997.1 0.54%
1997.2 1.61%
1997.3 0.17%
1997.4 -0.17%
1998.1 -2.34%
1998.2 -2.93%
1998.3 -2.91%
1998.4 -0.60%
1999.1 -1.35%
1999.2 3.78%
1999.3 -2.38%
1999.4 -0.19%
2000.1 1.88%
2000.2 -1.75%
2000.3 -0.14%

freako said...

"With the inflation rate high in 81/82 it exagerates the scale of the crash greatly."

I would flip that. Real prices don't exagerate crashes in high inflation time as much as nominal understate them.

If I could only have one set of numbers, I'd take the real ones.

freako said...

Anybody have 1981-1982 peak to trough percentage decline for both sets?

M- said...

Freako: the real numbers can be found here: Sauder Vancouver real stats.

freako said...

Thanks, M. It is just that I was too lazy to fire up Excel an calculate it. Here they are:

Peak to trough, real:
Q1 1981 to Q3 1985.
52% decline.

Peak to trough, nominal:
Q1 1981 to Q4 1982.
32% decline.

Which of these is more "valid"? Well, imagine an investor who bought at the peak with 25% down, 5 year rate. The interest rate was 15% at that time. That would mean payments of $2,345.63 a month in 1981 dollars. I don't know what rents were back the, but I assure you that they were a mere fraction of that (though rising rapidly at the time). Eating these kinds of losses would cost huge amounts over the next 5 years or so.

The moral is that nominal does not always tell the whole story.

Fencesitter said...

Hi Freako and Mohican,

Thanks for pulling up those numbers. The problem with looking at real numbers is that the everyday person will never see them. As someone who bought in '81 to sell in '85 and they will tell you they lost 32%, not 52%.

The same story holds true for those waiting on the sidelines with a downpayment waiting to buy. If you continue to see prices flat, or only declining slightly (as in the 1990's), it will not appear as a low point in the market, no matter what the inflation rate is.

The general publics perception of the market condition is very important. When is the last time you saw a news article using real rather than nominal terms?

freako said...

As someone who bought in '81 to sell in '85 and they will tell you they lost 32%, not 52%.

True enough, but IMHO these people can believe what they want, it doesn't really change anything. What happened happened, and what will happen will happen.

I think it would be great if people had a greater financial acumen, and acted more rationally as it would eliminate many wasteful misallocations of resources. But for the most part, this is a zero sum game. The reason some people make a killing in the stock market or real estate is because other people lose a fortune in the stock market or real estate. If markets were perfect, we'd all receive the aggregate returns, which are not bad btw.

freako said...

I guess a simply tangible demonstration would be a rent versus own between 1981 and 1985, assuming reinvestment of rental savings and downpayment. I shudder to think of the differential.

In fact, if it was done between 1981 and the present, I suspect (but not sure)that the renter would still be ahead.