Greater Vancouver - Inflation Adjusted House Price Index

As promised a few days back, I've put together a chart which shows quarterly Greater Vancouver benchmarked detached House Prices from 1976 to present. I have also added a simple linear trendline to the chart and the year over year change in real prices.

I really think that we have not seen the end of price decreases yet since this would be the smallest correction on record after the biggest boom on record - that would be unusual.

What do you think?

PS - I'm going away for a bit of a break so jesse and other will hold down the fort for the time being. Warm regards.

Teranet House Price Index for April 2009

JUNE 2009

Downtrend slower in three cities Canadian home prices in April were down 6.7% from a year earlier, according to the Teranet-National Bank National Composite House Price Index™. It was the fifth consecutive 12-month decline. April was also the eighth straight month in which the composite index fell from the month before - the longest run of monthly declines since the beginning of index coverage in February 2000. The composite index is now 8.9% below the peak of last August. Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: simon.cote@tres.bnc.ca For licenses covering all index-linked products, please contact: Simon Côté simon.cote@tres.bnc.ca 514 879-5379 Website www.housepriceindex.ca

Of the six constituent city indices, three were down from a year earlier: Vancouver (−10.9%), Calgary (−9.8%) and Toronto (−7.6%). Three cities held out against 12-month deflation, though with marked deceleration of their 12-month rises: Montreal (2.4%), Ottawa (0.6%) and Halifax (0.2%). The 12-month price increase in Halifax was the first since January. Calgary prices have been correcting for well over a year now, since August 2007, and are now down 13.3% from the peak of that month. Calgary has shown monthly declines in 17 of the 20 months posted since then, including the 10 consecutive months from last July through April. Vancouver prices have also shown 10 straight monthly declines and are down 11.9% from peak. Toronto prices have declined eight months in a row and are 11.3% below peak. In Ottawa the downtrend is less pronounced: prices have declined in each of the six months since the October peak and are now down a cumulative 4.8%. Halifax and Montreal prices were up from the previous month in both March and April and are now only 1.7% and 1.4% below their respective peaks. 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 2009 % change m/m % change y/y From peak Peak Date Calgary 152.01 -0.6 % -9.8 % -13.3% August 2007 Halifax 119.81 1.4 % 0.2 % -1.7% November 2008 Montreal 120.79 0.2 % 2.4 % -1.4% September 2008 Ottawa 112.53 -0.5 % 0.6 % -4.8% October 2008 Toronto 104.01 -0.6 % -7.6 % -11.3% August 2008 Vancouver 132.67 -0.3 % -10.9 % -11.9% June 2008 National Composite 119.19 -0.4 % -6.7 % -8.9% August 2008 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 at www.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 Economy & Strategy Team National Bank Financial Group Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report. 1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

Inflation and House Prices

Following up on a conversation in the previous post, I thought it would be interesting to look at the correlation between consumer price inflation and house prices. This chart shows YOY BC CPI and the YOY change in Nominal Benchmarked house prices for Greater Vancouver. Click on the chart to make it bigger.



The correlation between the two series is 0.18 - not strong, but positive. I think we need more data than 15 years to prove conclusively that there is a link between inflation and house prices. The fact of the matter is that inflation has been relatively low for a very long period of time and interest rates have fallen dramatically during this low inflation period. We don't really know what much higher inflation will do to real estate values of the short / medium term but we do know that real estate is a very interest rate sensitive asset since most people use borrowed money to buy real estate. If I look back at high inflation periods in the past (the 70s), house prices were a much smaller multiple of personal incomes than they are today and rates were also much higher than they are today which would indicate that affordability is a combination of the interest rate and the price - duh!

If we expect inflation then we should also expect much higher interest rates eventually to bring the inflation down and this would deflate house prices as current house prices with a 10% or 15% mortgage rate would be out of reach for all but the super rich. As we know, the housing market is fundamentally a supply / demand based market and if there is no demand at a given price the price will fall until the price meets someone's ability to pay.

500 Posts and Housing Market Indicators

Well this represents the 500th post on this blog. This blog was started out of a personal and occupational interest in finance and real estate. I was concerned with the price of real estate and the detrimental effects that unsustainably high house prices would have on the economy, personal finances, and my own personal life. This blog has been meeting my needs for an analytical outlet and a research topic area that is not well understood by many people in the finance profession. I hope you all find it interesting, I know that I do. I recently have especially appreciated collaborating with others on many posts and topics.

In the vein of thinking about the direction of the housing market, I stumbled across some data that I've had sitting on my computer for some time that I found quite interesting but have never posted for some reason. The data comes from http://www.macromarkets.com/ - who started and continue to operate the housing market futures trading on the CME.



So, let's talk about what these indicators mean to us in Vancouver. If we start with the premise that there should be no significant differences between the correlations in US markets and Vancouver, we can use the correlation data above to make some informed observations about the local market and perhaps on the future direction of the market. I think this is a fair assumption given that it makes reasonable sense to see correlations between housing starts, construction spending, unemployment and house prices.

For the record:

• Construction spending is way down in Vancouver at the moment.
• Housing supply is elevated but much lower than last year.
• Mortgage applications are not tracked officially on a local level but anecdotally they are up from last year.
• Housing starts are way down from last year.
• Building permits are also way down.
• New home sales are low but higher than last year.
• Median rent is high in Vancouver compared to other Canadian cities.
• Personal income is falling right now.
• The unemployment rate is rising.

Now what do you think?

Ask Dr. Housing Analysis

With mortgage rates very low these days -- I'm hearing people pulling 3.5% on a 5-year closed -- the buy-vs-rent bugbear rears its ugly head once again but now, on the face of it, ownership costs have dropped significantly from last year through a combination of price drops and interest rate cuts.

I keep hearing comments on blogs and amongst friends and family about how the buy-vs-rent equation has decidedly shifted to the buy side, given one's propensity to own instead of rent, so if the math works why not buy now? In some jurisdictions the tax laws favour owning biasing the calculation further, from a buyer's point of view.

So instead of lecturing on my views, I thought I'd present a real-life case from someone I know, inspired by Fish10 and, for wily veterans of the Vancouver housing blog scene, the old "Ask VHB" posts of yore.

For a change this person is not in the Vancouver area. Please feel free to analyse the situation in the comments. I'll post the "correct" answer in a few days. You will be marked on your analytical ability; this is, after all an "analysis" blog so don't suck.

Yo,

Right. There is a tax scheme in Holland such that it is actually cheaper to buy a house on an interest-only scheme than to pay rent. Long story short:

I’ve got the 30% tax relief, so the first 30% of my salary is non-taxable (a benefit for being an expat.) Mortgage interest payments are deductible in full – so would save big time on that if I were paying interest only.

All in all it makes sense IFF [if and only if] the value of the house rises by more than 10% by the time I sell it (because in the purchase fee is approx 10% fees, all borne by the buyer). So I’ve been looking into prices and here in Holland they’ve just started to drop – last month prices dropped across the board.

Here’s the official government statistics site (in English!) with some fun stats.

By looking at this, to me it seems like it might be a good time to start looking, but would appreciate your nerdly view on things too!

Nerdlings, what say you...?