It’s the end of the week again.  It was a bit of a mixed bag this past week so here are a few negative and positive stories:

–B.C. exports expected to fall 23%
–Canadian forest sector losses continue to climb
–Canada, Australia, the U.K. seen first to recover from recession
–Bank of Japan Raises Economic View, Keeps Interest Rate at 0.1%
–Another fear gauge returns to normal
–U.S. economic indicators rise in April
–Vancouver’s landmark Bentall 5 building sells for $300 million
–B.C. MLS sales price to slump in ’09, climb ’10: CREA forecast

So what are you seeing out there?  Post your news links, thoughts and anecdotes here and have an excellent weekend!

-Dave

The discussion around affordability keeps coming up, especially with the recent drop in housing prices and lower interest rates.  Arguments for and against real estate are often rationalized based on affordability from both bulls and bears.  But what exactly does the historic and current data show?

First let’s define affordability.  It is simply the percent of household income taken up by ownership costs.   For this exercise, I followed the methodology used by RBC (http://www.rbc.com/economics/market/pdf/house.pdf) because past information was readily available.  Household income is based on published numbers for Greater Vancouver (median) and mortgage costs are based on a five year fixed rate mortgage amortized over 25 years. You may argue that this is not representative of buyers for whatever reason, but to do so would be to miss the larger point, which is to simply compare where we are now relative to the past.

Second, let’s look at historic data.  I referenced the RBC to obtain affordability percentages (rounded to 5% increments) for various years, as follows (see page 5):

Condo       TH        SFH

1986      20%      25%      35%
1990      40%      50%      70% (Peak)
1992      30%      40%      50%
1995      35%      45%      65% (Peak)
2000      25%      35%      45%
2004      25%      35%      50%
2008      40%      50%      75% (Peak)

To define the norm, I looked to where affordability ranged for most of the time (say 80%) going back to the early 80’s. The historic norms for condominiums, townhomes and single family homes have roughly fallen between 20-30%, 30-40% and 45-55%, respectively.  These ranges ignore the ‘spikes’ of low affordability at peak years (e.g. spring 2008), but also the ‘trough’ of high affordability in the early 80’s.

And finally, where are we now?  Using $60k as the median household GVRD income (used by RBC), the latest MLS GVRD benchmark prices (Mar 2009) and the current five-year fixed rate mortgage (using the ING calculator), I come up with 27% for condominiums, 33% for townhomes and 51% for single family homes.

All of those values fall near the mid-range of historic affordability.

– Dave

It’s the end of the week again, but this week is a little different with a focus on some of the more bullish developments this past week. Here are a few stories:

– B.C. businesses slightly more optimistic: CFIB survey
– Olympic ticket sales put 2010 Games in ‘positive cash position’
– U.S. home sales climb at fastest pace in last 10 months
– U.S. bank bailout plan ignites stocks surge on Wall Street
– Entertainment software delivers $1.7b boost to Canadian economy
– Richmond-based Kin’s Farm Market to expand
– Immigration boosts population growth: StatsCan

So what are you seeing out there?  Post your thoughts, anecdotes and economic news here and have an excellent weekend!

-Dave

note: any conversation on Vancouver, real estate or economics is allowed, please keep it civilized. When posting articles please only quote pertinent points and link to the original instead of pasting the entire article here. Pasting a link into your comment will automatically create a clickable hot-link. Linking to more than one external link within a single comment may cause your submission to get held up in the spam filter.

Now that the correction has started, the only questions that remain are its depth and when we get there. Or more simply, when does one buy?

There are a lot of different ways of evaluating real estate prices and many of us are aware of the traditional metrics. I won’t repeat this analysis because it has been said before and is readily available. Most results would place fair value anywhere from current levels to another 20 to 30% on the downside (and even more by some).

Another way of evaluating expected prices is technical analysis, which is simply looking at past trends and assuming history will repeat itself. Real estate has appreciated at approximately 5.5% per year over the long term. Using 1983 prices (the bottom of the last crash) as a baseline, this would give an expected bottom of $630k for the average Greater Vancouver SFH. Using a similar approach, fair value was estimated at $730k, not accounting that markets tend to overshoot fair value. Considering this, I think $630k is a reasonable expectation for the bottom (based on technical analysis).

Based on the November 2008 average SFH prices of $750k, I think we have another $120k to go on the downside, or roughly another 15% drop on top of what we had to date. Considering the rate of the correction, it shouldn’t take long for us to get there. It might only take another 6 months.

But with all that said… who cares? Why are so many people consumed with buying at the absolute bottom? I think we are asking ourselves the wrong questions because none of us really know where the market will go (a known unknown). I think the following three questions are more important, partly because they can be answered (known knowns):

1. Can I afford it?

2. Do I like the product and the location?

3. Will I live there for a reasonable period of time (at least 5 years)?

If the answer to all these questions is yes, then it just might be the right time for you to buy.

Dave