Saturday, May 07, 2011

Something's Happening Here

Last week was the 25th anniversary of Expo 86, the world's fair held in Vancouver in 1986, lasting from May until October. From a housing perspective 1986 is important because it corresponds to the lowest point of real prices since the mid-70s. Since then, for the past 25 years, prices have been rising and average detached houses now stand at close to ten times the nominal price of those heady days of 1986. (Graph courtesy yattermatters)
So just for fun, how many people were around before 1986 who still live in Vancouver? It's an interesting question -- how many people are old enough to remember the carnage of the second-largest bubble in Vancouver's history that occurred in the early 1980s? (Graph courtesy UBC Sauder School of Business.)
So running a few numbers we arrive at the following:
  • There were 3 million people in BC in 1986.
  • 676,000 people died in BC since 1986.
  • Approximately 1 million people out-migrated from BC since 1986.
  • The population of BC now stands at around 4.5 million
We assume that most of the people dying in BC were living in BC in the early '80s, say 80%. We then assume that 50% of the 1 million out-migrants have since returned to, and are currently residing in, BC (and were residents before 1986). From these estimates of the 3 million people who resided in the province in 1986, only about 2 million remain in the province. Therefore, only about 43% of BC's population would have any chance of experiencing the fallout of house prices in the early '80s. Practically it is even less, since many counted in that population weren't old enough to be interested in housing prices in the early '80s anyway.

Given that most people residing in BC would not have remembered Vancouver in 1986, with its bargain-basement housing prices still shivering from the sell-off earlier in the decade, it should not be surprising in the least that the majority of people view BC's, and particularly Vancouver's, real estate as a can't-lose bet. We haven't even begun to include people who rode the early '80s bust but think this time is different.

I have high confidence that most of readers here will not remember Expo 86, not least the younger demographic of people likely to be reading this post. But in the off chance you do remember Expo Ernie, monorails, and what the heck that other platform at Stadium Skytrain Station is for, here's some nostalgia, from simpler times when a house was simply a place to live:


Unknown said...

I remember the Vancouver real estate market in 1986, as I was looking to buy my first house then. A good house on the West side cost around $400K then, and at 12% interest rates, the payments were just as unaffordable as they are now (two high professional incomes could barely afford to buy a house).

Its easy to forget the impact of interest rates, so the graph on real prices is leaving out half the story. Current interest rates account for more than a doubling in affordable house prices since 1986, and the rest is due to inflation. Of course, if rates go back up to 12% then prices will crash, but interest rate futures show that the smart money predicts nothing over about 6% in the coming decades.

mohican said...

Yes, I remember 1986 as well, although I was not even in high school yet never-mind buying a home!

It would be better to have low prices and high interest rates in my view because a frugal person could save rapidly, earn a great rate on her down payment funds and not worry about being outbid by some schmuck with no down payment.

I agree with david that it seems highly unlikely that interest rates will rise over 6% in the next 10-15 years.

jesse said...

Certainly higher interest rates will increase the acuteness of a correction but, if the US's and Japan's experiences are any indication, low rates cannot prevent a retrenchment of prices to fundamental value.

Unknown said...

Mohican makes a good point, which is that its a better deal for home purchasers to have high interest rates (due to inflation) and low house prices than the other way around, even if mortgage payments are the same. That is because a fixed mortgage payment quickly drops as a proportion of income in an inflationary environment, making home ownership the great investment that it was back in 1986.

Also, my previous comment that prices in 1986 were "just as unaffordable" as now was an overstatement. That may be almost true for the West side, but it used to be easy to pick up much more affordable housing east of Main. My impression is that now you have to go to Coquitlam for similar affordability.

Full affordability graphs are in this nice report from RBC, and you will see that the graphs are much flatter than those for just home prices as in this article. However, affordability for Vancouver is indeed worse than in 1986, I believe due to the lack of inexpensive housing on the East side or in Richmond:

jesse said...

"a better deal for home purchasers to have high interest rates (due to inflation) and low house prices than the other way around"

1986 saw rental yields around 10%, which is a reasonable rate for an investment whose revenues appreciate with inflation. High rates generally accompany these yields but parts of the US (and not just the declining rust belt areas) have yields approaching the same as Vancouver in the mid-'80s, without the high rates.

danielle said...

I was 4 in 1986. The only things I "remember" about Expo are the things that stuck around after... the skytrain, those crazy metal seat-benches that ended up all over Vancouver, and Science World.

Somehow I also remember the movie "Rainbow Wars."

I am glad I realized a few years ago that houses in the GVRD (not just Vancouver itself) are just too expensive.

greatervanhouse said...

I disagree with David's memory of 1986 affordability. I too remember the early to mid 1980's. It was more than TWICE as affordable back then even with the high rates then, record low rates today - see graph for Vancouver on page 5 of the RBC Affordability report - close to 90% of pre-tax income to buy a house today vs. about 40% back in mid-1980's....