A Few Thoughts on the Housing Market in Vancouver
Naturally, the first thought is that house prices are unsustainably high. You can read this (pdf) report from RBC and see that affordability levels in Vancouver are back up where they were last time prices tanked and didn't recover for a decade. Or you can compare house prices to rents and see that the ratio between these is way out of whack (check out this real estate trends document from Scotiaback which explained that you saved $1,200 a month renting instead of owning in Vancouver.) Or you can consider the standard bubble spotting wisdom that the time to sell is when even people you would least expect to be interested start telling you about how they've started investing in x (in this case speculating in condos).
Whatever measure you look at, the message is the same: bat time to buy, good time to sell or wait.
The second thought is that, on previous occasions when affordability levels were this poor, they were brought down by a combination of two things: Price decreases and interest rate cuts. In fact if you look at the historical spikes on the affordability curve, they were caused by sudden run-ups in interest rates which triggered recessions and then were (relatively) quickly brought back down. But this time, affordability levels have reached the same painful levels despite interest rates that are pretty low. So without the possibility of deep interest rate cuts to improve affordability, price cuts are all that is left.
Here's a chart of the bank rate, from 1976 to Q1, 2007 so you can get the picture.
The big spike on the left is what triggered the recession of early 80's. The spike in the centre is what triggered the recession of the early 90's.
But then look what happens as we move forward from the early 90's. Interest rates just go further and further down until a mild increase in the last year or two. But if you check back with the affordability chart in the RBC document, affordability actually deteriorates in this period of low interest rates. Just the small rise of rates we've seen in the last couple of years is enough to drive unaffordability up to where it was back when the bank rate was at 14% (as compared to the current 4.75%.)
The third thought is that ultimately it comes down to supply and demand: The supply is plenty high, as a glance around at all the cranes would tell you. Meanwhile, what about demand. Migration to the province is below historical norms and home ownership rates in Canada have already climbed from around 60% in the 80's to around 70% so you wouldn't think it could go a lot higher.
On the other hand, inspired by the success of looser mortgage lending standards in the U.S., lots of changes have been made in the last year to loosen lending standards here as well, allowing a down-payment of 20% instead of 25% to avoid needing to buy insurance, and allowing 0 down payment for insured loans, and extending the amortization period from 25 to 40 years for both insured and uninsured mortgages - so all that may push things a little higher.
Another question is how much demand is true demand (i.e. people who want to live somewhere) and how much is speculative (people investing in real estate because it always goes up).
I'd say the combination of speculative demand, demand borrowed from the future as people buy "before it's too late," year after year of high housing starts and low population growth will all lead eventually to too much supply, not enough demand. Which again means that prices will go down.
Of course, saying that the market is overpriced and will come back down - eventually - is easy. The hard part is saying when. If I had to guess (and that's all it would be, a guess), I'd say prices will peak in Vancouver before end of 2008, but only time will tell. In the meantime, I'm certainly no financial expert and you don't want to follow my advice, but in any event, the only advice I might offer right now is to be careful.
Now, I suppose you might say that it's always good advice to be careful, but there are particular times when it is much more important than usual, and this is one of those times, in my opinion.
Whatever measure you look at, the message is the same: bat time to buy, good time to sell or wait.
The second thought is that, on previous occasions when affordability levels were this poor, they were brought down by a combination of two things: Price decreases and interest rate cuts. In fact if you look at the historical spikes on the affordability curve, they were caused by sudden run-ups in interest rates which triggered recessions and then were (relatively) quickly brought back down. But this time, affordability levels have reached the same painful levels despite interest rates that are pretty low. So without the possibility of deep interest rate cuts to improve affordability, price cuts are all that is left.
Here's a chart of the bank rate, from 1976 to Q1, 2007 so you can get the picture.
The big spike on the left is what triggered the recession of early 80's. The spike in the centre is what triggered the recession of the early 90's.
But then look what happens as we move forward from the early 90's. Interest rates just go further and further down until a mild increase in the last year or two. But if you check back with the affordability chart in the RBC document, affordability actually deteriorates in this period of low interest rates. Just the small rise of rates we've seen in the last couple of years is enough to drive unaffordability up to where it was back when the bank rate was at 14% (as compared to the current 4.75%.)
