When Population Pyramid Dynamics Change
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.