CIBC: House prices will double in 20 years.
CIBC World Markets says that the average Canadian house price will double in the next 20 years:
Yes, the number of people aged 45 to 54 is expected to drop by 2.5 million by 2026 as the baby boomers age. But this age group accounts for only 12 per cent of the housing demand, it said.
Most home purchases take place when people are younger. CIBC says 68 per cent of all first-time home buying is done by people aged 25 to 44. That group is expected to decline only slightly in the coming two decades.
So only slightly less demand = double prices. They base their prediction on three factors:
-Interest rates are expected to stay low
For twenty years? Wow! That’s some crystal ball!
-Immigration is expected to increase
Good thing since its so much lower in BC now than the 90’s.
-New mortgage products will make home ownership more accessible.
What great news! You wouldn’t happen to offer any of those would you CIBC? You know, like those great 60 year mortgages in Japan?
Update: Cailin points out the obvious spin on this story. If all these positive factors come into play and house prices ‘double’ in the next twenty years that works out to be about 3.75% a year compounded, or a bit less than a presidents choice savings account, but I guess that doesn’t sound quite as impressive huh?
April 19th, 2007 at 9:15 pm
Good points Freako –
The article is such a random stab in the dark as to be almost completely meaningless – The other thing is that this estimate is for all of Canada not just Vancouver and over twenty years we could see prices going up, down and sideways.. Check back in twenty years and we’ll see how accurate the CIBC prediction is from our local markets current starting point.
April 19th, 2007 at 7:22 pm
“If all these positive factors come into play and house prices ‘double’ in the next twenty years that works out to be about 3.75% a year compounded, or a bit less than a presidents choice savings account, “
Also, the return is higher than that, as you need to include the net rental income, which is another 2-3%.
April 19th, 2007 at 7:21 pm
“Update: Cailin points out the obvious spin on this story. If all these positive factors come into play and house prices ‘double’ in the next twenty years that works out to be about 3.75% a year compounded, or a bit less than a presidents choice savings account, but I guess that doesn’t sound quite as impressive huh?”
As I and Jesse independently arrived at, it’s 3.5%.
Anyhow, I finally figured it out. Tal expects 3% real plus 2% inflation for 5% nominal a year. Then a lazy reporter/editor multiplies this by 20 to get a doubling. In reality, it is 186% increase.
Hence we were all right in some way or other. The article is wrong in the way it interpretes Tal’s report. Expecting 5% real returns (as opposed to the 3.5% implicit in nominal doubling), I think Tal is overly optmistic given the starting point. All speculation on my part, I don’t have access to the actual report.
April 19th, 2007 at 7:13 pm
Forensic evidence:when banks aprove loans and mortgage they also keep in mind if value goes down what people will do to down play them:
So this artical from CIBC is true in a sense
April 19th, 2007 at 12:09 pm
dosh
“Even if they did go up a half a percentage point won’t hurt our market at all”
Uhhhmmm yeah… Because when has the Canadian economy ever been dependant on the US economy? That’s like, crazy talk or something…
I’m sure that when CNN shows shots of dozens of families forced to live in homeless shelters because of their poor housing related financial planning nobody here will be capable of putting 1+1 together and say, “Hey, maybe that could happen here?” Is that really your hypothesis?
Who do you work for dosh?
April 19th, 2007 at 9:55 am
Something heard on the net is only slightly less reliable than something heard from a friend of a friend who knows a guy who knows a guy. Even if they did go up a half a percentage point won’t hurt our market at all – if you’re right you’re best off buying right now while rates are low.
April 18th, 2007 at 7:48 pm
… tripping around the net..
found a reference to the possibility that the next US rate move could be a half point up…..
wouldn’t that frost your cake?
April 18th, 2007 at 7:20 pm
I can’t see how they could possibly mean real dollars. If i assume that wages grow at the rate of inflation yet real house prices double, wouldn’t that mean that it would be like my 350k one-bedroom costing 700k?
Who would be able to buy it? Even a professional couple making 100k each (in today’s dollars) could just qualify for a one-bedroom.
