Teranet HPI through February 2019

March 13, 2019 Largest retreat for a February outside of recession In February the Teranet–National Bank National Composite House Price IndexTM was down 0.4% from the previous month.[1] Except for the recession year of 2009, it was the largest February decline in 19 years of index history. Indexes lost ground in nine of the 11 metropolitan markets of the composite index: Victoria (−2.0%), Hamilton (−1.4%), Quebec City (−1.2%), Calgary (−0.8%), Vancouver (−0.7%), Ottawa-Gatineau (−0.7%), Winnipeg (−0.4%), Toronto (−0.2%) and Edmonton (−0.1%). The only indexes up from the month before were those for Montreal (0.4%) and Halifax (0.3%). All five constituent markets in Western Canada have now joined the downtrend. For Calgary it was the eighth consecutive month without a rise, a cumulative decline of 3.2%, for Vancouver the seventh (a cumulative −3.9%), for Edmonton the sixth (−3.5%) and for Victoria the fifth (−2.5%). The index for Winnipeg has risen only once in the last five months (cumulative −1.9%). In central Canada, Hamilton has gone five months without a rise (cumulative −2.3%) and Ottawa-Gatineau has risen in only one of the last five months (cumulative −0.8%). The index for Montreal, in striking contrast, has declined only once in the last 11 months (cumulative gain 5.3%) and is the only constituent index that was up from six months earlier. For the composite index it was a fifth consecutive month without a rise, for a cumulative decline of 1.4%.   Teranet-National Bank National Composite House Price Index™ In changes from 12 months earlier, only three indexes showed the weakness that has more recently become apparent in several regions: Calgary (−2.7%), Edmonton (−1.6%) and Vancouver (−1.1%). The change from a year earlier remained positive for Halifax (1.2%), Winnipeg (1.3%), Victoria (2.8%), Hamilton (3.0%), Quebec City (3.5%), Toronto (3.6%), Montreal (5.2%) and Ottawa-Gatineau (6.0%). The composite index was up 1.9% from a year earlier. Besides the Toronto and Hamilton indexes included in the composite index, indexes exist for the seven other urban areas of the Golden Horseshoe. In February, they were down from the previous month for Kitchener (−1.3%), St. Catharines (−1.0%), Oshawa (−0.5%) and Guelph (−0.3%). The index for Barrie was flat. Indexes were up for Peterborough (0.5%) and Brantford (1.5%). As with Toronto, Hamilton and Ottawa-Gatineau, none of these indexes was higher than it had been six months earlier. Indexes not included in the composite index also exist for seven markets outside the Golden Horseshoe, five in Ontario and two in B.C. In February four of them were down from the month before: Sudbury (−3.4%), Kingston (−2.6%), Abbotsford Mission (−0.9%) and Windsor (−0.4%%). Kelowna was up 0.3%, Thunder Bay 0.3% and London 0.9%. Only two of these seven, Windsor and London, were up from six months earlier. In other words, of 25 metropolitan markets surveyed, only three – Montreal, Windsor and London – were up from six months earlier, the weakest diffusion of six-month gains for any February since the recession. For the full report including historical data, please visit our website. *Note on methodology: The current-month data used to calculate the index are those of closed sales registered in the provincial land registry. To illustrate the home price trend, the published indexes of the 11 metropolitan markets entering into the Teranet–National Bank Composite House Price Index™ are moving averages of the last three months of raw indexes. This procedure evens out month-to-month fluctuations. More granular monthly data are available upon request, possibly subject to subscription fees. For further information about the methodology, please visit www.housepriceindex.ca

Copyright 2019 Teranet Inc. and National Bank of Canada

Teranet House Price Index - April 2014

HOME PRICES UP 0.5% IN APRIL In April the Teranet-National Bank National Composite House Price Index™ was up 0.5% from the previous month, following a flat March. Though the gain might appear robust, it must be said that apart from the recession in 2009, the composite index always advanced in April, the average monthly increase having been 0.9%. Last month's advance is indeed the third weakest for April outside a recession since 1999. Though the countrywide composite index rose to an all-time high, only four of the 11 metropolitan markets surveyed did the same. Prices were up from the previous month in nine markets. Calgary's 1.5% advance was the third in a row exceeding 1%, taking that market to a new high. Montreal's monthly gain of 0.8% was far from making up the ground lost in March. Prices in Hamilton, Halifax and Ottawa-Gatineau were up 0.7% on the month. The rise in the national capital region ended a run of seven monthly retreats. The rise in Halifax left its index still below the January reading. The monthly gain was 0.6% in Edmonton, 0.5% in Vancouver (the only city whose prices have risen for 12 consecutive months, also to a new high), 0.4% in Winnipeg and 0.3% in Toronto. These last two markets reached new highs although their advances trailed the countrywide average. Two markets were down from the previous month, Quebec City (−0.5%) and Victoria (−1.0%). Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: info@housepriceindex.ca For licenses covering all index-linked products, please contact: Simon Côté 514 879-5379 Website www.housepriceindex.ca

