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There are indeed signs that inflation is picking up.

For inflation to be translated to rent inflation, wages need to rise as well or people just densify to make it affordable. As an example from a specific profession, Vancouver area Realtors on average are earning 25% less commissions this year than last. Public sector workers have wage increases negotiated at 2-3% per year. Hardly inflationary. I’ll believe stagflation when I see paycheques rise otherwise I’ll just reduce my spending in other areas to compensate for goods inflation. I’m sure most Canadians are doing the same or maybe just going into debt.

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One point which hasn’t been raised explicitly is that the criterion for deciding whether to buy or rent depends somewhat on whether one is buying to live in or buying to invest. For those who are buying to live in, sometimes there are other factors besides pure fundamentals and one often talks about an ownership premium. For those who are investing, the incentive in the past few years has been price appreciation since price/earnings (price/annual earnings from renting after expenses) is at an all time low right now.

If we have a prolonged stagnation, this incentive would disappear, suggesting that a prolonged stagnation is not stable and would tip towards an accelerated downturn if one believes there are a significant amount of investors playing the market for price appreciation (which I think few would deny).

Of course another possiblity is that investors are betting that rents will rise. However, historically if you look at the Saunder and statcan data, rents/salaries have more or less moved in tandem and followed inflation (with the important remark that couples now have to both work to maintain this salary against inflation).

There are indeed signs that inflation is picking up. However, our price points in Canada are higher than in the US, suggesting that the US has more room to handle inflation in terms of cost of living versus after tax salary (my guess as to why the BoC didn’t cut rates last week). The evitable spikes in the interest rates that accompany inflation together with higher cost of living in Canada seem to also suggest a sharper downturn to bring the market to fundamentals first.

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One point which hasn’t been raised explicitly is that the criterion for deciding whether to buy or rent depends somewhat on whether one is buying to live in or buying to invest. For those who are buying to live in, sometimes there are other factors besides pure fundamentals and one often talks about an ownership premium. For those who are investing, the incentive in the past few years has been price appreciation since price/earnings (price/annual earnings from renting after expenses) is at an all time low right now.

If we have a prolonged stagnation, this incentive would disappear, suggesting that a prolonged stagnation is not stable and would tip towards an accelerated downturn if one believes there is a significant amount of investors playing the market for price appreciation (which I think few would deny).

Of course another possiblity is that investors are betting that rents will rise. However, historically if you look at the Saunder and statcan data, rents/salaries have more or less moved in tandem and followed inflation (with the important remark that couples now have to both work to maintain this salary against inflation).

There are indeed signs that inflation is picking up. However, our price points in Canada are higher than in the US, suggesting that the US has more room to handle inflation in terms of cost of living versus after tax salary. The evitable spikes in the interest rates that accompany inflation together with higher cost of living in Canada seem to also suggest a sharper downturn rather than a prolonged one.

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Well if someone were to attempt to use that explanation then they really also owe an explanation of why purchasers were wrong about fundamental value then and they’re right now. An explanation of how this realization could come about in such an incremental fashion would help too.

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That’s easy: prices were significantly undervalued before. Nobody realised it until just a few years ago. Besides, prices are forward looking and the future is looking pretty good. Future’s so bright, I gotta wear rose-coloured shades.

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Good luck with that. It’s possible but unlikely to say the least. Don’t say you didn’t get the memo ;). Anyways if prices went up X% and fell back to today’s values a renter who is paying less in rent than the interest/taxes/maintenance for owning the same property is still further ahead.

“I have yet to hear anybody say they are holding out to buy in Burnaby, North Van, Coquitlam or Richmond. The reason for that is because those places are still affordable.”

Once again you miss the big picture. Lump everyone’s incomes into a giant pot and lump the appraised prices of residential properties into another pot. The income pot cannot carry the property pot.

It doesn’t matter if someone can afford a 30 year old walkup condo in Surrey. They have made a lifestyle choice and can rent a great place downtown for way cheaper than it is to buy it. Sounds like a good deal to me. They’re likely going to “miss out” buying at the peak as well.

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“Only 40 years? That covers quite a few economic cycles within the same market (i.e. apples and apples).

