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GVRD: 24% speculative?

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According to a story in the Vancouver Sun approximately 24% percent of new condo units are re-sold within 12 months (as of last april). That story puts the speculative rate peak in the early eighties at closer to 50%.. Funny how often I’m seeing comparisons these days that make our market look good compared to ‘the early eighties’.

Robyn Adamache, senior analyst with Canada Mortgage and Housing Corp. in Vancouver, said inventories of completed and unsold condominiums in Greater Vancouver remain very low — 160 in all of Greater Vancouver and only three in Abbotsford — as of July 1.

“We don’t see any evidence of oversupply so far,” Adamache said.

However, there were also some 14,779 condominium units under construction in Greater Vancouver, a near record. Another 665 are under construction in Abbotsford.

Adamache added that a clearer picture of how well housing supply is balanced with housing demand will emerge once more of those units are complete and owners either take possession of them or attempt to sell.

The article also says that sales are slowing and that Vancouver is no longer a “build it and they will come” market.

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patriotz

IMHO the '81 crash was due largely to the leaky condo crisisWell sorry to let you down, but the leaky condo crisis – in the public eye anyway – began in the late 1980's, and the new NDP government appointed Dave Barrett to investigate it, perhaps in part to try to embarrass a certain Vancouver mayor of the late 1980's who had a new job.Even the current RE bulls admit the '81 crash was about affordability (it's not so bad now by their calculations).

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freako

One odd thing though. Most of the stats I've seen show condos have increased more than SFH in the last few years.And that is a f*cked up market for you. Condos are depreciating assets. I can not say for sure that an east side SFH is overpriced, because I cannot possibly know Vancouver's future population growth. But for downtown condos, there is no frigging way that the present value of future income streams comes close to todays prices (is we make the assumption that inflation will continue to outpace rents).

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van-realestate-crash

Patiently Waiting said… One odd thing though. Most of the stats I've seen show condos have increased more than SFH in the last few years. How true, perhaps SFH has appreciated so much because we ran out of land 20years ago, and now condos are appreciating so rapidly because we are running out of sky.Or perhaps, it's just a bubble.

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Damir

…world population is rising steadily, and at an accelerated rate for the last 50 years…Global population growth rate has not only stalled over the past 40 years, it has been cut nearly in half. http://www.census.gov/ipc/www/img/worldgr.gif

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Patiently Waiting

One odd thing though. Most of the stats I've seen show condos have increased more than SFH in the last few years.

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markx

jmk: SFHs becoming unaffordable compared to median is generally a result of increasing population. In the current run-up, population growth has been fairly small, compared to late 90's and early 2000's. I wouldn't want to assume the same trend of population growth for the next 20 years as the past 20 years. Vancouver is already a major metropolitan area, with very high cost of living.

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freako

I don't have the numbers, but my guess would be that Vancouver's fraction of households in SFH's has gone down dramatically over the last 30 years.Good point. Priced in density potential skews SFH comparisons. I have posted pictures in the past of the West End a century ago, and it was nothing but houses. Those few SFH that remain have impossible affordability, and would likely not be owned by an owner/occupier.In any case, SFH affordability is poor even if we widen the area to the entire GV.

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tulip-Mania2

JMK:"consider what the affordability would be on an SFH in Manhattan."Are there any similarities Vancouver/Manhattan?I do see many differences, in size, population, incomes, economic base, but not many similarities.

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JMK

and why isn't relative affordability relevant? If Vancouver SFH numbers go from 55 to 60 to 72%, does that not indicate that there is less appreciation headroom?Hi Freako, I think the affordability measures are relevant. However, there is no good reason for it to be constant.If 2/3 of Vancouver's housing market is non-SFH right now, and that increases to 3/4 non-SFH in the future, then I'd expect the SFHs to get apportioned to the highest bidder. The price of an SFH goes up compared to the median income as more of the population moves into non-SFH housing.I don't have the numbers, but my guess would be that Vancouver's fraction of households in SFH's has gone down dramatically over the last 30 years. As an extreme example, consider what the affordability would be on an SFH in Manhattan. I'm not trying… Read more »

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freako

If the market prices are entirely random as purpoted by you and many other pundits,Whoah, slow down. To borrow a quote from Chipman, you are seeing what is not there. EMH is a framework for analyzing market, not a dogma with unrealistic assumptions. As mentioned, I don't think RE at the moment is even weak form efficient. Once more, so that there is no misunderstanding,I don't think RE at the moment is even weak form efficient. FYI, the EMH framework allows for three levels of efficiencies, weak, semi-strong and strong. It does NOT have an opinion about what is out there, it just provides a framework for evaluating efficiency.I did not conclude non-random walk by "trends" alone. Didn't say you did. I truly don't believe that this blog is an appropriate place to play out this debate.Sounds great, but I… Read more »

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Akhen

"If you cover 35 out of 36 numbers on the roulette wheel, you are likely to have long streaks of winning 1 dollar per spin. Is this a trend? Clearly not, the wheel is random. Every 36 spins or so, the ball will land on the number you didn't cover and take away all your winnings. The results look non-random, but of course they are.By the same logic, RE appreciation 12% a year for 5 years and then dropping by 60% could be random. I don't think RE is remotely efficient, but you can't conclude non-random walk by "trends" alone."Okay, freako … I will respond.If the market prices are entirely random as purpoted by you and many other pundits, and that trends merely appear to be related to each other, then why is there statistical correlation between discreet price movements… Read more »

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tulip-Mania2

"LIVING THE AMERICAN NIGHTMAREFORECLOSURES ON THE RISE: As the housing market softens, a combination of consumer naivete and aggressive lending means owners with subprime loans are increasingly getting sucked down a financial black hole"Hey is San Francisco a close enough comparison to Vancouver?

