Friday, March 30, 2012

Vancouver Teranet HPI Trendline Analysis

The Teranet House Price Index provides a reasonable indication of market movements by tracking same property sales pairs, a technique first used by Case and Shiller formulating an index for US residential housing markets. I have plotted the Teranet HPI for Vancouver below and included four appreciation scenarios as follows:
  • "New Normal" - prices of the last 8 years are indicative of future gains. This is about 9% per annum.
  • "Trendline" - Appreciation follows a trendline based on data from 1990 to current (5.27% pa)
  • "Old Normal" - prices from about 2004 are considered extraneous and past trends from 1990 to 2003 are used to determine long-term growth trajectory. (3.0% pa based on trendline 1990-2004 inclusive)
  • "Old Normal Bottom" - same as "Old Normal" but shifting the trend to be based on price troughs and not middle. This would be the "bearish" scenario.

The results can be summarised, for what they are worth, as follows, assuming one purchases a $500,000 property at today's prices (170), looking at scenarios in 2015 and 2020 where prices re-align with the respective trendlines
  • "New Normal" price will appreciate to $670,000 (10.6% CAGR) in 2015 and $1,030,000 (9.5%) in 2020
  • "Trendline" price will appreciate to $508,000 (0.9%) in 2015 and $655,000 (3.6%) in 2020
  • "Old Normal" price will depreciate to $341,000 (-11.7%) in 2015 and $394,000 (-2.8%) in 2020
  • "Old Normal Bottom" price will depreciate to $302,000 (-15.0%) in 2015 and $350,000 (-4.2%) in 2020
If one believes the long-term appreciation in Vancouver real estate looking at the trendline from the past 20 years, there should be no rush to buy in the next few years. If one believes the last decade was one that mirrored experience in the US, where prices have reverted in real terms to those of the mid-1990s, this is not what I would characterise as a good time for purchasing residential real estate in Vancouver.


Nestor said...

Is there any way you can do this analysis for the Toronto Market. I think your analysis is brilliant.

jesse said...

Oh you...

I'll see what I can throw up. And remember this is "for what it's worth". I don't get paid for this drivel ;)

jesse said...

Here is the Toronto one.

But unlike Vancouver I did not notice multiple deflections. Rather Toronto has been on a constant 5.3% trendline since 1998. (Teranet only has data on Toronto from 1998.)

So I had to eliminate some of my "assumptions" and included only the trend (which Toronto is at right now even after recent movements in the past year or so), and what I would assume to be the "old normal" which is 3% growth from 1998 baseline.

Now regions within Toronto will vary and this doesn't absolve Toronto being in a bubble since it's not on a 9% CAGR like Vancouver but from what I can see Vancouver is in a more acute pickle than Hogtown.

I might expand these to other cities just to flesh the "housing analysis" out.