Since in April 2013 the monthly rise of the composite index was the smallest on record (+0.2%), the rather modest advance of April 2014 resulted in an acceleration of 12 month home price inflation to 4.9% from 4.6%. However, for the first time since October 2010, prices were down from a year earlier in five of the 11 markets, including all four of those east of Toronto: Halifax (−3.5%), Quebec City (−2.4%) and Montreal and Ottawa-Gatineau (−0.4%). The fifth market with 12-month deflation was Victoria (−0.7%). In striking contrast were 12-month gains of 10.0% in Calgary and 9.0% in Vancouver. Toronto (+5.8%) and Hamilton (+5.3%) also pulled the cross-country average higher. Trailing the average were Edmonton (+4.0%) and Winnipeg (+2.5%). The softness of prices east of Toronto is consistent with the excess supply prevailing in the resale markets of these metropolitan areas. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at www.housepriceindex.ca. Metropolitan area Index level April % change m/m % change y/y Calgary 179.39 1.5 % 10.0 % Edmonton 174.88 0.6 % 4.0 % Halifax 137.75 0.7 % -3.5 % Hamilton 145.92 0.7 % 5.3 % Montreal 148.37 0.8 % -0.4 % Ottawa 139.49 0.7 % -0.4 % Quebec 172.74 -0.5 % -2.4 % Toronto 155.15 0.3 % 5.8 % Vancouver 180.52 0.5 % 9.0 % Victoria 133.88 -1.0 % -0.7 % Winnipeg 196.00 0.4 % 2.5 % National Composite 6 160.94 0.6 % 5.5 % National Composite 11 161.28 0.5 % 4.9 % The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given atwww.housepriceindex.ca The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005. By: Marc Pinsonneault Senior Economist Economics and Strategy Group National Bank of Canada

Price Changes, Sales and Inventory

A recent foray of activity in recent business news feeds has uncovered a slightly revised outlook on Canadian housing from investment shop PIMCO. Articles can be traced through Luke Kawa's article. What it seems to have boiled down to is an expectation that national prices could fall -20% to -10% in real terms (I'm assuming a 2% inflation rate) over about five years, though this could possibly happen faster. Taking the view that such a correction is going to occur over five years we can infer what this will mean for sales and inventory.

In Vancouver, sales and inventory have a relationship to price changes. Here is a graph showing annualized price changes versus the ratio of for-sale inventory to monthly sales (months of inventory AKA MOI) since 2005:

The relationship between MOI and price changes is clear however the variance is substantial. Using a baseline assumption of MOI of 7 leading to flat nominal prices and an MOI of 10 leading to -5% nominal annualized price changes, we can determine what level of increased inventory and decrease in sales is required to elicit the price drops conducive to PIMCO's -20% to -10% real call. (This is not to say that Vancouver will be in-line with the national average but the analysis is here as an example.) I have colour coded the results. Results are based on changes from current sales and inventory levels (that are around MOI=6.5).

MOI resultant from changes in sales and inventory from current levels:

Nominal annualized price changes based on inventory and sales changes

Real price changes over five years based on inventory and sales changes

The above charts are concentrating on the scenarios discussed by PIMCO. This is not to suggest that their estimates are realistic; price increases are certainly possible but not considered in the charts.

We can use the charts as follows:

To get a -10% real drop over five years, that would require:

• an average increase in inventory of 10% with a 0% change in average sales
• an average increase in inventory of 5% with a 5% change in average sales
• an average increase in inventory of 0% with a -10% change in average sales

To get a -20% real drop over five years, that would require:

• an average increase in inventory of 30% with a 0% change in average sales
• an average increase in inventory of 15% with a -10% change in average sales
• an average increase in inventory of 0% with a -25% change in average sales

An interesting observation is how little sales and inventory need to move (inventory up 15% and sales down 10%, say, albeit for a prolonged five year duration)  to change a slightly-increasing market (the current scenario) to one that will be down -20% in five years.

