Vancouver - Decline From Peak

Here is Vancouver's decline in house prices plotted in comparison to US cities since their respective price declines began. The Case Shiller indices track sales pairs much like the Teranet methodology and have been shown to be the most accurate house price tracking methodology.

Case Shiller data is as of April 2009 - data released June 30.
Vancouver REBGV data is as of June 2009 - data released July 3.
Vancouver Teranet data is as of April 2009 - data released June 19.



Dallas, Charlotte and Denver are 20 months into correction mode compared with Detroit, Boston, and San Diego which are over 40 months into the correction. In comparison, Vancouver is only 9 (Teranet) months or 14 months (REBGV) into its correction.

Time will tell if the latest uptick in prices has staying power but I would hazard a guess that we haven't seen the end of price declines. If we are 40 months from peak and we haven't decreased from current levels by then I will count myself as being wrong. Until then, I'll watch and wait.

Guest Post: Vancouver Housing Price Correlation Model

A recent discussion on the impact of low interest rates on local housing prices had me whipped up a quick, but significant correlation model between Vancouver housing prices and a few key factors.

The regression model is based on quarterly data, dating back to 1990. The independent variables for the regression are: Vancouver's unemployment rate, average 5-year residential mortgage rate, inter-provincial migration into BC, and international migration into BC. The result is as follows:

Adjusted R-Sq Value = 0.85

Volatility:

1) 1% increase in Unemployment rate translates to roughly a 10% housing price decline

2) 1% increase in 5-year mortage rate translates to a 8% housing price decline

3) every 1000 interprovincial migrants into BC increases housing prices by 1.8%, and

4) every 1000 international migrants increase housing prices by 1.7%

Significance Levels (P-Values):

Unemployment = 2.78E-19

Average 5-Year Mortgage Rate = 5.89E-13

Inter-provincial Migration = 8.02E-07

International Migration = 0.0163

Other factors like Canadian/US exchange rate & foreign investment flows are either non-factors or they are already embedded into one or a combination of the above factors. What's also interesting is that international migration has a low correlation and the least significant.

The graph below is a plot of the logarithm of the average housing prices (Source: UBC Centre for Urban Economics and Real Estate) and the regression model. The plot also tries to convey how each of the independent variables (components) are added together to yield the model price. Note that these components are arbitrary shifted so that it can be seen on the same axis. The rising yellow line since Q42008 represents a decline in the 5-year mortgage rate, and the falling dotted unemployment component since Q42008 reflects the rising unemployment rate.

Obviously, the caveats to this type of model are that correlations change over time, the causality of the variables is complex and unknown (i.e. we don't know what causes the other or which is really the independent variable), and there may be non-linear elements, such as a rise in RE price may fuel further decline in unemployment or vice-versa.

With this in mind, I took the liberty of forecasting some numbers through 2011, based on these 3 scenarios:

1) Unemployment gradually rising to 9% (1990s' levels) and the average 5-year mortgage rate constant at 2009Q1 levels of 5% (based scenario)

2) Unemployment rising to 9% and the average 5-year mortgage rate declining further to 2.5% (record low mortgage spreads)

3) Unemployment rising to 9% and the average 5-year mortgage rate rising to 8% ('00 levels)

All 3 scenarios use 2008 numbers for inter-provincial and international migration numbers. Note that the scale on the Y-axis is normal.

In 2007Q2, Vancouver housing prices appear to lose correlation held since 1990. What does this mean? Is there a factor in 2007 that we need to include? or are we just seeing irrational exuberance?

UPDATE 2009-07-07 :

The model was optimized by delaying the effects of the unemployment rate, mortgage rate and international migration by one quarter. New adjusted R-value is slightly better (0.851)

I also added another scenario (unemployment at 7% and 5-Y rate at 5%, unchanged from 2009Q2 through 2011)

REBGV Sales are the Story

The local real estate market has been goosed this spring by the super low interest rates available to your average home buyer.

Sales in the REBGV jurisdiction were very high at 4259 for the month of June.

Active Listings fell to 13,252 units.


Consequently the Months of Inventory fell to a mere 3.11 for the month of June. A dramatic fall from January's levels.

As sales have risen and inventory has fallen, prices have gone up.

The correlation between Months of Inventory and Price Changes is still very strong.

It will be very interesting to see how future price changes play out. We will see if this spring market is a temporary phenomenon like so many other spring markets around North America.

Unemployment levels, interest rates, and many other factors play a big part in the local market and it will be interesting to see which way things turn.

Ubergeek Post Update June 2009 - Price Changes and Months of Inventory in GVREB

Here is a quick update on the work mohican and I did in spring 2008 around refining mohican's work tracking price changes and months of inventory. Remember that the best fit was to track half-over-half (i.e. 6 months over 6 months) price changes to a three month moving average of months of inventory (total active listings at the end of the month divided by the sales in that month).

Here is mohican's famous scatter plot for half-over-half versus 3 month moving average MOI (the red dot is June 2009's datum):



Remarkably the correlation is disturbingly accurate into the downturn. Looking forward we can see how well the model has "predicted" the next month's price movements.



Weak-minded fool that I am, I second-guessed myself and thought the benchmark would come in at $690K, though if I had stuck to the model I would have been closer. I am at a loss to explain the reason for how well this model has done in Vancouver. Other cities where I have tried to run similar analysis show nowhere near as tight a correlation between months of inventory and price changes. Since the causation underlying this model is not well understood the model is interesting but not much more -- it will track until it doesn't.

If you're flabbergasted by the market's recent strength, consider affordability has improved close to 30% in the past year (thanks for pointing this out, fish10). That's a Brobdingnagian shift, even with aggregate incomes coming under severe pressure.

The "Inflation Hedge"

Much talk has ensued in past months, around the time of quantitative easing by central banks, about the concept of real estate being a so-called "inflation hedge". What is meant by this?

The concept of "hedging" is pretty straightforward: take a position in an investment that limits the possible losses when summed with another investment. Generally one gives up some return for doing this but one can prevent against an investment being wiped out. Of course in the context of real estate, there is no hedge per se. What is meant is that real estate returns generally track inflation. Therefore if you have investments that would be hit hard if inflation increased, real estate is purported to generally increase its total return in an inflationary environment and you would at least have something, all said and done.

It helps to remember, when it comes right down to it, why real estate has any value at all. Simply, real estate is a capital asset that generates income from rents. Without that income or potential income (tangible or intangible), real estate would have no inherent value. It so happens that rents generally increase with inflation so the future value of the asset would tend to increase with inflation as well, minus depreciation of course.

The problem with blindly touting real estate as an "inflation hedge" is that the cash flows eventually determine prices. If prices are out of line with cash flows, what fundamentally justifies prices increasing with inflation? Often it is taken on blind faith that real estate prices increase with inflation as a law but prices are dependent upon the cash flows -- prices do not rise in and of themselves without cash flows rising as well. Unless there is speculation.

In a speculative bubble, where yields from cash flows are poor compared to other similar investments, it is not true that prices generally appreciate with inflation. In such an environment the balance of probabilities will have prices trail inflation at least until the underlying income streams are competitive again. You would be better off investing in real return bonds or perhaps some of the countless other investments whose income streams track inflation as well, many of which may well have better risk-adjusted returns than that condo with a 4% cap rate.