Unless you subscribe to long wave theory (e.g. Kondratiev), then I think it is a solid time period to use.”

Wow, you really don’t pay attention do you? I’ve said a half dozen times already to you that I believe the bump in the ’90s was a feature of our current mega bubble. Certainly the market has been abnormal since the late ’80s. I know your type always wants to believe Vancouver is “different”, although nobody has really explained why it’s different and you certainly seem happy to use other cities as proxies when you think it fits your argument. The fact is bubbles have been happening for hundreds of years and the result is always the same. Prices drop to approximately the level they were at before the bubble.

I know you’ll probably argue that it’s not a bubble. If that’s your line then explain how prices can triple without any real fundamental change in the market?

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I have saved the difference and have done far better investing that sum than if I’d bought the place outright.

My position is that we don’t have a strong enough economy to support $5,000 dollar rental pricing now, nor will we in ten years. $9,500 a month? I’ll give it a reasonable chance in twenty five years. (This is for 1,200-1,400 sq. ft. prime Yaletown).

Nor do I think we’ll see suites selling for $2,000 a square foot for standard floor plate, 1,200 sq. ft. suites within fifteen years.

With those assumptions, I’ll be just fine renting in perpetuity, thank you.

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Possible, but not very likely.

Ok lets say they did, If I’m looking at it as an investment it still an extremely poor one. Transaction costs are what, around 6%? So after that rise and drop I’d be down about 6% IF I bought with 100% cash down. Thats ignoring the opportunity cost of that cash.

Lets say it takes two years for your imagined rise and fall. In that time the difference between what I save on rent vs. purchasing costs is currently around $2k per month. That adds up to almost $50K that can go into better investments than a stagnating (more likely dropping) real estate market.

If I was a gambler (you’d have to be to buy in Vancouver right now) I could take out a loan and make leveraged investments in any sector.

Let me ask you a direct question if you believe Vancouver Real Estate is not a bad deal right now: are YOU buying at these price levels?

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Unless you subscribe to long wave theory (e.g. Kondratiev), then I think it is a solid time period to use.

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Reductimat, I don’t know how far out of the money those buyers are. Were they just new to the workforce a few years ago and now have higher income and more stability? Or are they mostly people in a similar economic circumstance as they were before? I think there are probably more people in the first camp. The people in the second camp are probably always within the 30% that never buy real estate anyways.

That’s quite a drop from where Yaletown currently is at. Don’t hold your breath.

The funny thing I find about your statement most of the people who sat out on this bull market want to buy a condo downtown. I have yet to hear anybody say they are holding out to buy in Burnaby, North Van, Coquitlam or Richmond. The reason for that is because those places are still affordable. I know people who wanted to buy but couldn’t afford downtown 4 years ago. I sent them listings for places outside of downtown which were completely in their affordability range. But no, they only want ‘the best’. In the meantime, they missed out.

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“The pattern seems to be flat prices for 6 to 7 years and then another bull market.”

Would you stop looking at just the Vancouver graph? It only goes back 40 years and has only 2 or 3 features on it from which you’re drawing conclusions. Do you realize how utterly stupid that is?

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I’m in an almost identical situation, looking for prime Yaletown. As for $50k families, it doesn’t sound like much, but you and I are in lets say the top 20% of earners, looking for RE in the top 5% of cost, in terms of the area. Its all relative.

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My wife and I make a lot of money relative to the median or average. I have no idea how a family can survive here on $50k a year. We’ll likely be buying when prices in prime-Yaletown hit $300/$400 a sq. foot or never. Whichever happens first.

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I Agree, but your own estimate of a “10 to 15% drop” would be pretty dramatic at todays price levels. The lowest end 10% drop represents savings of more than $77,000 at todays benchmark house price.

As also pointed out, prices usually drop and then stagnate for years, so no real rush trying to ‘time the bottom’.

For me personally, $77k is worth waiting for.

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Yes, they have significantly dropped in the last few years.

I think it will provide some buffer on the downside because many of those people will want to enter after only a moderate price correction.

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Unfortunately, I still can not locate an extensive HPI index for the GVRD region like those published by the OFHEO. With the Americans, you can actually see this information..

