Tuesday, April 24, 2012

Fraser Valley Market Snapshot March 2012

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to March 2012.
I haven't concentrated much on the Fraser Valley but it is a part of the Lower Mainland and deserves attention going forward. As can be seen MOI has been above 6 for most of 2010 and 2011, which would lead to roughly flat prices over that time. This year is seeing higher MOI still (currently almost 7), with sales trending at the lower range of past years.

Like the REBGV, the Fraser Valley is not a strong market right now. Something to watch.

Wednesday, April 11, 2012

Case Shiller and Teranet HPIs: Follow Up 1

Following a previous post where I aligned house price index troughs to determine relative valuation, I put in a few caveats, one that Vancouver's trough (which I assumed occurred in 1998) may not have been its trough -- even in the 1990s Vancouver may not have touched its bottom and was riding the coattails of previous speculative excess. The issue faced here is that the data don't go back far enough to the previous trough in the mid 1980s. Nonetheless we can re-scale Vancouver's data set with its trough pulled back to 1990, the start of the Teranet HPI. Below are the two graphs under the two scenarios for Vancouver:
Wowzas, that makes a difference, but I reiterate the caveats here, that the Teranet HPI data don't extend back far enough to garner a complete picture if markets like Vancouver's had speculation in the 1990s. Likewise other cities, most notably Calgary, are likely understated due to lack of data in the mid-1990s. To flesh out this we would need to turn to historical non-HPI data to augment this data series or simply use a different dataset altogether.

Below are the trough-aligned graphs with Vancouver under two scenarios, including the nominal appreciation scenarios.
What do we do with these graphs? The biggest takeaway, for me, is to evaluate the conditions in Vancouver in the 1990s and determine why the city was on a secular growth trend since the 1980s, which is somewhat at odds with experiences in other cities graphed above. Were conditions in the late-1990s the true "baseline", a point relative to which we should gauge future growth, or should we look further back to the 1980s where prices were lower still. If the latter, valuations in Vancouver are disturbingly high.

I do not normally concentrate much on directly comparing cities' relative valuations for a host of reasons, not least demonstrated by the sensitivity of the results by slightly changing assumptions. I prefer to look at earnings and prices, the so-called price-rent and price-income ratios, when formulating valuation metrics. But here are the data graphed in all their glory.

Tuesday, April 10, 2012

Case Shiller and Teranet HPIs: A Comparison

To gain some perspective I decided to overlay the Case Shiller and Teranet house price indexes for direct comparison. The CS and Teranet HPIs use similar methodologies, tracking same-sales pairs to formulate an aggregate house price index, that is mostly independent of sales mix. The two measures are, for the most part, apples to apples and one of the best gauges available for house prices.

The Teranet and Case Shiller indexes are assigned the value of 100 at a particular date, however housing market cycles between regions and countries can be advanced or delayed based on local and macroeconomic factors. Here I propose rescaling the indexes based on their trough values and, for clarity of graphing, aligning the price peaks as shown below along with a nominal 2%, 3%, and 4% trendlines.

Why would we look at troughs? In this particular case most price troughs occurred in the 1990s, an era of positive real rates and, according to Professor Shiller's long-term analysis, a period where house prices are aligned with their century-long trend. Canada, arguably, due to similarities in its economy to the United States, would have had similar sentiment in its housing market under capital conditions at the time. 

The graph above indicates that speculative excesses can exceed by multiples the trough, therefore using a median or mode measure of the long-run average given there was obviously mis-pricing during that time, would tend to skew any data used as a baseline. A trough, on the other hand, I argue is governed more by rentier-seeking investors and relatively little in the way of speculative activity.

The above graph indicates that while Vancouver (and Montreal too!) is now above any current valuations of presented American markets, it has achieved nowhere near the excesses wrought by said markets. It could be argued that Vancouver's trough is lower than presented (its "trough" presented here occurred in 1998) but even so this would not significantly move its rank to the likes of San Diego, San Francisco, or Los Angeles.

Are Canadian and American markets directly comparable? I would argue, as presented, yes they are, insofar as the investment climate in these locales are roughly similar: if it's true that troughs are governed by baseline investor interest we would expect similar floors and the tax treatments and inherent risks of properties for investors are roughly equivalent. Las Vegas, Phoenix and Miami have oversupply problems and were hit particularly hard, to the point where they are approaching undervaluation; the markets of LA, San Diego, and Seattle -- coastal cities with growing metro populations -- have been slower to fall and would have appreciation higher than inland areas due to increasing land utility.