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freako

This has been raging on for over 100 years, and there are just as many studies supporting each side of the debate. I am not exactly sure what the debate you are refering to is. Besides, most of modern finance theory came about in the 60's, 70's, and 80's. EMH itself is from the early 60's.

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Tony Danza

Jim said… I don't know if its a "market", but world population is rising steadily, and at an accelerated rate for the last 50 years. Perhaps a comet or two or could reverse *that* trend.Jim, check out this timely opinion piece courtesy The Economist:http://tinyurl.com/2yxlguNote that immigration is ruled out as a solution to falling birth rates.

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Akhen

In any case, I don't think the issues and debate between both the school of thought is going to be resolved through our discussions. This has been raging on for over 100 years, and there are just as many studies supporting each side of the debate. Though the EMT and the Random walk theory seem to have a greater level of acceptability.

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freako

Price inflections are the result of active decision whereas numerical outcomes in a roulette is not. Therefore, the comparison is flawed. It was an illustration of how the ddirection and magnitude of price movements can interplay to create the false appearance of non-random outcomes. I chose it because it is easy to understand and removes non-relevant factors.It was not intended as a perfect model of the real world, so I don't know where your "flawed" comes from. It is what it is.Give me a minute, and I will think of some real world situations where this type of thing can occur.By the way, the biggest "flaw" in the analogy isn't the active decision making. If active decisions are made in an efficient market, the outcomes are entirely determined by probabilities and for all practical purposes similar to a roulette wheel.Rather,… Read more »

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Akhen

Yes, there is a primary and significant difference between the roulette illustration and the markets. Price inflections are the result of active decision whereas numerical outcomes in a roulette is not. Therefore, the comparison is flawed.

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freako

BUT … here is the big BUT, why then do markets trend?They do trend, and that is usually a sign of market inefficiency, BUT there are other explanations:As I have mentiond untold times, its just not about market direction, but also magnitude.If you cover 35 out of 36 numbers on the roulette wheel, you are likely to have long streaks of winning 1 dollar per spin. Is this a trend? Clearly not, the wheel is random. Every 36 spins or so, the ball will land on the number you didn't cover and take away all your winnings. The results look non-random, but of course they are.By the same logic, RE appreciation 12% a year for 5 years and then dropping by 60% could be random. I don't think RE is remotely efficient, but you can't conclude non-random walk by "trends"… Read more »

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freako

Well, firstly I don't believe in the random walk principle and I absolutely do not believe that the RE market is efficient.You don't agree with random walk theory, or you don't think that the markets follow a random walk?A random walk is an ideal, if markets were perfectly efficient, that is how prices would move.From this we can conclude that:a. Prices have not followed a random walk.b. Therefore the RE market is not efficient.c. Markets do strive for long run market efficiency (they don't have a bias to the upside or downside).d. Therefore expect a reversal of prices.e. UNLESS the runup was a correction of a previous inefficiency (underpriced RE to start with)f. Metrics such afforability and price/rent multiples do not support the previously underpriced argument.

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Akhen

I think affordability is one of the indicators of the speculative ferver. I think it is relevant, but should only form one aspect of one's investment approach.On the whole, it is rather difficult to point to any given statistic that shows speculative ferver. It's all up to interpretation.

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Akhen

Well, firstly I don't believe in the random walk principle and I absolutely do not believe that the RE market is efficient.Samuelson argues that randomness is achieved thru active participation of many investors seeking greater wealth and as such, pounces on even the slightest informational advantage resulting in prices quickly reflecting new information. BUT … here is the big BUT, why then do markets trend?Secondly, Efficient Markets Hypothesis requires frictionless market transactions and information distribution. We all know that the RE market is not that. Even the stock market is not efficient.Lo and McKinley's statistical work originally published in 1999 provides empirical evidence that markets are predictable to some degree. However, they didn't provide a model for such predictability.Again, going back to 24% speculative, in the absence of active government intervention, speculation is unavoidable. It feeds on itself until the… Read more »

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freako

Affordability is of course relevant. But averages applied across a Province don't tell much.Ok, what about Vancouver CMA numbers? Are they not relevant? The RBC affordability study calculates it broken down by housing type.And why isn't relative affordability relevant? If Vancouver SFH numbers go from 55 to 60 to 72%, does that not indicate that there is less appreciation headroom?

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freako

Population is of course not a market but its an example of a non reverting trend. Yes, but it's not a market. As mentioned, markets are forward looking, and once risk adjusted outcomes are as likely to be underperforming as overperforming.An asset that can only rise in value essentially wins every 50-50 bet it encounters. Theoretically possible, but implausable. And still only retrospective with no guarantees for the future.This continous run of RE points squarely at a market efficiency. There is no way that random walk factors would continously come out in the favor of RE.

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Jim

Affordability is of course relevant. But averages applied across a Province don't tell much.Population is of course not a market but its an example of a non reverting trend.

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Akhen

Okay, let me define "market" … "A formal or informal exchange where types of or category of assets are traded by buying and selling participants where price is the primary measure of value"I am not referring to the participants in the market where the number may grow or decline but rather the price and level of participation.

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