“History shows that Vancouver has always been a real estate boom-and-bust city. Now that the most recent mania appears to be over, with sales falling and prices threatening to follow, there’s no reason to think that’s going to change. Look for a long quiet period.
Fear and worry are rampant in Vancouver these days: the mighty real estate market is struggling. Whether it is in a tailspin or due for a monstrous crash is the subject of endless dinner conversations, office cooler chats and online messages.
I’m generally in the tailspin camp, because I’ve seen this kind of real estate mania in Vancouver before. Ever since I moved here, what seems like a hundred years ago, I’ve been hearing the “you have to get into the market” mantra and the “woe is me” reactions that follow.
Many years ago, when I was writing a financial planning column, I saw a chart that showed the increase in home prices generally mirrored the inflation rate – despite the bouts of mania – over time.
That means that, essentially, a house is like a big bank account, advancing about 3-5 per cent a year, if measured over decades. In some short-term periods it can rise much more than that, in others it falls or does nothing. Overall, it evens out.
So the people who “get rich” on housing usually own them for 30 years and essentially save their money in a house. They could have done better with some other kind of investment, but needed a place to live, so combined the two.
Here’s my own example: once, I bought a big, old, heritage house that required some rehab work. It cost me $270,000, which I thought was outrageous at the time, but as it turned out, wasn’t.
Some eight years later, I sold it for $425,000 – a gain of about 55 per cent. But for most of those years, it barely registered any increases, and in some cases, even dropped. All the gains – which averaged out to roughly 6-7 per cent a year – came in the last few years. That was at the beginning of the current mania that saw the price of that house hit almost a million.
That’s a long boom that has now apparently subsided – a 10-plus percent drop in sales usually signals the end of a giant buying spree.
Was this a massive bubble? Slightly. When prices rise that much, we’re nudging bubble territory. But bubbles imply resulting crashes, and I don’t believe we’re going to have one. Of course, prices will drop a bit, but an American-style catastrophe isn’t going to happen.
More likely, we’ll just have a long fallow period in which prices have to correlate with incomes, and markets have to better adjust to geographical and other factors. During this period, prices will drop somewhat, but mostly they’ll stagnate. What will likely happen is that this stagnation period will be longer than usual, because the market got ahead of itself so much.
But eventually it will happen again. The Vancouver region now has about twice the population it had 20 years ago, and will continue to increase over time. This increasing population means that more people have to live farther out in the region, where it’s cheaper and there’s more housing availability. In the more popular inner regional areas, prices will inevitably rise again.
Those who understand these rhythms and are patient will do very well. But that will be a minority. It always has been.”
- entire text of ‘Real Estate Mania Is Ending’, Tony Wainless, BC Business, 13 July 2012 [hat-tip Don]
1. To paraphrase the old quip: Our market is ‘slightly’ like a bubble in the way that someone gets ‘slightly’ pregnant.
2. The author seems to lay out at least some of the important dots, but then, in the end, fails to draw the logical conclusion. Note the form of his flawed logic: “Was it a bubble? Well, if it was a bubble it’d have to end in a crash. I don’t believe it’ll end in a crash so, it can’t have been a bubble.” Why doesn’t the author draw the logical conclusion? He doesn’t share with us why exactly he believes it won’t end in a crash, but it’s very likely he does that simply because he hopes it won’t.
3. Yes, the Vancouver RE market is “a massive bubble”. How do bubbles end? Do they peter out over a “long quiet period”? Or do they collapse? Do we have any examples of bubbles simply going away over a “long fallow period”? [Answer: No].
4. To Tony Wainless and others proposing a ‘soft landing’: Who do you expect to now be doing the buying? Prices are still at stratospheric levels compared with price levels supported by fundamentals. For a soft landing to occur, you need a steady supply of buyers over years and years of flat or reducing prices. People in Vancouver have only been overextending themselves to buy at these levels because they presumed future price strength would be relentless. With a lacklustre market, people will stop stretching (hasn’t this already started happening?), and prices will collapse. We cannot see how this market could resolve itself with a soft landing.
5. Talking of minorities: Those who understand that this is a speculative mania, and understand the full implications of that conclusion, remain a very, very small minority.