Monday, November 24, 2008

The Game

The red line on this graph is the Royal LePage benchmark price of a "Standard Condominium Apartment"* in the "Vancouver West" neighborhood:

Here is a map
of Vancouver West with condos priced around the Royal LePage benchmark.

Also shown on the graph in blue is the then-value of $300,000 in 2008 dollars.
This was derived from historical Consumer Price Index data courtesy of statscan.
In yellow is the yearly rent for the same Condo also provided by Royal LePage. I multiplied it by 15 so it would be more-or-less equal to $300,000 for comparison purposes.
The green line is the median after-tax income for non-elderly Vancouver families (2+ people). This data is available also from statscan. Once again I multiplied the income by a constant, 5, to get it into the $300,000 range (the point here is to show trends).

Here is the data behind that graph.

This is the same table, but with my guess as to what will happen to prices in this town over the next three years. It's definitely not bullish on prices, but neither is very bearish on rents (it assumes rents will stay even on a dollar-basis rather than dropping through the floor as a potential depression takes over).
Here's a graph of what my guesses look like:

A huge drop is coming. That much I feel sure about. The reason is simple: if real estate costs a whole lot more than 15 times annual rents it becomes a bad investment. If rents don't go up, prices have to come down. Rents can't go up unless income goes up, and that's just not going to happen.

Now we're coming to the game: how much is that red line going to fall? Perhaps it will fall to hit the blue $300,000 line it has in the 80's, in 1991, 1995 and 2000. Bearish people would tell you it will crash far below the blue line for the first time since the depression, bullish people will say it's going to moderate and stabilize for the next ten years until everything catches up. I think perhaps it will come in for a smooth dip above the blue line like in my graph.

This is a graph that has a big gap between now and the end of 2011:

This one's a little squiggly because it's based on quarterly data instead of yearly.
As the data comes in over the next 13 quarters I'll be filling it in and we can see how my predictions match up.

* A two-bedroom apartment with a living room, a dining room (possibly combined) and a kitchen, in a high-rise building with an inside floor area of 84 sq. metres (900 sq. ft.). Amenities include standard broadloom, 1 1/2 bathrooms, 2 appliances, a small balcony and 1 underground parking space. Common area includes a pool and some minor recreational facilities.


M- said...

Angus, you can find great stats, including income, from Metro Vancouver:

Anonymous said...

I'm a realtor in Downtown Vancouver and I am telling people prices are going to fall for the next 3-6 months.

I can't prove it, because I don't have a crystal ball. But thats the consensus and there is alot of bad news to back it up.

How much its going to fall or when the market will hit bottom is anyone's guess.

Angus said...

Thanks M, there's some good stuff there.
Unfortunately the very specific numbers I'm looking for (median after-tax income for non-elderly Vancouver families (2+ people)) are not there. They have only have median and average incomes for families in general and only for four years.
This is so annoying. Statscan has the data and my taxes and my legally required survey answers helped make it but I'm not allowed to see it without paying again.

Angus said...

Hi Mike.

We met a couple weeks ago at an open house in SoMa (love that neighborhood name... whoever's idea that was is a marketing genius).
Since these numbers are your livelyhood I'll understand if you don't want to speculate, but if you do, just tell me the numbers and I'll make up a graph. It'll be fun.
In a sense it's my livelyhood too, because as soon as I get a sense that prices are approaching a bottom I'm going to be right in. I don't want to wait for the upswing to buy and face the hassle of a seller's market. I'd rather pay a little bit more and be able to take my time without fighting off other buyers.

Anonymous said...

Hi Angus,

I remember meeting you as well. It was a pleasure.

I am very reluctant to forecast on the market beyond 3-6 months for two reasons.

1) Liability - I am a licensed Realtor and it places levels of liability on my shoulders far higher than regular people. If I tell you the market will peak on June 1, 1988 and you rely on that and buy a place and this doesn't come to pass you can sue me.

2) I can't predict the future with any precision or at all for that matter. I can have opinions and I have shared them on another comment on your blog. There are just too many unforseen events both negative and positive in life, that I am not comfortable making any firm predictions on the future.

For example

If you bought a place on September 10, 2001. Would you be comfortable saying that it would be easier or harder to sell the following month?

Great blog btw

I think taking your time and doing your research as you are quite obviously doing is a very sound course of action.

I am launching a new video blog on my site and I would be honoured if you were to participate.


I look forward to hearing your thoughts.

Unknown said...

Good work! Thanks for post.