What's That Hissing Sound?

Economic topics are generally interesting to me, and the possible existence of asset bubbles (like the tech bubble) are no exception to this, but as a potential first time buyer of a home in the Vancouver / Victoria area, I have a particular interest in the possible existence (or not) of a housing bubble - especially one in the Vancouver / Victoria market.

For the global perspective, the best way to get up to speed on this topic is to read this thorough and worrying article from the Economist with the ominous subtitle,

"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"

Canadians might take comfort from the fact that the index of Canadian housing prices has only increased 42% over the period 1997-2005 as compared to 154% in Britain, 114% in Australia and 73% in the United States.

A Canadian could be further reassured by this TD Economics report, written by Carl Gomez and reassuringly titled, "Cooling Housing Market Shows No Signs of Bubbly Behavior"

For now, let's leave aside the chart on page 1 which is presented as evidence of why there is no bubble but looks to me like it is showing that prices haven't been this far above the long term trend since the last bubble burst. Looking inside the report, we find the following comments,

"we believe the risks of a speculative bubble are elevated in Vancouver's housing market."

and

"indicators are pointing to increasing risk of a housing bubble in Victoria."

and

"current economic conditions cannot fully account for the pace of housing price growth in Vancouver and Victoria"

and

"if history is any guide, past housing price corrections in Vancouver have resulted in cumulative real price declines of anywhere from 50 per cent (1981-1983) to about 25 per cent (1996-2001)."

Good thing the 'market shows no signs of bubbly behavior' then!

I jest, but I highlighted this article in particular because it is probably one of the better such articles out there, with solid data-supported analysis.

The line I most take issue with is in the conclusion, which reads,

"but what prices will do in the next five years should not be of great importance to any potential homeowner in Vancouver or Victoria who is simply buying for the long-run since real home prices have consistently grown over the longer-term ... any potential fall in the market price of their home should have little or no impact on their standard of living."

To which I can only reply, 'speak for yourself Carl!'. If I'm going to be on the hook for a home costing half a million dollars, the fact that there is a good chance that half million could be reduced to three or four hundred thousand dollars is most definitely of very great importance to me. Try as I might, my lifestyle is modest enough that saving $100,000 to $200,000 on a transaction can make a real impact on my standard of living.


Thankfully, if you're looking for some thorough yet entertaining commentary and analysis of the Vancouver market - from the perspective of your average homeowner (or would-be homeowner) - you need look no further than the Vancouver Housing Market Blog, which I stumbled across the other day.

If the topic interests you, I recommend following the link and poking around for a while. Track down the modest little house selling for $900,000 on the Westside. See pictures of the shacks in the heart of the downtown Eastside (the worst neighbourhood in Canada, by most accounts) that sell for $300,000. Listen to Robert Schiller, professor of economics at Yale and noted author of 'Irrational Exuberance' - a book which predicted the bursting of the tech bubble - refer to Vancouver as the 'bubbliest city in the world'.

Interesting stuff, all leading to the conclusion that buying property in Vancouver/Victoria right now isn't so different from buying into tech stocks in the last 1990's. Having said that, I started investing in stocks in late 1999 and I came out OK, but I still think it would be wise for anyone to think twice (and maybe a third and a fourth time) before buying anything in Vancouver or Victoria these days. I know I will.


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An afterthought: I approached this topic from a pretty personal, local point of view. As the article in the Economist notes, the real story here is the potential impact on the global economy of housing bubbles all over the world starting to deflate simultaneously, with the reduction in consumer spending (because people can't borrow against their houses increasing value any more) that is likely to accompany the bursting of the bubble(s). More on that another day, perhaps, but for now, here is the short version: "Uh oh!"