Tipping Point? and the Long View for Discussion this Long Weekend

The above chart represents the price of a Greater Vancouver Single Family Home adjusted for quality and inflation from 1975 to present. The chart clearly shows periods of wild price appreciation and periods of price declines. The average is indicated by the black trend line representing a rough 'fundamental' value for homes in the market. If values were to retreat to the black line either through price declines or high inflation it would bring the price of a benchmark home down nearly 25%. In past price declines, the benchmark has lost value bringing it far below the trend line.

The question for the weekend is:

In recognition that bubbles are inflated and deflated with psychology, have we reached the sociological tipping point in Vancouver surrounding our lurid affair with real estate values? Have we now recognized the error of our ways and are now contemplating confession? Will we look up to realize we have been staring in the mirror while the world falls apart around us? Are we ready to atone for our bubble misdeeds? The hard work in paying off that 40 year, 100% financed Whalley condo looks pretty unappealing at this point.

Case in point, I heard the 'business analyst' Michael Levy on CKNW radio this morning say that we will have a real estate correction in Canada. Previous to this reference I have not heard, aside from Victor Adair, any of the local business talking heads mention this as a possibility.

More abnormally, I also heard the sportscaster Neil McRae reference a 'so-called bubble in real estate' when discussing BC Lion's Lui Pasaglia decision to leave sports and help in his family's development company, which is developing some properties in Port Coquitlam. The station obviously has some vested interests as nearly every commercial aired on CKNW is for real estate or mortgage products.

I'll be glad when we can hear other commercials again!

CMHC Data Update

I received the August Housing Now report yesterday from the Canada Mortgage and Housing Corporation for the Vancouver and Abbotsford Census Metro Areas. The report covers housing starts, units under construction, and completions for these areas during the month of July 2007.

Starts were 1524, which is down significantly from July 2006 at 2163 but the starts series is highly volatile and July 2006 was a higher than average month.


Completions were average with 1534 new housing unit completions in the month of July.


There is still a near record number of units under construction in the Vancouver area right now at 21941. Starts have really come off their rolling 12 month highs during 2006.


On another note, I have noticed a recent trend with the completions numbers that CMHC publishes. They publish two separate completion numbers: 1) Completed and Absorbed and 2) Completed and Not Absorbed. The "Completed and Not Absorbed" count has risen by 48.4% from last July. There are currently 1083 new housing units for sale (Up from 730 in July 2006) that nobody apparently wants to buy. I wonder why?

And just to emphasize my point for clarity. Who the heck is going to buy all of these new units? If existing residents buy them then who will buy their house?

Population growth is anemic and current building levels are unsustainable without population growth. Who wants to move here with these high housing prices?

Props to VHB for the head start on the charts.

Home Prices: Steepest Drop in 20 Years

By Vinnee Tong, AP Business Writer
S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987

NEW YORK (AP) -- U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

The report came a day after the National Association of Realtors said sales of existing homes dropped for a fifth straight month in July while the number of unsold homes shot up to a record level. The S&P/Case-Schiller quarterly index tracks price trends among existing single-family homes across the nation compared with a year earlier .

A separate index that covers 20 U.S. cities fell 3.5 percent in June from a year earlier. A 10-city index fell 4.1 percent from a year earlier.

Housing is among the economic indicators closely watched by Federal Reserve policymakers. After five years of rapidly rising home prices, the market stalled last year, with prices holding steady or falling as sales slowed. Since then, lenders have made it more difficult for some people to get mortgages by tightening standards just as foreclosures rise and some who borrowed at adjustable rates facing higher payments they can't meet. Problems have spread from those with poor credit repayment histories to more creditworthy borrowers.

The Fed has taken a number of steps aimed at stabilizing the situation, and market watchers look further for a possible cut in the federal funds rate, which is the rate commercial banks charge each other for short-term loans. That rate has been kept steady at 5.25 percent for more than a year. The Fed has its next regularly scheduled meeting on Sept. 18.

Fifteen of the cities surveyed for S&P's 20-city index showed a year-over-year decline in prices in June. Prices in Boston dropped in June at a slower rate than they did in May, continuing a trend that started at the beginning of the year. In April 2006, Boston was the first metropolitan area to show a year-over-year decline, so any turnaround there could be an early sign of recovery. S&P said it needed more data to determine whether Boston would be the first area to improve.

Detroit led the cities with the biggest price declines, with an 11 percent drop from June of last year. Other cities with falling prices included Tampa, Fla., San Diego and Washington, D.C., which all recorded drops of at least 7 percent. Seattle and Charlotte, N.C., were on the small list of cities that saw prices rise in the same period. Seattle prices rose 8 percent in June while Charlotte saw a 6.8 percent increase.

In Monday's report, the National Association of Realtors said sales of existing homes dipped by 0.2 percent in July from June to a seasonally adjusted annual rate of 5.75 million units. The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch.

Reason for Blogging

I found this little gem over at Seattle Bubble Blog that is pretty sad in so many ways. I encourage you to listen. This is the type of situation I have hoped to help people avoid by having this blog and by working hard at my job. Finances can dramatically affect one's personal life.

Some more news to chew on over the weekend:

1) Subprime Spillover affects Canadian Mortgage Market
2) Vancouver 6th Most Overpriced City in the Whole Wide World!

Charts are Cool!

I admit it. I have an addiction to maps and charts. I love looking at them and I love creating them. They provide a visual insight into raw numerical data like lat / long coordinates and data points in a series. I think maps and charts can tell a story too, just like a picture is worth a thousand words, a chart is worth a 1000 data points!

In the past 30 years Vancouver has experienced 4 significant real estate price contractions. 3 of these price contractions are represented in chart form here.

The last contraction was from 1Q 1995 through 3Q 2000 and represented a 13.8% decrease in prices from a high of $418,050 to a low of $360,220.


The previous contraction in 1990 was very short lived at only 3 quarters. This contraction was from 2Q 1990 through 1Q 1991 and represented a 15.3% decrease in prices from $324,710 to $284,750.


The most memorable real estate price contraction in BC history was in 1981. It was memorable because of its magnitude and suddenness. The contraction lasted from 1Q 1981 to 2Q 1985 and it saw nominal benchmark prices decrease 32.3% from $229,730 to $155,560.


Clearly, price contractions can last a long time and represent fantastic opportunities for real estate buyers. We are currently far above the nominal price trendline and one would expect, based on history, that we will see prices fall below the trendline at some point in the future. This will represent a great opportunity for real estate buyers.

The trendline is at roughly $520,000 for the Vancouver CMA detached benchmark and that threshold represents a potential buying point if prices dropped below that mark. Currently prices would need to fall 26.8% for the trendline to be breached. If history is any guide, prices will likely fall below the trendline before the next run up in prices.