Teranet House Price Index - February 2014

HOME PRICES UP 0.4% IN JANUARY In January the Teranet-National Bank National Composite House Price Index™ was up 0.4% from December. This advance took the composite index to an all-time high, though individual indexes reached all-time highs for only two of the 11 metropolitan markets surveyed, Toronto and Vancouver. Since in January 2013 the index was down from the month before, the increase of January 2014 resulted in an acceleration of 12 month home price inflation to 4.5% in January from 3.8% in December. The gain from a year earlier exceeded the cross-country average in four of the 11 markets: Vancouver (7.5%), Calgary (7.1%), Toronto (5.8%) and Hamilton (5.1%). It was close to the average in Edmonton (4.4%) and Winnipeg (3.9%). It was minimal in Montreal (0.8%) and Quebec City (0.6%). Prices were down from a year earlier in Victoria (−5.7%), Halifax (−2.9%) and Ottawa-Gatineau (−0.6%). The 12-month decline was a first for Ottawa-Gatineau, the 11th straight for Victoria and the fourth in six months for Halifax. Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: info@housepriceindex.ca For licenses covering all index-linked products, please contact: Simon Côté 514 879-5379 Website www.housepriceindex.ca

The 0.4% advance of the composite index from December to January was the largest monthly rise in five months. Over this period, it is also the first time that a majority of the markets surveyed showed prices up from the month before. Vancouver (+1.1%), Toronto (+0.5%) and Quebec City (+0.5%) led the composite index. Calgary equalled it. Hamilton prices were up 0.3%, Winnipeg and Montreal prices 0.2%. Edmonton was flat on the month. Prices fell 0.3% in Victoria, 1.1% in Ottawa-Gatineau and 1.7% in Halifax. The January rises in Montreal and Quebec City interrupted runs of five consecutive monthly declines. For Ottawa-Gatineau it was the fifth straight monthly decline, for Victoria the fourth and for Halifax the second. For Vancouver it was a ninth straight monthly rise, for the composite index the 10th in 11 months. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at www.housepriceindex.ca. Metropolitan area Index level January % change m/m % change y/y Calgary 172.42 0.4 % 7.1 % Edmonton 172.33 0.0 % 4.4 % Halifax 138.06 -1.7 % -2.9 % Hamilton 146.63 0.3 % 5.1 % Montreal 148.98 0.2 % 0.8 % Ottawa 140.42 -1.1 % -0.6 % Quebec 176.52 0.5 % 0.6 % Toronto 154.80 0.5 % 5.8 % Vancouver 176.94 1.1 % 7.5 % Victoria 133.48 -0.3 % -5.7 % Winnipeg 193.96 0.2 % 3.9 % National Composite 6 159.45 0.5 % 5.0 % National Composite 11 159.93 0.4 % 4.5 % The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given atwww.housepriceindex.ca The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

The Vancouver Condo Price-Rent Ratio

A method of measuring relative valuation is to look at price-rent ratios, a "price-earnings" ratio for real estate. Vancouver does not have a market rent index, however CMHC does provide rental survey data that I have quickly validated to be close to prevailing rents. The price is garnered from the Greater Vancouver MLS-HPI (note the MLS-HPI before 2005 uses a different base so I "stitched" the two indexes as best I could). The results are normalized for Jan 2005 below:

The red line has been slowly falling from 2008 onwards, most recently the drops have been from an equal combination of rising rents and falling prices. The historical bound for price-rent ratio before 2000 has been between about 70 and 90. As an estimate, say the price-rent ratio is to revert to this historical bound in five years. What average annualized price change is required to do this?

Rents have averaged about 2.5% annual gain since the 1990s. Under this scenario, five years of -2.5% nominal price changes will put the price-rent ratio within historical bounds. To get to the middle of this range would require a more hearty -5% annualized nominal price change. If rental growth slows due to slow income growth or oversupply, price drops would need to intensify.

Fun With Predictors

Here is a fun predictor I use to guess near-term (i.e. 4-6 months out) price movements on the Teranet HPI. The model works by finding peak correlation between price changes and months-of-inventory, the best is shown below:

I then use a simple regression fit (I'm ignoring log fit for now) and play around with the regression window length and get minimized error post-2009 with an 8-month window. Since peak cross correlation is shifted we have the ability to "predict" price changes some time into the future, in this case 3 months ahead:

This is then translated onto a year-on-year prediction:

On the graph above I get an estimate of close to -5.5% YOY change in the March Teranet HPI. I have been calling for between -6% and -4% on the Teranet HPI in February-March of 2013.

