I have commented before that there is good evidence to lead me to believe that the current run up in housing is not just a cyclical real estate price pattern but also a generational pattern that perhaps began in the mid-70s or 80s.
Here is a really interesting paper discussing this possibility.
Some highlights:
The giant baby boom generation born between 1946 and 1964 has been a dominant force in the housing market for decades. This group has always provided the largest age cohorts, and has created a surge in demand as it passed through each stage of the life cycle. As its members entered into home buying in the 1970s, gentrification in cities and construction of starter homes in suburbs increased. Their subsequent march into middle age was accompanied by rising earnings and larger expenditures for move-up housing. Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market.
Given the potential effects of so many of these changes happening in a limited period of time, communities should consider how best to plan this transition. Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades.
We also expect that this change will make many more homes available for sale than there are buyers for them. The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences.
Sellers of existing homes provide 85% of the annual supply of homes sold, and home sales are
driven by the aging of the population since seniors are net home sellers. The ratio of seniors to working-age residents will increase by 67% over the next two decades; thus we anticipate the end of a generational housing bubble. We also find that younger generations face an affordability barrier created by the recent housing price boom. With proper foresight, planners could mitigate what otherwise could be significant consequences of these projections.
We argue that the United States is currently experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude. The recent housing price boom has been remarkably strong. From 2000 to 2005, the median sales price reported by the National Association of Realtors rose 48.6% nationwide, and in some areas, such as California, the median sales price rose 117.1%. Only in 2007 did prices begin to slip in particular metropolitan areas and nationwide. This price run-up had a two-edged effect that substantially increased the home equity of existing homeowners while at the same time making housing less affordable for would-be home buyers. The result is a sharply increased generation gap, with the baby boomers largely gaining, while members of younger generations face higher affordability hurdles.
Sunday, January 27, 2008
Tuesday, January 22, 2008
Vancouver Real Estate Bubble Uberpost
It has been awhile since I've put everything together in a complete picture for us to formulate an informed view on our local real estate market. This is a long post but well worth it.
First some history:
Average home prices have catapulted into the stratosphere recently.
The price of a benchmark condominium in Greater Vancouver has risen 111.5% in the past five years to a disgustingly unaffordable $377,579.
The price of a benchmark townhouse in Greater Vancouver has risen 100.8% in the past five years to a sickeningly unreachable $456,941.
The price of a benchmark single family home in Greater Vancouver has risen 95.5% in the past five years to nauseatingly excessive $730,399.
Even adjusted for inflation we are far above any historical norm.
What this means is that the average family can’t afford to buy a first home or upgrade since the income required to fund this purchase via a mortgage is double or triple what they make.
Now our current house prices wouldn't be a problem if people were earning more money but they aren't. Average incomes have not increased to the extent necessary to afford the average home.
This wouldn't be all that concerning on its own either if rents were rising but the crux of the matter is that the income yield or rent from real estate in the Vancouver area has not increased to the extent necessary to justify today's high prices.
Many observers point to low interest rates to justify current real estate prices but this does not explain our current situation either. If interest rates were low enough to justify current prices then we should see a similarity between mortgage payments and rents but we see a wide disparity between the two at this point in time. In fact we would have to go back to the heyday of 1981 and 18% interest rates for the mortgage payment to rent ratio to be as high as it is today.
Many people see the current building boom and assume we have high population growth which, if it were true, would partially explain the huge run up in prices but it is just not true as population growth has not been high by historic standards.
Granted, we have had population growth (in 1000s of persons) and all of these people do need to live somewhere. We did go through a period of time in the late 1990s and early 2000s when developers were not building a lot of new homes because there wasn't a lot of profit in it and demand seemed low but that changed quickly as interest rates declined dramatically after the tech bubble crash and 9/11. Subsequently, people went out house shopping in droves causing a shortage of supply in our local market.
We do live in a mostly free market economy and supply demand economic equations really come into play when we are discussing price movement of commodities such as real estate. When development companies are able to make a profit selling a home they will do so and the higher the profit earned they will consequently build even more homes. Logically, this would suggest that we shouldn't have a problem at all with prices because supply and demand should quickly come into balance but this is not so.