In Washington state, starting with the index of 100 from the 1980, they went through a similar rise and fall in their real estate, but during a span of some 20 years, to the year 2000, their index never had gotten past 300. Just 278.84. But from the year 2000 to 2008,
it went from 278.84 to a high of 512.54 in 2007. It has dropped since to 510 in 2008.
It took 20 years to get a more than double in the HPI, but it took only 8 years to not only quadruple but, I don’t even have words for that. California is even more silly at 600+. In fact, California is suffering from a big decline more than the others.

Our HPI is also behaving very similarly. I don’t think you’re going to see price drops like those that we saw in the early 80s and mid 90s. Because, during those years, the HPI went a little more than fundamentals, but quickly went back. It didn’t have 5x increase like we do today! When you have an index going from 150 to 600 in 6 to 8 years, it definitely isn’t going to take 6 to 8 years. Remember that historically and with proper fundamentals, this index level is simply unsustainable. So far, price drops have been mild in the US. I see not much changes in the HPI, so either prices will drop slowly like Japan does or somehow, fundamentals like wages have to rise 6x to 8x higher to catch up to home prices.

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The HPI serves as a timely, accurate indicator of house price trends at various geographic levels. Because of the breadth of the sample, it provides more information than is available in other house price indexes. It also provides housing economists with an improved analytical tool that is useful for estimating changes in the rates of mortgage defaults, prepayments and housing affordability in specific geographic areas.

The HPI includes house price figures for the nine Census Bureau divisions, for the 50 states and the District of Columbia, and for Metropolitan Statistical Areas (MSAs) and Divisions.

That’s why the Japan’s HPI index is used as well as the Landcor Website. Now, there’s also the S&P Case-Shiller Home Price Index (another HPI). And while both serve in a similar fashion, the Case-Shiller is a value method which can skew the index when more expensive homes dominate the statistical homes. It does not take into account refinancing appraisals as do the Housing Price Index. So in effect, this index is a measure of what you are looking for..

To give you an idea of HPI in various states in the big US of A. Using the base index of 100 from 1980, the 1Q of 2008 shows the West South Central states standing at 234.29,
West North Central states at 305.56, East North Central states at 320.16, Mountain states at 385.87 and the Pacific states at a whopping 562.44. Our HPI pales in comparison to theirs. That is also why our homes are still valued as being cheaper, if you compared our apples to their expensive apples.
The state of Hawaii is some 500 in the HPI index.

So in reality, everybody have problems. And that was why, I was interested in Japan because where they were 10 years + ago is where the Americans are right now and soon will we. The fall is eerily similar.

You know, I hope it doesn’t behave like the Japan HPI index. There are a lot of home owners like ours who will have found out that homes and cars are so alike!

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http://www.youtube.com/watch?v=rOimUM_sA0Q

“And all the roads jam up with credit
and there’s nothing you can do
It’s all just bits of paper flying away from you.

Look out world, take a good look what goes down here.
You must learn this lesson fast and learn it well.

This ain’t no upwardly mobile freeway

Oh no
this is the road
this is the road
this is the road to hell”
_______________________

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It also obviously depends on the trigger. For example, a major recession would knock values down more quickly than a slight economic downturn.

The pattern seems to be flat prices for 6 to 7 years and then another bull market.

As before, I think a person should buy when it makes sense to them. Trying to time the market isn’t worth doing. If you can afford to buy, plan to own for at least 5 years and find a product you want, then by all means, take the plunge. If I knew ahead of time that prices would be stagnant, I would rather buy earlier than later and start building equity.

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Might it be possible that the longer the run up to the peak the longer the clock is turned back, which might explain why the downturn in 1995 turned the clock back more than previous downturns, which were following short run ups.

Another issue is how long the downturn takes to bottom out, which is the more relevant point I think in one’s decision to rent or buy. After the 1995 downturn, it took until 2001 for prices to start appreciating again. If rents and cost of living were low during that period, it might not have made sense to buy depending on one’s financial and economic circumstances, and indeed be worth sitting out for more than 12-18 months because the downturn was prolonged.

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