Thursday, August 23, 2007

Charts are Cool!

I admit it. I have an addiction to maps and charts. I love looking at them and I love creating them. They provide a visual insight into raw numerical data like lat / long coordinates and data points in a series. I think maps and charts can tell a story too, just like a picture is worth a thousand words, a chart is worth a 1000 data points!

In the past 30 years Vancouver has experienced 4 significant real estate price contractions. 3 of these price contractions are represented in chart form here.

The last contraction was from 1Q 1995 through 3Q 2000 and represented a 13.8% decrease in prices from a high of $418,050 to a low of $360,220.

The previous contraction in 1990 was very short lived at only 3 quarters. This contraction was from 2Q 1990 through 1Q 1991 and represented a 15.3% decrease in prices from $324,710 to $284,750.

The most memorable real estate price contraction in BC history was in 1981. It was memorable because of its magnitude and suddenness. The contraction lasted from 1Q 1981 to 2Q 1985 and it saw nominal benchmark prices decrease 32.3% from $229,730 to $155,560.

Clearly, price contractions can last a long time and represent fantastic opportunities for real estate buyers. We are currently far above the nominal price trendline and one would expect, based on history, that we will see prices fall below the trendline at some point in the future. This will represent a great opportunity for real estate buyers.

The trendline is at roughly $520,000 for the Vancouver CMA detached benchmark and that threshold represents a potential buying point if prices dropped below that mark. Currently prices would need to fall 26.8% for the trendline to be breached. If history is any guide, prices will likely fall below the trendline before the next run up in prices.


Fencesitter said...

Thanks for the charts Mohican! Just curious as to what happens to the trendline when you use a polynomial rather in the 3rd or 4th order instead of linear?

mohican said...

the trendline intersects at approx $575k with poly in the 3rd order and approx $650k in the 4th order.

I recognize the trendline will move up even higher even if prices began heading down today. In fact it is likely that the trendline will be intersected on the downside at the $560-575k range. It will likely remain below that range for at least 6 quarters.

Of course that is all speculation.

Warren said...

Great charts, thanks for your hard work.

It seems like the last 2 slumps have had prices sit below the trendline for right around 6 years.

When to buy, or call the bottom is always difficult, but both of the last slumps also seem to have a minor false recovery about 1 year after the big drop. Good to note.

Warren said...

Sorry I should have referred the last and 3rd last slumps. That 2nd last one in '91 is almost too small to see. :)

REsteven said...

great charts mohican. If prices were to hold at current levels, how many years would it be until we intersect the trendline?

patriotz said...

Prices aren't going to hold. Bubble valuations are based on expectations of price growth (greater fools), because of the negative cash flow (actual or opportunity cost) on the asset.

Once price growth stalls, the game is over and prices fall back to levels supported by fundamentals.

I can't recall any BC RE bubble holding flat in nominal terms. Even the boom of the early 1970's was followed by a nominal decline in the late 1970's, and that was a time of high inflation.

If you look at an RE price chart you'll find that flat nominal prices are found at market bottoms, not tops, because prices are at levels supported by fundamentals. Until the next bubble starts.

mohican said...

resteven - I agree with patriotz that it would be unprecedented to not have a price contraction after a run up.

If nominal prices remained at their current level it would take until the 4Q of 2014 for the trendline to be intersect.

JMK said...

Hi Mohican,

Prices tend to grow exponentially, so fitting a linear trend through them will make current prices look more above the trend than they really are. Try to fit an exponential: P = P0 (year/year0)^n. Or fit a line in log space.

freako said...

Try to fit an exponential: P = P0 (year/year0)^n. Or fit a line in log space.

Or use a real chart. Taking out inflation would "normalize" the chart. Second, I think real prices are much more likely to adhere to a trend. The chart, going back to 1975, contains periods of high inflation. Since were are currently in a low inflation period, a nominal chart will OVERSTATE the recent end of the trendline.

JMK said...


I did the exercise on the Sauder real data. You are right that an exponential and a straight line give almost the same fit for that data set. The linear trend is for real prices to rise at $30k a year (Q1 2003$).

Right now, Vancouver is 120 k real dollars above the trend line for that data set, or about 20% too high. The two other peaks were 97k (1995) and a whopping 231k (1981) above the real trend. Lows below the trend were similar amplitude (-87k and -75k).

My take-home message from this would be that Van is pretty expensive compared to the trend right now, but 4 years of only keeping up with inflation would be a reversion to the trend. But real-estate is no deal at the momment.

There are games you could play with where in the data set to fit the straightline, but the above fit appears to be pretty robust if you go from valley to valley.

freako said...

My take-home message from this would be that Van is pretty expensive compared to the trend right now, but 4 years of only keeping up with inflation would be a reversion to the trend.

A few more interesting facts:

Since the early 70's, real prices are up 300+ percent. But real rents are down 35%.

Reconcile that one. Clearly real prices occur because of density increases related to population growth.

A couple of unknowns here that relate to future price growth:

1. Will the pace of population growth slow, stay the same, or increase? As of recent, population growth is way down.

2. Will the rate of density increase slow? I expect it to. It is a lot easier to go from 5 to 30 stories than from 30 to 180 stories.

If these two slow, expect a much slower pace of real growth.