Wednesday, February 2, 2011

Vancouver January 2011 Price Chart Update

The change in house prices, year on year, declined on the linear trend line, as expected. [See earlier post Vancouver House Price Predictions from Jan 10]

Vancouver House Price Chart Change in Price Year on Year

It's now a six month trend, which is pretty solid. If this linear trend holds, the detached HCI price for February will be 813k and for March will be 804k.
The all dwelling HCI for February will be 588k and for March will be 585k.


Real Estate Specialist Mike Stewart said...

What makes you so sure a bust is soon in coming for Vancouver Real Estate?

GG said...

Historically, house values have tracked inflation. Aside from some small discontinuities around the switch to two-earner families, it's pretty steady flat, inflation adjusted.

If housing in an area does not track inflation, there is a distortion in the market. So the next thing you have to look at is what is the distortion? Given that the total housing valuation in BC is 1 trillion and the GDP is a mere 191 billion, it doesn't take much to conclude that the wealth piled up in housing wasn't generated in BC. It is either coming from outside and/or it's the outcome of excessive leverage (paper wealth, or scare-quotes "wealth").

If you look at that price decline in 2008 into 2009, that's pretty much a trial run for what's about to happen. Sentiment shifted, leverage was pulled out from under the next round of buyers and down went prices. Other than the arrival of additional outside money, that decline is destined to repeat itself. (I disagree with Garth, I think once declining sentiment catches hold, that downward slope will reappear, and it's a brutal one.)

So, why do prices fall when high leverage is removed? Turns out they won't (at least not as precipitously) if the price is at or below a cash-flow positive one for a potential landlord. That's 15x annual rent. You can do the math on that one. That measure, like every other one for Vancouver, is flashing red alert.

Barring any other trigger that brings on a painful fall in prices, other factors start to take hold, and in Vancouver those have already taken hold. Housing that eats such a high fraction of income is just plain misallocated capital. Every other sector will start to suffer until housing is the only industry. That is what makes the collapse complete across the entire economy, a la Arizona or Nevada.

Why now? Because the data shows it. You're looking at it. You would need another distorting input into the system to change the path of that trend line or by April prices will be declining year on year. Harper doesn't seem willing to provide another distortion. The foreign buyers have picked their favorites and it's not the entire Greater Vancouver Area, which leaves most of the market looking for Canadian mortgages.

If you don't see a decline coming soon I'm probably not going to convince you, and it is more of an intellectual game than anything else. For me, that is. But I have a serious recommendation for you to take a look at Jim the Realtor's blog archives:
Jim landed on his feet during the crash in California because he adapted, fast. For example, he found new temporary financing partners to help buyers who wanted to buy on the courthouse steps but didn't have all cash to do it with. He learned the tricks of buying short sales and the best way to hand hold buyers through that obnoxious process. If you go back to 2005 and read forward you may be able to get in the right mindset for the opportunities and pitfalls of the shake-out. I mean, you know, if it ever comes, right?