Wednesday, November 19, 2008

Likely Outcome - Price Drops to continue to 2011/2012

In the efforts to visually represent a likely outcome for local housing prices I put together the chart (above - click to enlarge). I think it is likely that the benchmark detached house in Greater Vancouver will fall no less that 40% in value from the April / May 2008 peak price. This is a likely trajectory of the fall given the current and expected economic climate. I fully expect the majority of the price correction will take place over the first 24 months so we will see prices 30% lower by the time we are just about experiencing the hangover of hosting the Winter Olympics.

Of course nobody knows for certain how large this correction will be or how fast but I think based on current data this would seem a probable outcome.

It will be a good day when the average family can afford a basic home and condos are affordable for first time buyers.

Greater Vancouver House prices shoud be no more than $500k for a decent house in a decent neighbourhood and Fraser Valley houses $350k for the same. Greater Vancouver one bedroom condos should fall to $150k and Fraser Valley $120k. By the end of this, it will as if the bubble never happened except for the shattered finances of the speculators, and highly leveraged peak buyers.


Traciatim said...

Can the average family really afford a 500K home? I thought the median income there was like 65K . . . wouldn't that make the average home price around 250K if it was really affordable?

Also, I noticed that MOM vancouver average prices actually increased . . . calm before the storm perhaps? Statistical Anomaly? Maybe things aren't as bad as thought?

mohican said...

Average prices are nearly useless since they are bounced around by the sales mix.

The average family does not need to own a home on the West side of Vancouver but a home that is worth 3-4 times household income with a mortgage of 2-3 times household income - near the city - within a 30 minute drive from work - is a reasonable expectation.

jesse said...

I think your assumptions are reasonable. I would question the slope of prices after the speculative element is disposed of in 2011/12. There is no more long-term disinflation to keep real prices rising at the same clip as the past generation. And that's the best we can hope for.

tulip-Mania2 said...

Mohican I gather you don't believe the "experts" who projected the benchmark in Vancouver would hit 1 Million by 2010.

I didn't think so iether.

Tick Tock, Tick Tock

John Collison said...

Good work, as usual, Mo -- but do your projections account for the MASSIVE amount of inflation already in the pipeline and ready to hit after the current recession subsides, circa 2010?

jesse said...

"do your projections account for the MASSIVE amount of inflation already in the pipeline and ready to hit after the current recession subsides"

If there were to be "MASSIVE" inflation, there would be declines way more than 40%. The case for this happening is open for debate.

kopyright_klepto said...

Mo - Very generous of you to have such a nicely damped response curve after the fall with no undershoot.

Trac - My current projection for November SFH average is -8% yoy and -9% mom.

M- said...

Octagonian, what makes you think there's massive inflation sitting in the pipeline?

Gabriel said...

probably because we're going to head to 5800 in the Dow.

If the government doesn't do something soon it'll be deflation or it'll be hyperinflation if they choose to.

Confidence in the market is abysmal and pensions are going to be screwed as most have lost at least 20% and were at a shortfall already. They plan in the order of 8% annual return which hasn't happened. Either the corporation has to make up the difference or the government has.

patriotz said...

but do your projections account for the MASSIVE amount of inflation

Any increase in inflation will inevitably lead to corresponding increases in interest rates and also probably not be matched by wage increases, which is an even worse scenario for house prices than we have now.

The people running the BoC are not that stupid, a return to high inflation ala the 70's would be catastrophic for Canada and it's not going to happen. They are simply concerned with preventing CPI deflation and may overshoot a bit, but we are not headed for Weimar Republic days.

John Collison said...

M, and Gabriel

The inflation already in the pipeline is the Bank of Canada's increase in the money supply, keeping pace with that of the FED south of the border. Ottawa has poured tens of billions into the banks, into loan guarantees, mortgage guarantees, etc.
It takes time for this "liquidity" to work its way through to consumer and commodity prices.
The US has increased its monetary base by about 1500% this fall. Had Ottawa and the B o C not kept pace the loonie would be worth about $1.50 US now, even with decline in demand for its use in buying our energy and commodities...
So brace yourselves for borderline hyperinflation circa 2011, ESPECIALLY after a few years of the Harperites running deficits which will assuredly reach $30 - $50 billion per annum despite the fairy tales they are telling about "only" $10-billion per.
Sadly for Real Estate speculators, the housing sector is scarcely likely to reinflate.

