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When Population Pyramid Dynamics Change

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April 03, 2010 – Comments (12)

Mish has a post on the housing bubble in China.  What struck me about China is the land isn't owned or free title, more like it is leased.

It is under debate how much the value of land should increase (or decrease) over time, but, when land is not own it should be clear that the property needs to be depreciated over the period of the lease.

Which brings up another point.  Shouldn't all building be depreciated over their useful life?  

So, how is it that we have consistently had home values increase, even in old tear down garbage houses?  Well, that has not happened everywhere.  Look at Detroit where people have left and population has not increased like pretty much the rest of North America.

Since I was born the population has more then doubled and this constant increase in population creates a constant demand for more homes.  

I am moving forward on the premise that the rate of increase in the population is declining.  We see it happening over and over that as economic times get harder the birth rate declines.  I also suspect that immigration won't be what it used to.  I know people who have immigrated who have had drastically reduced lifestyle and this is far more common so the stories about opportunity that help to drive immigration or the demand for immigration are not the same today as they were 20 years ago.

Demand for housing is what has kept the price of housing up.  Certainly I have the experience of looking at housing in one of the most bubbled cities in the world, Vancouver, but what I see is homes priced at $300-400/sq ft with significant strata fees, the example has monthly strata fees of $244 for an 800 sq ft 2 bedroom apartment.  And then there is tax on top of that.  That example is the first that came up in my search and it is actually $400/sq ft and it is 10 years old so there will start to be some expensive maintenance issues now.  This one is more like $300 sq ft but it is 20 years old and strata fees are $300/month.

These are multi-housing units.  It means there isn't much land per unit.  In say 50 years they will be tear downs.  That means that a linear depreciation would be about $6k per year.  I did not find any apartments in the area over 30 years, so I switched to houses and I found this beauty, an almost 2000 sq ft 60 year old home for 3/4 of a million dollars.  For Vancouver the lot is big, if you bought 2 houses together you could replace them with 3 houses as 33 ft lots are standard.  However, this is an old house and it suggests a land "value" of half a million per 33 ft lot.  Here is a similar sized new home on 33 ft lot for 868k.  A comparison of the two gives the actual house on the second a value of about 368k over the land value suggested by the first house.  

Certainly first time buyers could not afford those homes and even the 800 sq ft apartment is not affordable for a first time buyer.

Vancouver has had exceptional home demand due to high immigration, and high wealthy immigration.  Supply has also been limited by policy.  There is a strong dislike of "urban sprawl" and developers have significant challenges getting developments approved.

So, now there are lot of people living in over priced old homes that require expensive maintenance that not everyone living in the units will be able to afford.  Some homes are getting to the point that they should be torn down yet they are part of a collective of owners, who most likely are stretched in their finances or they would not have bought such an old home.

Clearly these homes are over valued, not just because of the housing bubble, but because theoretically, homes should depreciate just like cars and it only the ongoing demand for housing that has maintained crazy prices for garbage homes.

Detroit has shown that in a big city garbage houses return to garbage pricing because the population is not there to create the demand.

Grossly rising population and immigration have shaped beliefs around housing and the value of housing.

In the bigger econony housing construction has always helped to drive the economy, but what happens when population is not growing as fast?  If construction continues at the same relative rate, but population increases are declining, I suspect older homes are going to decline in price far more rapidly relative to newer homes to reflect the increased maintenance and reduced life expectancy of the home.

In my life time housing really hasn't priced itself to reflect the declining value of the building and I suspect this is something that will be more visible in the future.  I also suspect that has these multi-unit homes reach the end of their lives and the challenges they leave become evident the price of multi-housing units will also decline.  Certainly multi-housing units were a lot cheaper relative to a house when the concept first developed and their relative increase has far exceeded the relative increase of a house.

12 Comments – Post Your Own

#1) On April 03, 2010 at 5:05 PM, alstry (34.90) wrote:

Actually...it is not the supply of population that determines the value of housing....it is the supply of money.

You could have a massive influx of population, but no money....at that point, you would have a lot of people with low priced housing.

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#2) On April 03, 2010 at 8:37 PM, dwot (42.69) wrote:

I disagree, both are playing a role.  But you might think of it as the money follows the people or the people follow the money.  With a stagnant population you would still have demand for new housing so you would end up with more homes then there would be the demand for.

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#3) On April 03, 2010 at 9:37 PM, alstry (34.90) wrote:

Just to clarify my point.....

Population determines demand.....money determines value.

Africa has a strong demand for food.....unfortunately many starve due to insuffucient funds....among other political reasons as well.

There is a growing population of homeless in America who demand housing in greater quantities each week....but without money, they remain homeless.

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#4) On April 04, 2010 at 2:02 AM, dwot (42.69) wrote:

No way, demand and money will determine the price people will pay.  If there isn't demand there can be tons of money and the home value will go down, and with insufficient supply demand will bid price up beyond the money supply and what people can pay.

You see it all the time in one industry towns, the industry closes and the homes plummet in value.  Tumbler Rigde in BC had homes selling for $25-30k about 10 years ago because the homes were there and there and the main industry left so most the people left.  It reopened and those homes have increase about 10-fold, selling in the 200k range now.

You look at the demographia stuff and where homes bubbled they found it was strongly related to a supply issue.

