A recent discussion on the impact of low interest rates on local housing prices had me whipped up a quick, but significant correlation model between Vancouver housing prices and a few key factors.
The regression model is based on quarterly data, dating back to 1990. The independent variables for the regression are: Vancouver's unemployment rate, average 5-year residential mortgage rate, inter-provincial migration into BC, and international migration into BC. The result is as follows:
Adjusted R-Sq Value = 0.85
1) 1% increase in Unemployment rate translates to roughly a 10% housing price decline
2) 1% increase in 5-year mortage rate translates to a 8% housing price decline
3) every 1000 interprovincial migrants into BC increases housing prices by 1.8%, and
4) every 1000 international migrants increase housing prices by 1.7%
Significance Levels (P-Values):
Unemployment = 2.78E-19
Average 5-Year Mortgage Rate = 5.89E-13
Inter-provincial Migration = 8.02E-07
International Migration = 0.0163
Other factors like Canadian/US exchange rate & foreign investment flows are either non-factors or they are already embedded into one or a combination of the above factors. What's also interesting is that international migration has a low correlation and the least significant.
The graph below is a plot of the logarithm of the average housing prices (Source: UBC Centre for Urban Economics and Real Estate) and the regression model. The plot also tries to convey how each of the independent variables (components) are added together to yield the model price. Note that these components are arbitrary shifted so that it can be seen on the same axis. The rising yellow line since Q42008 represents a decline in the 5-year mortgage rate, and the falling dotted unemployment component since Q42008 reflects the rising unemployment rate.
Obviously, the caveats to this type of model are that correlations change over time, the causality of the variables is complex and unknown (i.e. we don't know what causes the other or which is really the independent variable), and there may be non-linear elements, such as a rise in RE price may fuel further decline in unemployment or vice-versa.
With this in mind, I took the liberty of forecasting some numbers through 2011, based on these 3 scenarios:
1) Unemployment gradually rising to 9% (1990s' levels) and the average 5-year mortgage rate constant at 2009Q1 levels of 5% (based scenario)
2) Unemployment rising to 9% and the average 5-year mortgage rate declining further to 2.5% (record low mortgage spreads)
3) Unemployment rising to 9% and the average 5-year mortgage rate rising to 8% ('00 levels)
All 3 scenarios use 2008 numbers for inter-provincial and international migration numbers. Note that the scale on the Y-axis is normal.
In 2007Q2, Vancouver housing prices appear to lose correlation held since 1990. What does this mean? Is there a factor in 2007 that we need to include? or are we just seeing irrational exuberance?
UPDATE 2009-07-07 :
The model was optimized by delaying the effects of the unemployment rate, mortgage rate and international migration by one quarter. New adjusted R-value is slightly better (0.851)
I also added another scenario (unemployment at 7% and 5-Y rate at 5%, unchanged from 2009Q2 through 2011)