The problem is that real estate product takes from 6 to 24 months to produce and the time lag is substantial as people, after all, do need a roof over their head. This lag produces another effect - speculation - savvy speculators perceive shortage in the marketplace and act quickly to take advantage of the obvious price implications of shortage by buying any available units. This competition for housing causes prices to rise very quickly. This also causes a feedback loop and sends a signal to developers indicating that there is even more demand and so they build even more units. This feedback loop causes further effects such as skilled labour shortages and escalating construction costs as other people become aware and want to take advantage of the perceived shortage. People now feel the prices are justified because of these higher costs.
All the while the loop increases until we have exhausted all demand and the feedback loop that made everyone feel we were in a boom ends and it is replaced by a vicious circle of increasing developer inventory, speculators who cannot sell the homes they speculated on, decreasing construction input costs as competition becomes fierce, and increasing unemployment which further exacerbates the problem. We are nearing this exhaustion point as the number of units under construction in the Vancouver Census Metropolitan Area is way higher than justified by our population and many projects have completed or are scheduled to complete in the next 12 - 24 months.
Anecdotes abound of Realtors, mortgage brokers, and wanna-be Donald Trumps picking up 4, 8, or 12 housing units before they are even completed so they can sell at a profit when the building is finished. The problem is that this will cause the vicious circle mentioned above and prices will decrease as all demand is exhausted and the supply burgeons with newly completed inventory and desperate speculators.
The prospects are bleak for Vancouver real estate as there are very few potential buyers out there, population growth is low, average incomes are below urban Canadian averages and we have a housing inventory that is projected to increase dramatically in the next 12 - 24 months. Stay tuned and grab some popcorn since this is going to get real interesting.
First some history:
Average home prices have catapulted into the stratosphere recently.
The price of a benchmark condominium in Greater Vancouver has risen 111.5% in the past five years to a disgustingly unaffordable $377,579.
The price of a benchmark townhouse in Greater Vancouver has risen 100.8% in the past five years to a sickeningly unreachable $456,941.
The price of a benchmark single family home in Greater Vancouver has risen 95.5% in the past five years to nauseatingly excessive $730,399.
Even adjusted for inflation we are far above any historical norm.
What this means is that the average family can’t afford to buy a first home or upgrade since the income required to fund this purchase via a mortgage is double or triple what they make.
Now our current house prices wouldn't be a problem if people were earning more money but they aren't. Average incomes have not increased to the extent necessary to afford the average home.
This wouldn't be all that concerning on its own either if rents were rising but the crux of the matter is that the income yield or rent from real estate in the Vancouver area has not increased to the extent necessary to justify today's high prices.
Many observers point to low interest rates to justify current real estate prices but this does not explain our current situation either. If interest rates were low enough to justify current prices then we should see a similarity between mortgage payments and rents but we see a wide disparity between the two at this point in time. In fact we would have to go back to the heyday of 1981 and 18% interest rates for the mortgage payment to rent ratio to be as high as it is today.
Many people see the current building boom and assume we have high population growth which, if it were true, would partially explain the huge run up in prices but it is just not true as population growth has not been high by historic standards.
Granted, we have had population growth (in 1000s of persons) and all of these people do need to live somewhere. We did go through a period of time in the late 1990s and early 2000s when developers were not building a lot of new homes because there wasn't a lot of profit in it and demand seemed low but that changed quickly as interest rates declined dramatically after the tech bubble crash and 9/11. Subsequently, people went out house shopping in droves causing a shortage of supply in our local market.
We do live in a mostly free market economy and supply demand economic equations really come into play when we are discussing price movement of commodities such as real estate. When development companies are able to make a profit selling a home they will do so and the higher the profit earned they will consequently build even more homes. Logically, this would suggest that we shouldn't have a problem at all with prices because supply and demand should quickly come into balance but this is not so.
The problem is that real estate product takes from 6 to 24 months to produce and the time lag is substantial as people, after all, do need a roof over their head. This lag produces another effect - speculation - savvy speculators perceive shortage in the marketplace and act quickly to take advantage of the obvious price implications of shortage by buying any available units. This competition for housing causes prices to rise very quickly. This also causes a feedback loop and sends a signal to developers indicating that there is even more demand and so they build even more units. This feedback loop causes further effects such as skilled labour shortages and escalating construction costs as other people become aware and want to take advantage of the perceived shortage. People now feel the prices are justified because of these higher costs.