Panamericana said...

Octagonian,I salute you!

jesse said...

"Ottawa has poured tens of billions into the banks, into loan guarantees, mortgage guarantees, etc."

Do you know something that the collective wisdom of the long term bond market does not? They are pouring in liquidity to stave off deflation. You are right they need to be careful to prevent inflation but it is not impossible to prevent. What makes you think the money they created in short order cannot be destroyed at the same rate?

Maybe you have a point but, as I already mentioned, if inflation does increase, discount rates increase as well until the inflation genie is put back in the bottle and asset values are depressed further (by the way of higher cost of capital).

Gabriel said...

Octagons situation depends on the amount of Bonds by the Fed being issued in 2009 summer to be absorbed by the treasury. As they have over 1 trillion dollars to sell if they can't it'll be purchased by the treasury. In effect monetizing debt or printing money or for there to be a bottom to take place so banks can have a higer leverage with their tier 1 capital.

What Octo has said so far all depends on what the Fed does but it makes more sense to go into inflation than deflation.

Liquidty helps stabilize markets but when deleverging is happening it's only countering it.

I still think it all depends on the Fed, but I do think a high inflation scenario would play out first.

John Collison said...


Inflation, by its strictest definition, is about an increase in the money supply, best measured by M3.

The FED has increased M3 to such as degree that all the wealth in the stock markets and hedge funds could be destroyed (it won't be) and there would STILL be more digital credit money floating around than you would believe.

Once the bottom appears to be in for the various markets, the FED will attempt to soak up and decelerate the amount of money it is printing. Even then, it can only reverse so much.

Interest rates are low because the bond phenomenon is happening out of sheer fear of equities of all kinds, whether stocks, houses, or commodities.

Since 1914, the FED has only done ONE thing: increase the money supply. Whenever they put on the brakes for tactical reasons, there is a recession, and a portion of wealth is destroyed... but they always print more than is lost.

The same is happening now.

Once things settle down, all the money that is being hoarded by some banks and various other investors and safe haven repositories will come washing back across the economy with a vengeance.

There does not appear to be any way housing will re-inflate due to psychological exhaustion and because an inflationary environment will be accompanied by high interest rates...the classic "stagflation" which will sand bag productivity, and therefore wages, preventing housing's return to stupidity, at least for a generation.

So, enjoy PRICE deflation while it lasts; stock up on physical goods of all kinds if you can; and be prepared, too, for gold to go to $2,000 and oil $200 as 2012 closes in on us....

John Collison said...

I should add that the B o C, controlled as it is by Ottawa, beholden as it is to the dumbocratic population centres of Ontario and Quebec, will continue jacking up the supply of loonies to subsidize the aforementioned provincial population centres.

Demand for commodities will take off again, and so Ottawa will order even MORE inflation to prevent another bout of parity...

BC and the Prairies really should consider separation unless they stop worrying and learn to love hyperinflation ;-)

jesse said...

"Interest rates are low because the bond phenomenon is happening out of sheer fear of equities of all kinds, whether stocks, houses, or commodities."

Well then you know better than the multi-trillion dollar bond market. Just saying.

"So, enjoy PRICE deflation while it lasts"

And we can all enjoy WAGE deflation as well. I wonder if future inflation will mean paycheques will be increasing as well. I will say that Volcker and other storied economists have hinted inflation may be a future problem.

I think we can agree that markedly higher inflation is not good for house prices.

patriotz said...

Well then you know better than the multi-trillion dollar bond market.

He also knows better than the commodities markets, which otherwise would already have bid up oil and gold.

I'm smart enough to predict which way overvalued RE will go (down) but I sure don't claim to know which way much else is going.

John Collison said...

Jesse, Patriotz,

I do not "know" better than the markets.

I only synthesize economic and economists' theory, those with a near perfect track record forecasting where we are now.