The third thought is that ultimately it comes down to supply and demand: The supply is plenty high, as a glance around at all the cranes would tell you. Meanwhile, what about demand. Migration to the province is below historical norms and home ownership rates in Canada have already climbed from around 60% in the 80's to around 70% so you wouldn't think it could go a lot higher.
On the other hand, inspired by the success of looser mortgage lending standards in the U.S., lots of changes have been made in the last year to loosen lending standards here as well, allowing a down-payment of 20% instead of 25% to avoid needing to buy insurance, and allowing 0 down payment for insured loans, and extending the amortization period from 25 to 40 years for both insured and uninsured mortgages - so all that may push things a little higher.
Another question is how much demand is true demand (i.e. people who want to live somewhere) and how much is speculative (people investing in real estate because it always goes up).
I'd say the combination of speculative demand, demand borrowed from the future as people buy "before it's too late," year after year of high housing starts and low population growth will all lead eventually to too much supply, not enough demand. Which again means that prices will go down.
Of course, saying that the market is overpriced and will come back down - eventually - is easy. The hard part is saying when. If I had to guess (and that's all it would be, a guess), I'd say prices will peak in Vancouver before end of 2008, but only time will tell. In the meantime, I'm certainly no financial expert and you don't want to follow my advice, but in any event, the only advice I might offer right now is to be careful.
Now, I suppose you might say that it's always good advice to be careful, but there are particular times when it is much more important than usual, and this is one of those times, in my opinion.
posted by Declan at
Thursday, July 26, 2007
4 Comments:
One of the currently observed effects of lower rates, relaxed down payment restrictions, and longer amortization periods is to encourage movement out of rental and into owned housing (affordability thresholds are crossed).
There is also an unusual one-time and short-term factor to consider: the effect of the Gateway Plan on times of travel for east-west traffic. As commute times shorten, there will be more accessible housing stock to renters. Some people are clearly anticipating this already and buying accordingly.
I expect housing prices will not contract much if at all, but that the value of middle class (and some low-end) rental stock will drop and it will be redeveloped into high-end stock (including older houses extensively renovated and sold or demolished and replaced). The drop will be cushioned somewhat as the boom bulge moves through retirement and old age (downsizing housing as they age). Then unless we have been aggressively encouraging immigration and there is not a large internal migration from less desirable parts of Canada, I expect the value of small units (rental and condo) to crash, resulting in still more conversion to larger units for high-end markets.
It's just a semi-educated guess based on what's going on in GVRD neighbourhoods and known infrastructure planning.
lrC
By
Anonymous, at 10:15 PM
"One of the currently observed effects of lower rates, relaxed down payment restrictions, and longer amortization periods is to encourage movement out of rental and into owned housing (affordability thresholds are crossed)."
Agreed.
"There is also an unusual one-time and short-term factor to consider: the effect of the Gateway Plan on times of travel for east-west traffic. As commute times shorten, there will be more accessible housing stock to renters. Some people are clearly anticipating this already and buying accordingly."
You think the Gateway project will have a noticeable impact? Living and working on the downtown peninsula I don't have much of a grasp of typical commuting experience, but I would have thought the overall impact would be minor (on the scale of the whole GVRD - obviously the areas directly along the gateway routes will be affected).
With regards to the rest of your comment, I wonder how anyone will afford to buy high end properties if the low end properties are losing value and the high end ones aren't. Would seem to leave a few rungs missing in the property ladder, so to speak.
Also, fundamentals would suggest that rental rates and ownership costs will (eventually) converge, not diverge further.
I guess we'll see what happens.
By
Declan, at 9:26 PM
PRICES ARE MORE LIKELY TO GO DOWN THEN UP.KEEP YOUR MONEY ...ONLY SUCKERS ARE BUYING RIGHT NOW.
By
Anonymous, at 12:32 PM
There's something to be said for being concise, it's true.
By
Declan, at 6:23 PM
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