Some discussion took place on the previous post about how a correction may play out in our local real estate market. Will it be fast? Will it be slow and steady? Will it look like previous busts? How will unemployment or a recession factor in? What about the olympics or other psychological factors?
Here is a pictoral illustration to give some food for thought - click to enlarge.
If we accept the premise that housing in Vancouver is overvalued based on fundamental analysis of the assets and the earnings or imputed earnings that these assets can earn, then we must evaluate how this overvaluation will be corrected.
Will earnings / rents grow to meet current prices? This would require a near doubling of local rents. I think most people would agree that this would devastate the local economy as the labour pool would dry up rapidly and many businesses would shut down due to the expense of operating here.
Will prices undergo a minor correction while rents increase modestly and interest rates are lowered? This is possible although trouble in the internation mortgage and credit markets would indicate that lenders may be unwilling to lend money to purchase real estate.
Will prices correct very quickly thus restoring a fundamental valuation to local real estate assets? This is also possible and perhaps even the most likely outcome given several possible events.
Here is the way I see things:
As the US enters recession it is likely to effect many industries here in Vancouver. This, combined with a wrapping up of several mega projects (Canada Line, Highways Improvements, Convention Centre, Condo Developments) during the next 12 - 18 months will drive unemployment up rapidly.
This unemployment will cause two things:
1) Developers will fast-track current housing projects as labour becomes available and
2) Unemployed or underemployed workers will leave and / or put up their homes for sale as they are unable to make the payments.
A wildcard in all of this is the amount of 'speculator owned' housing inventory out there. It is impossible to quantify at this moment but, if anecdotes are to be proved correct, this accounts for perhaps tens of thousands of underutilized or unutilized housing stock that could be put onto the market very quickly.
What do you think?