A note about comparing HPIs. Price levels do not tell us much without knowing their earnings potential. Vancouver has always had a high price-income ratio, in part due to future land utility improvements. Looking at aggregate market prices through HPIs is useful but won't directly tell us much about individual property profitability.

In summary, while Vancouver's appreciation from trough is significantly above inflation, it did not experience anywhere near the amount of price distortions in certain US markets. Vancouver and Montreal are currently the most highly priced metropolitan areas in North America based on that measure and while not achieving the insanity we saw Stateside, now find themselves the leaders.

Thursday, April 05, 2012

BC Employment by Sector March 2012

Below are some graphs highlighting BC's employment over the past 15 years in various sectors. But first here are the historical employment, participation, and unemployment rates (CANSIM table 282-0117)

Here are the contribution of the two major goods producing sectors (construction and manufacturing) as a percentage of total employment. These are seasonally unadjusted with 3 month moving average applied (CANSIM table 282-0111).
And the service producing sectors. There is seasonality in the education and recently in the business and building services sectors as well.

The latter half of 2011 has seen a welcome rebound to the manufacturing sector as well as a drop in construction employment as a percentage of total employment. Construction employment is still high relative to its historical limits of the past 15 years and remains a larger part of BC's workforce than previous. If construction were to stumble closer to levels seen earlier in the century, there is some hope that manufacturing can fill at least some of the gap, though at what quality remains to be seen.

What causes seasonality? With education there are typically layoffs in the summer break as teachers without full time positions are terminated then re-hired in the fall. The troughs in education employment correspond to the summer months. The recent uptick in construction employment peaked in the late spring and is now completing. I am not sure why this occurred. Other sectors show mild seasonality but nothing immediately obvious that could be of much use.

Despite BC not showing as strongly in the latest labour force survey, it nonetheless appears that parts of BC's economy are recovering alongside the rest of North America and that is a good thing.

Monday, April 02, 2012

Greater Vancouver Market Snapshot March 2012

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to March 2012.

When I collate numbers for the updated benchmark, and compare its performance compared to the Teranet HPI, I'll formulate updated price graphs. No rush; market prices aren't going anywhere fast in the next while!


March, as January and February, continued with relative weakness compared to not only 2011 -- which was borderline insane -- but also past years from 2005 (except the residual emerging from the recession of 2008-2009). An interesting trend is that 2012 has mirrored 2008 in terms of sales, with January and February continuing at trend with March starting to peter out. This may well be a coincidence; inventory growth has slowed in March compared to the previous months, a trend seen before in 2010, where one assumes owners can refinance and handle carrying their properties in case of a failed sale.

Make no mistake that this March was a relatively weak report, not surprising perhaps given benchmark prices have been increasing at multiples of the inflation rate since the trough of early 2009. One assumes that higher prices would tend to limit demand.

There are some worrying clouds on the horizon: population growth is falling, dwelling completions are set to increase in the latter half of the year, banks are beginning to implement stricter mortgage guidelines, and the home ownership rate is highest in recent memory. On the other hand mortgage rates remain low, near net zero real territory, and it is possible for rates to remain low for a prolonged period (i.e. years). I am nonetheless sceptical low real rates will be a saviour for house prices after looking at examples in other parts of the world throughout history.

As a final note this month, I am looking at 2008 with some renewed interest, at least insofar as understanding why it behaved so differently from subsequent years in terms of growing inventory, falling sales, and (eventually) falling prices. What were the root causes of 2008's distress? A look at some macro indicators like layoffs and unemployment, current account shifts, and mortgage rates -- things I would have thought would directly impact sales -- does not immediately yield anything that would cause a sudden drop in demand for housing.

The only inkling of distress came in mid-March 2008 when the so-called TED spread spiked above 2% around the time where Bear Stearns's troubles became more apparent. The spread remained inflated until June and then spiked up again in September. This initial distress could have led to banks imposing emergency loan crimps as they started to provision more capital for perceived counterparty risk. Other parts of the country faced simultaneous distress signs in the spring selling season, an indication that conditions affecting prices were national in scope.

Though I haven't done thorough analysis, my conjecture is that Vancouver's 2008 distress was primarily caused by a sudden lack of access to credit. If true 2008 gave us a truly concerning peek into what is primarily driving Vancouver's run up in prices since the early part of the century. If mortgage credit were to face a renewed bout of rationing I do not see much positive for prices going forward.

All the best in the coming quarters to my friends and colleagues who will be exposed to Vancouver real estate.