I just can’t see it. It would also be the equivalent of a SFH on the east side costing $1.2m instead of the 600k that they cost now.
I just don’t think it’s possible for prices to double in real terms.
April 18th, 2007 at 7:00 pm
In response to the G&M, one reader writes:
“Keith N Calgary from CALGARY, Canada writes: Hmmm..sounds just like 1981 to me. Boom’ll never end; make a fortune in real estate etc.
I also remember 1982 – where the $850,000 mansions of ‘81 were the $250,000 large home of ‘82. What goes up, will come down in Boom n’ Bust Alberta.
But don’t you just admire how the Realtors and Banks still work at encouraging people to “get in now” . . . . even to the point of “forget about location location location – buy anywhere just buy now”.
Got to get me a map to find out where the swamps are I think . . . . .”
I think he sums it up.
Tick Tock, Tick Tock
April 18th, 2007 at 6:39 pm
VHB is running a new blog and we’re not invited?
Sniff, sniff.
And my recovery was going so well … now all I can think about are updated cycle charts I can’t see….
April 18th, 2007 at 5:52 pm
The G&M article on the same subject states
“…the bank predicts average real house prices will mirror the performance of the past two decades.”
You can figure out what they mean. Looking into their methodology outlined in the article they compared prices from 1987 to 2006 and used that to extrapolate from 2007-2026. Can you spot the mistake?
April 18th, 2007 at 5:25 pm
I heard VHB came home to find a pot of boiling water on the stove. When he got close he new it was his pet chinchilla. Gasp! and a note urging him to leave the blog or he would be next…. It was signed BR…. scary stuff
April 18th, 2007 at 5:24 pm
VHB used that as a quick way to lock down the blog for the moment. That is the offical line anyways. The cabal of conniving bears like it that way.
April 18th, 2007 at 3:37 pm
For sure any possibility of a crash is now eliminated. Thank God for bank economists. Who can possibly dispute this comprehensive study?
April 18th, 2007 at 3:13 pm
I’d tell ya but… well you know what would come next.
April 18th, 2007 at 3:06 pm
OT: I see that
van-housing.blogspot.com
is back, but only for invitees.
I would guess that some of the privileged few also frequent this blog. Anyone care to comment on what’s going on in VHB-land? Or is it all super-secret?
April 18th, 2007 at 1:55 pm
“Doubling in 20 years is an appreciation of 3.5% per year.”
An flipping that around, the near doubling in real terms that we saw over the past 7 years, used up over a decades worth of real appreciation.
April 18th, 2007 at 1:53 pm
The headline obviously refers to nominal prices. I presume, but cannot conclude with certainty that the report in questions meant nominal as well.
The reason I am not sure is this quote:
“CIBC projects that the average real house price will mirror the performance of the past two decades. During the period between 1987 and 2007, Canada experienced a 3% annual increase in real home prices, the report said.
“Assuming a 2% annual inflation rate, this means that house prices in Canada are expected to double by 2026,” said Tal.”
That would make 3% real and 5% nominal.
3% real makes for an 80.6% increase over 20 years.
5% nominal makes for a 165% increase over 20 years.
A doubling (100% increase) falls in between.
April 18th, 2007 at 1:40 pm
Hold on, the fact that the article doesn’t mention real returns most certainly means nominal.
FYI inflation for the past 20 years according to the BOC was 63.8%
Here’s a fun calc that was posted on some blog recently:
BOC Inflation Calc
April 18th, 2007 at 1:31 pm
“CIBC is talking about Nominal dollars”
Are you sure? It was never explicitly stated in the CBC article. Doubling in 20 years is an appreciation of 3.5% per year.
Doubling from what pricepoint is a very good question. Currently the market is well above the long term average, even after assuming rates remain at current levels.
April 18th, 2007 at 1:30 pm
Nothing new, the usual suspects always without exception pump out reports like this.
Banks make big money financing inflated RE.
Let’s not forget the targeted audience for this type of report is somebody who is already brainwashed into thinking that they better buy before they are forever priced out.