Some Thoughts on Bank of Canada and House Prices

Deputy Governor of the Bank of Canada John Murray gave a speech to a crowd in New York on global rebalancing. I'm certainly not learned enough to comment meaningfully on his arguments and rationale but he did mention something in subsequent commentary about Canadian housing:

Canada's heated housing market appears to be cooling as desired, a senior Bank of Canada official said on Tuesday, although he noted that housing starts remain unusually high.

Housing prices and construction in Canada roared higher in 2011 amid low interest rates, sparking fears of a U.S.-style bubble. The market started to slow after the government tightened rules on mortgage lending in July, and policy makers hope to see a gradual softening rather than a crash.

"It's still early days. But we're certainly seeing evidence of movement and acceleration in the right direction," Murray told a business audience after giving a speech in New York.

"Some sort of smooth transition, at least on the housing side, is what we're looking for," he said.

An interesting comment for a "housing analysis" blogger! Murray is commenting that transitioning housing to a more sustainable level is something the Bank is looking for, and on which is likely advising the government to form fiscal policy. So we can play some guessing games as to what the Bank of Canada would like to see for a "smooth transition" and what that means.

What are the risks of high house prices and debts? Currently there is some risk of external economic shock to incomes, but absent that, with real rates depressed, debt-service ratios are currently for the most part manageable. If rates increase, however, this poses a significant headwind for the Canadian economy and worse could be almost impossible for policymakers to contain the fallout. Luckily, based on the yield curve, it looks as if rates have a good chance of staying low for a prolonged period, perhaps for the rest of the decade. The question then is what does Canada need to do in the coming years to ensure that when interest rates do rise she will not be caught out with excessive debt levels and overinflated asset prices.

Based on Murray's comments we have a smidgen of a clue what the Bank's and government's strategy is on the front of asset price reversion. It looks as if they are trying to pull of a "smooth transition" of prices back to levels that are able to be carried with historical interest rates. If prices continue at current levels (or increase) they will not have reverted quickly enough to stave off a big shock when rates rise. If prices fall too quickly this will lead to situations where a large swathe of owners are in negative equity situations, something that has knock-on effects to the broader economy. Given the assumption the Bank wants to control the band in which prices revert, we can do a quick calculation what that would mean for prices.

Say prices as a ratio to incomes are 40% above their long-term average. To revert prices to this range will require a 30% drop. To do this in seven years requires a -5% annual drop in the price-income ratio. Assuming incomes rise by 2% per year that means national prices need to drop at -3% per year for seven years to revert. If markets like Vancouver are, say, 50% overvalued, that will require prices dropping at -5% per year with 2% annual income gains to revert.

Prices do not often move in a straight line, rather we should expect that price drops will be more severe near the middle of the reversion and less severe near the ends. We can approximate this trajectory as a raised-cosine profile, say

P=(Pi-Pf)/2*cos(π*x/L) + (Pi+Pf)/2

where P is the price, Pi is the initial price, Pf is the final price, x is the year from start of correction, and L is the duration of the reversion target. Below are the year-on-year price change results for a 20% and 30% decline in prices:

Assuming the Bank of Canada is serious about price targeting we have some rough estimates of the level of annualized price drops required to pull off this delicate manoeuvre. As a reference, Vancouver looks to be on track for between -4% and -6% annualized price drops in the late winter of 2013.

But here's the thing -- if prices are to revert in a controlled manner, as regular readers of this blog know, this necessarily requires a certain ratio of for-sale inventory to prices. In other words, to ensure prices drop at a defined rate it will likely mean the government will need to control the level of sales. The only ways I can see them accomplishing such a feat are through controlling immigration intake -- not easy since they don't have much control on where immigrants settle -- and through credit availability.

In short, if the Bank of Canada is indeed "price targeting" so as to attempt to revert housing valuations to their long-term averages in the advent of future interest rate hikes, I believe we can expect further adjustments to controls of credit availability, both looser and tighter, over the coming years. It will remain to be seen how much capacity is left to accumulate additional credit, and where it can be stuffed!

