Crawl Across the Ocean

Monday, November 14, 2005

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."
"indicators are pointing to increasing risk of a housing bubble in Victoria."
"current economic conditions cannot fully account for the pace of housing price growth in Vancouver and Victoria"
"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.

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!"


  • I wonder what kind of effect the 2010 Winter Olympics might have on a Vancouver bubble.

    By Blogger Simon, at 6:59 PM  

  • You'd figure that in a rational market known future events would already be pretty much accounted for so any 'Olympic bonus' would have been a one-time adjustment to prices when the announcement was made. Still, I guess the whole point is that the market is not rational so it's hard to say for sure.

    The TD paper I linked to suggests that cities get a modest bonus from winning the Olympics but that that can't really account for all the price growth Vancouve has seen (and especially not for Victoria).

    The Vancouver Housing Bloger has a few posts which mention the Olympics as well.

    Maybe if some country with a fairly large sized wealthy class has a crisis around 2010 a lot of them will move to Vancouver?

    Certainly Sydney hasn't escaped the sagging real estate prices in Australia which have followed the big run-up in prices there (although obviously the timing of the bubble relative to the timing ofthe Olympics was different in Sydney's case.)

    By Blogger Declan, at 9:56 PM  

  • I bought a house during Toronto's housing craze when the price of a house rose daily. Houses sold so fast there was no time to consult a lawyer regarding the purchase of sale. It was nuts. The worst time to buy a house -- people lost their shirts -- but we sold it for a profit a few years later (5 I think).

    That writer is right: if you're buying it as your permanent residence then the question isn't is it overinflated, it's what are your expenditures now on rental, what will you spend on mortgage and property tax, will you spend less on mortgage or rent (rent is money chucked away whereas mortgage is money coming back to you in percentage of home ownership), can you carry the house in case of unemployment for at least 6 months, how long are you willing to wait to have your own place, how well is the house constructed and maintained (future repair costs), and are you naturally inclined to be a homeowner? -- You would not believe how many I see buying their first house only to let their gardens become weed fests in a year and to become stressed over the most minor of repairs.

    I think housing in Canada is pretty underpriced compared to the rest of the world, but in our own country Vancouver is outstandingly expensive!

    But there's nothing like having your own place! If you plan well, you'll be OK.

    By Blogger talk talk talk / Shireen, at 7:56 AM  

  • My concern in all this was voiced by Jane Jacobs in "The Dark Age Ahead". The price of a median house is now such that a median salaray can;t afford it - you need two people working or an extra long mortgage or to be in the top 10% of earners in Canada.

    There are many people and families spending more than 50% of their income on housing. The market is simply not rational - rather than refusing to buy at those prices (in order to force them down to where the 'market can bear', people are mortgaging to the hilt, taking it out longer, accumulating record levels of debts.

    In a situation like that, I would hardly expect a full bubble burst to cause economic issues.

    I fear a full scale burst (as Jane Jacobs predicts by 2015), but a smaller scale 'correction' could be just as devestating to people and the economy.

    By Blogger Mike, at 9:18 AM  

  • Hi Declan,

    I just bought a 3 bdroom townhouse in Victoria this summer for $175,000. In Esquimalt, so not the 'best part of town', but there's nothing wrong with my area either. I needed to do some renos - mostly painting and building a bike closet - but nothing over the top.

    Yes, in Victoria you can spend $500,000 on a brand new 3-4 bdrm house if it's a little out of town, or $1,000,000 on just about anything in Oak Bay - but if you are looking for a 2-3 bdrm single family house in reasonably good shape (but with some renos to make it top notch), you can still find homes like that in Greater Victoria in the $300,000 range. A LOT better than the prices in Greater Vancouver.

    Good luck with your house hunt.

    By Anonymous Anonymous, at 9:40 AM  

  • You make a good point about comparing the cost of renting vs. owning. If you take a look at the chart on page 3 of the TD report I linked to, you'll see that, for Vancouver, the cost of owning is estimated at 110% of the cost of renting. So you're actually chucking more money away (in interest, opportunity cost, taxes and maintenance costs) by owning than you are by renting.

    I've done some rough calculations estimating the change in expenses if I was to stop renting and buy an equivalent place (smalller but newer) in the condo building next door. It would be a lot more than a 10% increase in expense (money chucking), probably more like 50% - 100% (admittedly, the current place is a good deal).

    'there's nothing like having your own place'

    True, but thast sentiment reminds me of this post from the Van. housing blogger talking about a family which by his calculations was going to pay an extra $17,500 a year to own vs. renting but justified it saying, "Renting does not provide the pride or capital gains potential of home ownership".

    Said Van. housing blogger in reply, "I don't disagree with Mr. Moran's statement about the pride of ownership being important when making the rent-or-buy decision. However, the $17.5K per year difference between renting and buying for this family would be a fairly hefty price to pay for some pride. That's one expensive emotion."