Can any realtor/lender or other usual suspects point out one time in history that a bank has forecast a real estate crash?
Tick Tock, Tick Tock
April 18th, 2007 at 11:43 am
From today’s Van Sun:
USED HOMES SALES SLIP
The Greater Vancouver resale housing market was down in February of this year compared to the same month in 2006. That made Greater Vancouver the only major urban centre in Canada to report a drop in resale housing sales.
RESALE HOUSING SALES, % CHANGE IN UNITS SOLD FEB. 2006 VS. FEB. 2007:
Vancouver -4
Calgary +10
Edmonton +18
Saskatoon +45
Winnipeg 0
Toronto 0
Montreal +7
Halifax +13
Comment: this market is like an active volcano…..when it is stays dormant for so long, you’d better start worrying….
Money has been growing on trees for many people and we know that can’t last. The big one is coming soon…..
April 18th, 2007 at 11:41 am
patriotz
“If say that bus fare is 10 times what it was when I was a kid, I certainly mean nominal dollars.”
Sure, obviously. Several problems with your analogy however.
1) You are not speaking as the representative of a bank.
2) You’re talking from a historical perspective not a predictive one.
Since we have no way of predicting what inflation will look like over the next 20 years any statements about value over that time period SHOULD be made in adjusted values, using nominal dollars is just a parlour trick to fool idiots into buying now. It is intentionally misleading and a less accurate way of describing a market.
April 18th, 2007 at 11:19 am
Oh come on off it drachen.
If say that bus fare is 10 times what it was when I was a kid, I certainly mean nominal dollars. That’s what the average person on the street means when they talk about prices going up.
I think you’d have to go back all the way to the 1920’s (or more) to find the start of a 20 year period in which house prices have not at least doubled, so they’re really not saying much.
That said, I think housing is looking so bearish going forward over the lifetimes of the boomers, we may be in for a repeat performance.
April 18th, 2007 at 11:16 am
Drachen,
CIBC is talking about Nominal dollars…..so big deal! Even bonds double in nominal value over 20 years…I would say they are pretty bearish on housing.
By shares, and hold them over 20 years: they will more than triple in nominal value (and that’s history!)…
April 18th, 2007 at 10:54 am
REAL dollars Freako.
The only time people use inflated dollars for that sort of statement is when they’re trying to persuade through trickery.
April 18th, 2007 at 10:41 am
“House prices have NEVER doubled and held that gain in the past.”
Not sure where you are coming from. In the past 20 years, the price of a chocolate bar has doubled, as has most other things.
A doubling over 20 years is only 3.55%, lower than inflation for much of the latter part of the past century. From a nominal appreciation perspective, it is pitiful.
April 18th, 2007 at 10:37 am
“Interest rates are expected to stay low”
First of all, I don’t really care that much about nominal prices. I presume it does matter, because when you borrow money, you hope for inflation. But by expecting low interest rates, they are also expecting low inflation. That means low nominal appreciation, unless real returns shoot up (unlikely given the abnormal real returns over the past 7 years(.
“New Mortage products will make home ownership more accessible.”
Ownership is already historically high. What are you going to have next? High school kids in town homes? Going to the extreme of interest only lower payments payments by about 20%. And that is assuming that 100% of the freed up affordability headroom gets makes it into prices. A bold assumption, give that prices may god forbid be based on value rather than max affordability from time to time.
Having said that, a doubling in 20 years is actually pretty low from a historical perspective, so they must have taken some pessimism into account.
April 18th, 2007 at 10:34 am
Hmm…
House prices have NEVER doubled and held that gain in the past.
In fact the only time they’ve nearly doubled in the US is if you count from the 1940s to 2003 or so and I don’t think the great depression to a ridiculous bubble is really a sensible comparison…
I don’t have a graph for Canada but I know the bubble is affecting us only regionally so I suspect that Canadian real estate has NEVER doubled in price unless you go back to the times when a few beads and pestilence ridden blankets bought a whole forest…