What sets house prices?

Jesse put together a nice clear presentation on our housing market.

Check it out.

His argument is that the factors that set house prices are different for the long term than they are for the short term.

If short term factors drive up supply and pull demand forward, what happens in the future to balance this out?

With housing affordability in Vancouver hitting an all time low and sales scrapping along under 100 a day It sure looks like Months of Inventory is starting to flash a big warning sign for current buyers.

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No Noise
Guest
No Noise
Anonymous
Guest
Anonymous

Rolling Stone? Politics?
Puuuleez…this is a RE blog!
O-bummer is going down with their crappy economy anyway.

patriotz
Member

Another way of putting it is that in the short run you borrow and in the long run you pay it back.

PetrSyk
Guest
PetrSyk

Jesse – Great job with the ppt presentation. Just one comment

Slide 19 – “These matter but… they are catalysts. They determine the path for prices but not the destination. The price-rent ratio is key”

I’d argue that the credit availability is the key to house prices falling. I look at the price-rent, price-income and price-gdp ratios as signs of an unhealthy market… but is there really a threshold that price-rent can reach until prices fall? Credit availability there is a discrete limit and is the biggest deterrent to the artificial demand we’ve seen in the last decade.

Bo Xilai
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Bo Xilai

@PetrSyk:
“I’d argue that the credit availability is the key to house prices falling”

I agree… Spiking the punch bowl and then taking it away has been the hallmark of the Conservative government. CMHC insurance in force has tripled since 2006 and who can forget the 0/40 “Extend and Pretend” debacle? Credit might not create asset bubbles, but it is the lifeblood of its expansion.

patriotz
Member

@PetrSyk:
“is there really a threshold that price-rent can reach until prices fall?”

Absolutely. The higher this ratio gets the greater the gap between rent and ownership costs, the fewer people are willing and able to buy, and the more new supply is built. The bubble inevitably collapses even without a change in availability of credit.

Do you really think price/rent could get up to, say, a million? Nobody could possibly make the mortgage payments.

Mort
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Mort

@patriotz: with enough credit prices could go up that far. Multi generational 5000 year mortgages would just about do it. 😀

PetrSyk
Guest
PetrSyk
@patriotz “The higher this ratio gets the greater the gap between rent and ownership costs, the fewer people are willing and able to buy, and the more new supply is built” I’d have to agree with you. But price-to-rent ratios are different in all cities of Canada. There is no city as stretched with fundamentals as Vancouver, but what’s going to cause (is causing) the slowdown in all cities of Canada is tighter regulations, and limited capacity to borrow via CMHC. Most (all) Cdn cities regardless of price-to-rent ratio will see (is experiencing) higher MoI, less demand… but what is the story to get out of this ppt presentation? 1) Vancouver has reached its price-to-rent limit? 2) Borrowing is getting harder lowering the artificial demand of RE of the past decade?… it’s my opinion, that #2 is the key. #1… Read more »
patriotz
Member

@PetrSyk:
“what’s going to cause (is causing) the slowdown in all cities of Canada is tighter regulations”

Prices started falling in mid-2007 in Calgary and Edmonton without any change in lending requirements.

Tighter lending is certainly going to speed things up, but it does not change the long run sustainable price/rent.

Dan
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Dan

Great presentation. According to The Economist, Canada is the most overvalued in the world right now price-rent (latest reading was Q2). Imagine where that leaves Vancouver?
http://i.imgur.com/e5Kw5.png
What I think we’re underestimating, is how far real rents could decline due to dwelling formation, thus pulling prices further.
http://i.imgur.com/8YM90.png
I don’t believe our weak in-migration can cushion the decline much. Also looking at the pyramid, it may not be long before BC’s death rate reaches it’s dwelling formation. Death rates increase a lot around retirement age. For instance, the data below, show males born between ’50-’52, only average age 66.
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/health26-eng.htm
I’m just saying.

Patiently Waiting
Member
Patiently Waiting

One thing I notice is how tenants are often timid. A landlord will go in for the rent increase as much as they can, as soon as they can. The fact that rents have barely gone up, really speaks to the weak demand for housing along with low incomes. This is despite the waves of immigration that have crashed on our shores.

At the same time, tenants don’t seem to have the nerve to ask for a decrease when vacancy rates go up and good tenants are hard to find. If the economy was really weak for a long time, I wonder if this could change. I know the 80s didn’t have decreasing rents, but that was when baby boomers were ramping up their families.