    By Blogger Declan, at 9:40 AM  

  • For a description of the townhouse I bought (so you can get a feel of what you get for your dollar in Victoria):

    Sorry, no pictures of the inside

    By Anonymous Anonymous, at 9:42 AM  

  • My previous comment was in reply to 'talk talk talk' (a couple more comments came in while I was writing my comment).

    Mike - Yes, you're right that with people already on the edge it wouldn't take a big correction to cause some real pain. One of the Vancouver Housing Blogger's posts notes that while the savings rate is low in Canada in general, in B.C. it is -8%!. That is for every dollar earned in B.C., people are spending $1.08 - that is not sustainable.

    Of course, things could get far harsher in the U.S. where many of the recent mortgages are purely variable rate (and some are interest only!) as opposed to here in Canada where most people are still somewhat protected by having fixed rate (for a few years anyway) mortgages.

    Deanna - Thanks, I do think that Esquimalt and a few other western neighbourhoods are better deals than most of the city for sure, but prices in Victoria are still out of whack compared to the rest of the country, even in those areas. I do agree that the situation is not (quite) as dire as in Vancouver.

    By Blogger Declan, at 9:58 AM  

  • Great post, Declan. Yeah, I'm fed up with renting, but terrified of buying here in Toronto because of the possible bubble burst. I occasionally look at condos, but the way new buildings are popping up everywhere, I just can't see how this is sustainable. But then I worry that if I wait any longer, prices will just go higher and higher...
    Sigh. All in all, I think there's less stress in my life staying a renter, even if I am throwing my money in a pit.

    By Blogger J. Kelly, at 12:08 PM  

  • Thanks Kelly, I'd feel a lot more comfortable buying in Toronto right now than in Vancouver or Victoria. Consider that year over year condo prices are up 3.6% in Toronto, 14.1% in Vancouver and 31% in Victoria.

    Prices in Toronto are high, but not really out of line with historical norms or rental rates. I could see prices in Toronto stagnating as increases in supply put downward pressure on prices, but I don't see the same risk of a big drop that exists in Vancouver/Victoria.

    On average (according to TD) the average homeowner in Toronto has 80% of the 'throwaway' expenses of the average renter so you're only really throwing away 20% of your rent (vs. owning). :)

    By Blogger Declan, at 1:35 PM  

  • Although maybe that small increase in condo prices in Toronto was just a sign that they are already slowing down because so many have been built! There's (relatively speaking) lots of land in Toronto to build houses on, so who knows how durable condo prices will be, long term.

    Truth is, I'd probably be nervous about buying in Toronto as well - especially a condo.

    By Blogger Declan, at 1:43 PM  

  • Declan: I didn't realise you were thinking of a condo. That's a whole other ball of wax, especially in Vancouver where all those condos were built a few years ago in such a way that water got into the sheathing and caused major rotting. Unlike a house, condos have annual fees, management issues, and the usual living in an apartment type stuff. A house inspection becomes a whole project in itself for a condo!

    In terms of ownership, it's not just pride, it's being able to paint your room red and not have the landlord have a conniption!

    "There's (relatively speaking) lots of land in Toronto to build houses on..."

    Well, not exactly. There's a growing chorus against the sucking up of farm land to feed developers here in T.O. Meanwhile, councillors talk about infill, but have just turned down a developer to build a behemoth in the middle of skyscrapers. If you can't build a skyscraper in the middle of skyscrapers, then where else? There's the additional problem that a lot of this architecture going up sucks, aside from the few cultural ones.

    By Blogger talk talk talk / Shireen, at 6:29 AM  

  • I'm not really planning on buying a condo, I was just speculating, in reply to Kelly.

    Condos have fees but houses have higher taxes and maintenance costs so things balance out on that front but I certainly agree on the whole condo management issue - I can put up with that kind of meddling when I'm renting, but it gets a bit much when you own the place and you still have to put up with it.

    Didn't that building in Toronto that was turned down have 17 floors of parking because the piece of land it was on was so small and wasn't it going to be just south of Nathan Phillips Square (casting a long shadow on the square all year)? I'm all for infill but that particular building sounded a little iffy.

    By Blogger Declan, at 9:47 AM  

  • I think I know where that building was supposed to go (will go if the OMB stays true to form) and couldn't figure out why it would cast a shadow on Nathan Phillips Square. According to Hume in the Toronto Star, it would cast a shadow for only a couple of hours a few months of the year. Still that's one tall building to be able to do that!

    Apparently the councillors only looked at height not esthetics. They should be thinking the other way around when making these decisions. Toronto is losing some fantastic modern buildings and getting crap built, or even worse, nothing but hoardings for YEARS! It's insane.

    By Blogger talk talk talk / Shireen, at 11:11 AM  

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