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Housing numbers and perspective

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January 10, 2009 – Comments (4)

Common Sense Forecaster has picked up a housing post like that I quite like for the numbers it gives.  That is not to say that I like the numbers in themselves, but rather I like the perspective on the numbers and that it gives number conditions.

In particular it is says a 40% decline in housing from peak to trough but, here's the realistic perspective, a 40% decline is the same as what prices were in 2002.  I don't know about the rest of North America, but I know that housing in Vancouver has simply been expensive since about 1991.  Somewhere in 2000-2002 was a bottom in Vancouver relative to this last bubble, but it wasn't that big of one relative to how expensive housing housing has been since about 1991, I'd say 10-15% off the 93-94 peak.  The 93-94 peak more then doubled the cost of housing from the previous bottom around 1986.

One of the things that I have said before about Vancouver's economy is that I think it is a micro example of what's now playing out in the world economy.  People with assets before the housing bubble were protected and although they have seen their buying power decline, they have remained comfortable.  Almost the entire population who had not gotten into housing prior to 1991 has simply struggled, and many have found they are not keeping finances under control. That is literally a generation now.  I have friends my age with sibblings 5-10 years older then me and the story is the same everywhere, the older sibblings own twice the house, mortgage-free, have managed to upgrade vehicles far more frequently and taken nicer vacations.  Those that have bought since that 1993-94 housing bubble still struggle with debt, and in many cases they are far better educated then their older sibblings.  Some have better paying jobs then sibblings.

I don't see this scenerio playing out much differently in the bigger economy now.  Personally I think it has stiffled Vancouver's economy for years.  There has been an ever increasing part of the population with highly limited disposible income, or perhaps no disposible income.  That increasing population that is throwing an extra say $1k per month to debt and they aren't spending it where it supports more jobs.  I often said that I thought the economy would come to a stand still if people spent money the way I did, especially since I lived in a household with two adults with 8 years of university each, and no kids to support.

We all have difference personal experience and I think my experience gives me insight into how this economy will play out.

Vancouver was a tough micro economy in a world stage where things weren't as challenging.  There was an opportunity to try and do business with places with better economies.  How does that work in a world economy that has slowed down?  I think there are less choices and options.

Right now you have about 5 years of people buying homes on a world scale that have destroyed their opportunity to have economic choices.  They are straddled with debt.

As the above link suggests, people that are buying now are probably over paying for a home and what they spend on that home will not be available to spend in other places or on things that probably create more jobs.

I am not so sure people appreciate how big it is to be removing spending choices from the age group that historically has been a huge stimulus for the economy.  What I've seen here in Vancouver was that older boomers got cheap housing and they spent a lot over the years on things that stimulated the economy.  I spent a lot as well, all on mortgage.  There were years where something like 85% of household income went to mortgage and taxes.  I think there are way more people living with this kind of reality today then there was in say 2002.

The article talks about the length of time needed to stay in a home to come out ahead.  I suspect anyone who bought at the peak in the very bubbled places will be very old before coming out ahead, if ever.  But then I suspect devaluation of the dollar will eventually play out in a bad way as well, probably flat wages at the bottom, where every cent is already being spent in the local economy and wage increases would actually help the economy.  In Vancouver the spread between minimum wage and professional wages has grown dramatically, yet even professional wages haven't kept up to costs.  That's just another squeeze on the economy.

So, my target time to be looking at possibly re-entering the housing market is about 2012, but it is subject to change based on how the economy goes.

4 Comments – Post Your Own

#1) On January 10, 2009 at 2:56 PM, dwot (44.44) wrote:

Crumb, Vancouver's tax bill is going to be bigger then I thought...

And with the economic down turn I suspect the Olympic turn out will be less then expected.

I am not sure if this is a Vancouver only problem or a GVRD problem.  Vancouver only has about 1/4 of the greater Vancouver region tax base.  Already Vancouver is grossly over burdened with debt, imho and this will be absolutely crushing if not shared among the various municipalities.

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#2) On January 10, 2009 at 2:56 PM, ByrneShill (73.96) wrote:

Vancouver is the whackiest RE market on earth imho. Not only the Price/Rent ratio is out of whack, but rent prices are also out of whack compared to other Canadian metros. I understand that not breaking your backs shoveling tons of snow or freezing your balls every winter has a price, but the rental price in Vancouver is 2X that of, say, montreal. And the P/R is almost 3X that of toronto or montreal. While the income isn't that much higher.

The latest RBC affordability report (http://www.rbc.com/economics/market/pdf/house.pdf) reports that Vancouver's cost of ownership is between 30% and (gasp!) 85% of their gross household income. In other words, a lot of vancouverites couldn't possibly buy today the home they live in. Vancouver (and to a lesser extent, BC) is in a unique situation, wheter you compare it to other canadian metros or to its historical average.

On a side note, the time to re-enter the housing market should be when the P/R is equal or lower to 1, but as this post (http://www.calculatedriskblog.com/2009/01/residential-rental-market.html) on calculated risk shows very well (check the last graphic), it doesn't happen very often, if ever. I doubt it'll ever happen for vancouver, but if you shop long enough you might get a bargain. I was lucky enough to buy my condo at a P/R of about 0.7 in 2006 (not in vancouver though!), so everything can happen.

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#3) On January 10, 2009 at 5:31 PM, briyan (30.96) wrote:

I liked your post.  For future posts, I recommend using "than" instead of "then" where appropriate (such as your first five uses in this post).

I bought in mid-2008, and I am hoping that in about 10 years I may be in the same type of relative position as the folks you describe who bought before the 93-94 peak.  I think government policies will push so strongly toward bailing out irresponsible borrowers that those of us who bought conservatively will get a free ride on the inflationary wave within the upcoming decade (despite having a higher tax burden due to bailouts).

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#4) On January 11, 2009 at 7:20 PM, dwot (44.44) wrote:

ByrneShill, absolutely about the rents, and wages are not high.  You'll for sure make more money in Ontario or Alberta.  Well, who knows how it will go with the downturn, but up to now...

I think I did a recent blog on a silly report from the economics department at UBC saying that Vancouver's housing would decline less then other places because it isn't as far out of line compared to its rent.  Well, I'd say rents are coming down.

I am probably going to be ok with paying more then what affordability standards say.  If prices come down 30% you would still have affordability in the 4 to 5 times range based on average income but that is affordable for me.  

 

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