VHB
Member
VHB

@Mort: you realize that payments are not linear in amortization, right? They asymptote to the interest-only payment.

Mort
Guest
Mort

@VHB: I’m assuming zero percent interest rates to go along with those 5000 year mortgages. 😀

patriotz
Member

What $2 Million Buys You in Silicon Valley

Now before you say that Vancouver doesn’t look so expensive in comparison, check out what this sort of house rents for:

http://sfbay.craigslist.org/search/apa/sby?query=saratoga&srchType=A&minAsk=&maxAsk=&bedrooms=4

patriotz
Member

NEW PRICE! DETACHED BUNGALOW 3 Bed 2 Bath, huge lower level Family Room + Den (currently bedroom). Beautifully upgraded, Roof 2012, Furnace 2010, Windows 2010 & 2012, Laminate floors 2009 & 2012, Painted 2012, Main Bathroom 2009. Central Air Conditioner. Bedroom 3 currently TV room & access to back yard. 3 PC Bath in Lower Level. Private back yard fully hedged & fenced & Deck. Single garage.

But in Silicon Valley North the market seems to be falling.

http://www.realtor.ca/propertyDetails.aspx?propertyId=12307573&PidKey=-618663235

ScubaSteve
Member
ScubaSteve

@No Noise:

I don’t like Mitt Romney, but that article is pure trash. The author is misleading the “general public” in a lot of ways. It is one of the most bias articles I’ve ever read in my life. You can tell the author hates mormans too. It almost seems like an anti-morman rant given some of the statements.

Anonymous
Guest
Anonymous
@patriotz: “Do you really think price/rent could get up to, say, a million? Nobody could possibly make the mortgage payments.” You are assuming some rationality to the credit market and that a regular mortgage payment is required. For example many of the mortgages in the US gave a loan of over the purchase price and then a payment as low as 0.5% of the principal per month for the first two years. As an example you could buy a house for 1 million, get a loan for 1.05 million keeping some cash after closing costs and then have a payment of $416 per month for the first 2 years in which you could use the cash from the loan to pay for. Pretty much anyone could afford that if someone gave the credit. Of course we could go even further… Read more »
Anonymous
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Anonymous

@ScubaSteve: “I don’t like Mitt Romney, but that article is pure trash.”

Personally I don’t blame Romney I blame the system which he and others took advantage of. Who has had the power to change the system over the past 4 years? Obama. What has changed? Nothing.

Van
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Van

patriotz – do you always hunt for the most crappy houses in the most crappy locations just to prove there is a cheap house somewhere?

Why not find properties in Iraq?

Van
Guest
Van

Listings plunged under 18k 😀

Crikey
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Crikey
@ScubaSteve: “You can tell the author hates mormans too. It almost seems like an anti-morman rant given some of the statements.” (Sigh – I know, I know…wading into this discussion on a real estate blog…) I don’t think there is anything wrong with some scrutiny over the religion of the person who may very well become leader of the free world. Certainly, some religions hold alarming, scary, beliefs and customs. I’m not saying that Romney is bad, but I would certainly like to know how he feels about Mormonism’s tradition (until very recent history) or excluding blacks; Mormon origins even include an explanation as to why blacks are made dark-skinned (ie: so that they be singled out for their bad deeds) If (for example) Romney were to believe that part of Mormon doctrine in the least, should all journalists not… Read more »
Dave#1
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Dave#1

Supply and Demand always sets the price.
Dave#1

Anonymous
Guest
Anonymous

@Dan: Dan.. Can I ask what you mean by “dwelling formation”?

Anonymous
Guest
Anonymous

@Dave#1: “Supply and Demand always sets the price.”

Yes. And the available credit drives the demand.

jesse
Member
@PetrSyk: “I’d argue that the credit availability is the key to house prices falling” I think that’s true. The way I look at this — and what I’ve tried to get across in the presentation — is that price-rent is what we should be looking at for predicting where prices and rents are going in the long run. Further, the daily/weekly movements of the market — supply and demand — are at the nexus of how these price drops occur. All the other factors — immigration, income growth, credit conditions, et cetera — will and must adjust somehow to revert price-rent to its historical long-run average pre-bubble. Credit tightening is a near certainty if prices are in for a prolonged bout of weakness and I agree with other commenters here that it’s by far the largest determinant of the current… Read more »
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