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#5) On April 04, 2010 at 7:48 AM, alstry (34.90) wrote:

I think we are viewing opposite sides of the same coin.......;)

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#6) On April 04, 2010 at 9:52 PM, jgknot (31.23) wrote:

thats right, we are looking at the same coin..but alstry's has it more right i would say..

you said dwot " if there isn't demand there can be tons of money and home value will go down" not true.

you said "Detroit has shown that in a big city garbage houses return to garbage pricing because the population is not there to create the demand" -- not true, Detroit went down, because money stop flowing there, people starts to move out, so no demand.

michigan is already offering tax incentives now and the defense industry is moving there already..

 if detroit say today, they will offer incentives to the future technology, there you go.. money flow back there, people will move there

its the tug of war makes the market fascinating

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#7) On April 04, 2010 at 10:02 PM, jgknot (31.23) wrote:

money flows where it can increase in value and people flow..and there comes the demand..

certain industries  create demand and certain industries follow demand..unfortunately we have less that creates and more that follows, which is why we are in deficit (we are consuming nation) detroit use to be a producing city, money flowed there, but not any more so no money, so no demand..

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#8) On April 05, 2010 at 11:17 AM, dwot (42.69) wrote:

After reading the comments and posting I was chatting with a friend who said home prices have not bubbled where he is and have remained flat for 15 years.  He is in one of these places where population is not increasing.

My point here is that our belief systems about the housing market are based on a rising population.  I do not think population increases or immigration will be anything like the past.  Demand plays a huge role in increasing the price of homes.  If there aren't enough people to live in them I think you will see homes come more in line with the economic reality of the home.  If it is old and is obviously in need of huge maintenance those maintenance costs are not going to be absorbed by the wanna be home owner the way they are now, at least they are now in growing population places.  

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#9) On April 05, 2010 at 11:50 AM, dwot (42.69) wrote:

igknot

I don't disagree.  Job opportunity brings people and with it those demand flows, but with less population growth I tend to think you'd see less of it.

And then there is things like the sheer beauty of a place.  Many times I have talked with people who have been all over the world and Vancouver usually gets a high score as a beautiful city, it has all kinds of outdoor recreation and the climate is mild year round, none of the extreme storms like the east coast and none of the extreme heat waves.  Vancouver Island protects it from the extremes of the ocean.  The mountains are some of the most beautiful in the world.  Vancouver is a place people like to live and that keeps people coming.  The wealthy immigration here has destroyed affordability for the masses and that isn't about employment opportunity.  These people have made their money elsewhere.  We also have the economic immigration and those people have not fared well.  They are working poor.  I know a lady that was a teacher in her country and she cleans houses for a living now.  English was not her first language and the barriers to get her qualifications transferred were impossible to get past.  I remember her teenage daughter talking about how painful she found it that her mother had to clean houses when she used to teach music.  This is typical of what happened to the economic immigrants of the 1990s.  When she came she'd heard great stories about the opportunity here, which was true for the earlier immigrants.  This is why I also think immigration will not be what it used to be. 

But, speaking of immigration, I notice it in the north.  There are still some very good paying jobs and it is hard to keep workers for jobs that pay under about $15-20/hour.  People keep their eyes open and move to better paying jobs, so I notice the service industry brings in foreign workers.  I have meet at least half a dozen workers from the Philippine, not in the community I live in, but when I go to Ft Nelson and Ft St John.  I hear stories of some food service businesses paying $18-19/hour not able to keep workers. 

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#10) On April 05, 2010 at 1:07 PM, chk999 (99.97) wrote:

Vancouver has had exceptional home demand due to high immigration, and high wealthy immigration.  Supply has also been limited by policy.  There is a strong dislike of "urban sprawl" and developers have significant challenges getting developments approved.

Well, this is kinda the problem right here. If you hold down supply in the face of strong demand, you walk up the price curve. Blame your civic leaders for a policy that made it so you can't own a house.

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#11) On April 05, 2010 at 1:37 PM, dwot (42.69) wrote:

For sure chk999.  It will be interesting to see how the next generation manages this issue as the current generation retires.

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#12) On April 05, 2010 at 2:32 PM, jgknot (31.23) wrote:

Absolutely Vancouver is great, but policy guys mess things up too, as chk999 says.

And yes, immigration is not going to be like it use to, it will shift to the east more in the future.

the internet changed everything, people say obama took over at the worst time and blame Bush for all the tax incentives he provided for the rich, but i don't feel that way.

Bush was the one who took over at the worst time period, he dodged or i should say pushed it later with the tax policy.

Clinton was the one who enjoyed the fruit of the reagan policy, the talented immigration wave,  awesome explosion of the technology, from weapons to technology to manufacturing, we were net producing nation, exports peaked, strong dollar, tech bubble, outright wealth creation because of all this.

internet changed it all , East get access to a lot of things , which they didn't before . trade played a little role too. so at 2000, when tech bubble burst, when hatred was at its peak, with East possess the knowledge to produce things, wealth gap made it feel the East can produce things cheaper, so West send it all there.

there goes manufacturing, technology ..

housing was the only thing left that got to be done here, which were required by all the immigrants who landed here .

and the congress leaders home affordability push, pushed housing up, along with the banking and mortgage industry greed.

so we are in a diff world now , no way all those jobs are coming back, so no more immigration rush here, especially with those healthcare costs..

but we got our creativity, ingenuity..., the social networks, the iphones, the movies, the games/sports we create both physical and virtual which are still the dream for all.

its our liberal thoughts and the conservative caps which keeps us from going off track, that makes it all. lets embrace it.

but soon the world is gonna be one place with no barriers , with diff talents live at diff places, its better to get the most out of everyone. the sooner we realize , the happier we all will be .

 

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