All the while the loop increases until we have exhausted all demand and the feedback loop that made everyone feel we were in a boom ends and it is replaced by a vicious circle of increasing developer inventory, speculators who cannot sell the homes they speculated on, decreasing construction input costs as competition becomes fierce, and increasing unemployment which further exacerbates the problem. We are nearing this exhaustion point as the number of units under construction in the Vancouver Census Metropolitan Area is way higher than justified by our population and many projects have completed or are scheduled to complete in the next 12 - 24 months.
Anecdotes abound of Realtors, mortgage brokers, and wanna-be Donald Trumps picking up 4, 8, or 12 housing units before they are even completed so they can sell at a profit when the building is finished. The problem is that this will cause the vicious circle mentioned above and prices will decrease as all demand is exhausted and the supply burgeons with newly completed inventory and desperate speculators.
The prospects are bleak for Vancouver real estate as there are very few potential buyers out there, population growth is low, average incomes are below urban Canadian averages and we have a housing inventory that is projected to increase dramatically in the next 12 - 24 months. Stay tuned and grab some popcorn since this is going to get real interesting.
Bob Rennie is a (very well) Paid Shill
I heard a panel of financial market analysts on CKNW this morning comprised of Michael Campbell, Michael Levy, Helmut Pastrick and Bob Rennie. I am amazed every time I hear the silver tongued Bob Rennie open up his mouth. I believe that Bob actually believes the crap he says about Vancouver being able to weather the financial storms that are hurtling around the world right now and that our economy is an invincible fortress built upon ever increasing real estate wealth.
At times, during the few minutes I could tolerate, it seemed as if the 3 actual financial industry players were about to say - "What is this guy doing here?" After all Bob Rennie is a marketer, not an economist. He wouldn't know a price/rent ratio if it hit his Rolls Royce on the hood.
Bob, after being lobbed softball questions by host Bill Good, spouted the usual nonsense about the Vancouver Olympics, world class city, blah, blah, blah. Are you nucking futs? Blind? Deaf?
Rant off.
At times, during the few minutes I could tolerate, it seemed as if the 3 actual financial industry players were about to say - "What is this guy doing here?" After all Bob Rennie is a marketer, not an economist. He wouldn't know a price/rent ratio if it hit his Rolls Royce on the hood.
Bob, after being lobbed softball questions by host Bill Good, spouted the usual nonsense about the Vancouver Olympics, world class city, blah, blah, blah. Are you nucking futs? Blind? Deaf?
Rant off.
Wall Street Owns Federal Reserve
In a move that basically puts central bank interest rates below the rate of inflation, the US Federal Reserve lowered their prime rate 75 basis points to 3.5% before markets opened this morning.
Just a reminder to everyone out there, this is exactly the stupid type of move that got us into the whole mortgage mess, housing bubble, credit crisis. Look for the next bubble to start anytime now with even more interest rate cuts left to come with the inflation beast lurking and about to be let out into the street.
What is your bet on the next bubble?
Here is my short list of candidates:
Infrastructure
Agriculture
Alternative Energy
Monday, January 21, 2008
Time to Start Buying? Maybe, Maybe Not
Update:
Trading was halted Tuesday on the Sensex after 9.5% drop in market value.
The Nikkei, Hang Seng, and other Asian indexes are also down dramatically in Tuesday trading.
Keep your powder dry.
The TSX is down nearly 5% this morning and down well over 10% year to date. We are back into 2006 territory for the level of the TSX and I am getting calls from clients now to sell everything. This is, from my past experience, the time to start buying. Most people are their own worst enemy to their long term financial health. They buy when they should be selling and the sell when they should be buying.
Trading was halted Tuesday on the Sensex after 9.5% drop in market value.
The Nikkei, Hang Seng, and other Asian indexes are also down dramatically in Tuesday trading.
Keep your powder dry.
The TSX is down nearly 5% this morning and down well over 10% year to date. We are back into 2006 territory for the level of the TSX and I am getting calls from clients now to sell everything. This is, from my past experience, the time to start buying. Most people are their own worst enemy to their long term financial health. They buy when they should be selling and the sell when they should be buying.
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