Markets can be blind -- when a credit "crisis" is on, and a panicked flight from equities occurs, bonds are a refuge where investors, as the old joke goes, do not seek a return ON capital so much as a return OF capital ;-)

If I had an actual crystal ball, I would be independently wealthy. I am not. However I DID get out of investment housing late 2006 when everybody thought I was a doom'n'gloom crack pot; I got out of most of my gold around the $1,000 mark, and got out of SOME of my oil around the 130 mark.. since then I have lost plenty in energy.

But there are absolute facts, which combined with mostly (Austrian) reliable theory, can provide some basis for rational navigation.

Asset price correction is well underway, perhaps 2/3 completed; M3 has increased exponentially; Oil is in declining supply; there are still structural shortages of most metals and minerals; Chindia is still poised for parabolic growth even through this recession; wages are a little bit stickier than consumer prices; interest rates MUST go stratospheric in the face of the M3 now working its way through to us. Low growth conditions (stagflation) will keep prodcutivity and wages in check even as consumer prices and asset prices reflate.

All that said, I am confident that oil and commodities will take off again; wages will not; debt will be easier to manage, but still a drag on investment; housing will not reach previous peaks for the better part of two decades; and we may be in for a Muddle Through economy for the next ten years resembling something like North America in the 70s and/or Japan in the 90s.

John Collison said...

To clarify an apparent contradiction: debt wracked up and locked at current low interest levels will be easier to deal with under inflation; debt with adjustable or renewable rates at the time of rising interest rates, will while more rare, be a nightmare to deal with.

macho slob said...

You mind sharing your list of economists with a near perfect record of forecasting?

I try to pay attention to Soros, Roubini, Krugman, Rogers, Prechter, Coxe, and of course Buffet. With the exception of Buffet, who seems to be emitting mixed signals recently (perhaps because of political aspirations and patriotism), One noteable observation is that their take on the economy is not just bearish, but downright SCARY. Of course that doe'nt mean that opportunities do not abound in the stock market. Unlike real estate, stock markets have a habit of recovering way before the economy bottoms, and Rogers and Coxe appear to be as bullish as ever on comodities.

The thought of missing the bottom of the stocks on my list rivals the fear death and taxes. Thank god that the idiot driven RE market is much easier to is prepped for the biggest slide ever, and it won't come charging back after the bottom.

jesse said...

"debt wracked up and locked at current low interest levels will be easier to deal with under inflation"

Where can I take on such debt in Canada? Anyone wanting to do financing in a high inflation environment will only be willing to do so if asset prices are further devalued. Sure past debts are manageable but what about the asset's new value.

Who's better off: the guy who bought an asset in a low inflation environment but inflation subsequently increased, or the guy who bought in the new high inflation environment but has a higher cost of capital?

aetakeo said...

Well then you know better than the multi-trillion dollar bond market. Just saying.

What I know about inflation/deflation and the trillion-dollar bond market is indeed bupkis, but I've been following housing since 2004, predicted the dot-com bust before that, and have been watching sort of incredulously as credit spending has crept into being a star in the greater economy.

I remember hearing the Holt's rep on BC Almanac when the new store opened admitting that people probably couldn't afford the merchandise, really, but we were in a new era where people bought what they liked, putting luxury things on their credit card. And I remember mentioning this to people and them laughing, yes, it's like that.

But I have NOT heard economist standing up, saying wait, someday the piper gets paid and there's less disposable income on that day. For Holt's or anything else.

All of which means that the economists on the radio and the stock traders on the floor don't look terribly ... uh, prudent.

Probably because I am NOT an economist, having gone through two bubbles and having listened to experts talk random idiocy, suddenly I'm rather convinced that economists and traders and bankers are rather dull and greedy.

Is a trillion dollar bond market different? Or does it price itself on the short term, based mainly on hoodoo or the psychology of people who in the main haven't entirely thought it through, but are flocking after each other like birds pecking at best-scenario projections based on greed? I don't know because I'm a plumb idiot in these matters, but it means that I'm rather suspicious of the herd's wisdom. I s'pose at the point where if I haven't derived it, I cannot believe. A market wisdom atheist.

Anyway; I wouldn't put money on either argument on inflation/deflation right now, because this discussion runs way past my own understanding.

Is this too cynical as a result from watching this crash? From a layperson's perspective, it sure looks like the flocking market is reacting over and over to the Emperor's New Wisdom, doesn't it?

jesse said...

Article from the Globe on inflation.