Price to Rent Ratios for Vancouver

I have been loath to publish price-rent ratios for Vancouver, even though I think it's one of the primary methods by which prices are set in the long run. I went over the issues with price-rent ratios here. For a backgrounder on why this is important, read Calculated Risk's posts (like this one) and refer to the Federal Reserve Bank of San Francisco's letter from 2004 on the subject.

When looking at an area like Vancouver with increasing density one must be careful using detached dwellings when formulating price-rent ratios as the earnings are forecast to increase greater than rental inflation into the future and would carry a higher price-rent ratio. The best gauge we have for a time-insensitive price-rent ratio is by using apartment rents and prices, that is, properties that have undergone most of their density increases.

Below is Greater Vancouver's apartment price-rent ratio, measured by using the MLS-HPI for apartments and the CMHC-surveyed one bedroom apartment rents, then normalizing them to a point in time.

As of December 2011 the price-rent ratio was 100% above the nadir in 2000 and 66% above the upper level of the price-rent band going back to at least 1991 (and likely longer).

As moderate stress test we can assume that the price-rent ratio will revert to at least within its historical band of 100-120 (on the graph above) in 5 years. For different rental inflation numbers the annual nominal price drops, from December 2011, required are:

• -8.5% per annum (cumulative -35.8%) for rental growth of 1% per annum
• -7.6% per annum (cumulative -32.6%) for rental growth of 2% per annum
• -6.7% per annum (cumulative -29.2%) for rental growth of 3% per annum

For reversion to the middle of the 100-120 historical band:

• -10.1% per annum (cumulative -41.2%) for rental growth of 1% per annum
• -9.2% per annum (cumulative -38.2%) for rental growth of 2% per annum
• -8.3% per annum (cumulative -35.1%) for rental growth of 3% per annum

For reversion to the bottom of the 100-120 band:

• -11.8% per annum (cumulative -46.5%) for rental growth of 1% per annum
• -10.9% per annum (cumulative -43.8%) for rental growth of 2% per annum
• -10.0% per annum (cumulative -41.0%) for rental growth of 3% per annum

The US's experience found that most price drops occurred within several years followed by a more prolonged (and still ongoing) period of flat prices and at-inflation rental growth to fully revert price-rent ratios back to their norms.

If one believes the sanctity of price-rent ratios, those are a lot of scary negative numbers.

Teranet House Price Index and Inventory

Long-time Vancouver real estate blog readers will remember the work mohican did regarding scatter plotting months of inventory (MOI, defined as month-end for-sale inventory divided by sales of that month) with price changes. Price changes have been based on the REBGV detached benchmark, alas the benchmark was revised and historical data are not available. Nonetheless the ever-resilient Vancouver Housing Blogger (VHB) has attempted to stitch together a longer-term MLS HPI and the results can be seen here.

After a bit of refinement it's been possible to improve the price-change-to-MOI fit by looking at price changes over different periods and leading or lagging the datasets. Using Teranet, not MLS-HPI data, I have found the best fit to be as follows:

The best fit is looking at 6 month price changes, delayed by 3 months, and plotting against 3 month moving-average of REBGV months of inventory (MOI). I have plotted above on semilog only to show the effect has a geometric component. Nonetheless a linear correlation is about -0.9, or in statistical lexicon, not bad.

I would take away the following things from this graph, (and I will have much more over the coming months as monthly data become available):

• Teranet data lags months of inventory. This is for a few reasons, first that Teranet uses data based on closed transactions where MLS uses data timed on subject removals, which can be several months in advance of the closing date. Second Teranet uses some averaging to produce a more statistically significant dataset but results in a lag in reporting the data.
• Price changes have a seasonal component. Prices are usually firmer in the spring and weaker in the fall and this is part of the reason why 6 month price change correlations protrude from the data field.
• Most intriguing, and astute readers will have already figured this out, is that there is a strong predictor of the expected Teranet HPI several months in advance of it being reported, based solely on 3 month moving average MOI data.
• We have a strong indication of MOI about halfway through a month. That is, we need not wait for the REBGV reported month-end data -- with daily numbers being reported by Paul Boenisch and Larry Yatkowski we get a sneak-peak at the likely MOI value. Also check the comment section of vancouvercondo.info for some more analytical predictions of month-end inventory and sales.
• This graph validates that an MOI above 7 means prices are going to drop. Current MOI is approaching 10.

I'll have some more fun graphs in the months ahead.

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.

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.

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.