Category Archives: 17. The Froogle Scott Chronicles

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 10: Reversion To The Mean

Van_house_price_1960_2012

Reversion to the mean

The most likely outcome of any bubble is a reversion to the mean — that is, a return to prices that reflect the long-run mean or average growth rate that existed prior to the bubble. As the various forces that helped inflate a bubble cease to exist (low interest rates, easy access to credit), or reverse themselves (speculative mania turns to fear), prices collapse. One or more external events may also play a role; however, bubbles always contain the seeds of their own demise. Market sentiment in its extreme form is the true creator and destroyer of bubbles.

Falling prices typically stabilize around the point where they would have been had prices followed the average growth rate rather than rapidly inflating and then collapsing. In the aftermath of a house price bubble, prices probably won’t return to where they were before the bubble — although they may temporarily overshoot to this lower level. They’ll likely return to where they would have been if there had been no bubble and they had continued increasing at the average rate of growth, a rate which is typically supported by economic fundamentals such as average household income, house-price-to-rent ratio, and the rate of inflation. We can see two historical examples of this phenomenon in the chart above — the Vancouver house price bubbles that peaked in early 1981, and in late 1994. In both cases, a half-decade later, prices had reverted to the mean.

I’m able to present a clearer picture of this pattern because I recently discovered some Vancouver house price data stretching back to 1960 (details below). Most commentators in the Vancouver RE blogosphere have been using the Real Estate Board of Greater Vancouver (REBGV) average price chart, which goes back to only 1977, at least in the publicly available version, or the Teranet house price index, which goes back to only 1990.

The current Vancouver house price bubble certainly looks epic, in both size and duration. Many people now believe that  a) the past decade has been a bubble, and  b) the top has been reached and the bubble is now beginning to collapse. If the current bubble follows the pattern of the two previous bubbles, collapsing prices should eventually revert to the mean.

What is the mean?

So, what is the mean, or average annual growth rate of Vancouver house prices, in percentage terms? Based on the data underlying the chart above, here are the numbers I’ve arrived at, which assume annual compounding. For calculating the growth rate of the current bubble, I’m excluding 2012, because it has the appearance of being the transitional year between rising prices and what could be a long period of falling prices — although no one can yet be certain.

  • 1960 to 2001, House Price Nominal:  8.33%
  • 2001 to 2011, House Price Nominal:  10.21%
  • 1960 to 2001, House Price Real:  3.62%
  • 2001 to 2011, House Price Real:  7.83%

‘Nominal’ means actual price — what someone actually paid at the time they made the purchase — and ‘real’ means actual price adjusted for inflation — that is, with the inflation component of the price in relation to a control or base year  factored out. The base year is 2002, in this case, meaning real amounts are expressed in 2002 dollars.

The distinction between nominal and real rates of growth would appear to be quite important to the analysis of Vancouver house prices. If we look at only the nominal rates of price growth, we see less than 2% separating the rate for all the years prior to the current bubble, and the rate for the bubble itself. Judging by growth rates alone, we might question whether much of a bubble exists. However, if we look at the real rates for the same time periods, we see a much different picture. The bubble rate of growth is more than double that of the years 1960 to 2001, with over 4% separating the two growth rates. That’s a major difference, especially given the effect of compounding over a number of years.

The reason for the seeming discrepancy between the nominal and real comparisons is that the period 1960 to 2001 includes the years of rampant inflation that occurred during the 1970s and early 1980s, an era when the annual inflation rate hit 14% and almost 13% in two separate peaks. That rampant inflation hasn’t been factored out of the nominal house prices for the period. By comparison, the period 2001 to 2011 has had stable and low annual inflation, around the 2% mark. For the bit of prognosticating I’m about to embark upon, I think it makes better sense to use real rates of growth, which remove the distortions caused by significantly different inflation rates, and which highlight price changes more integral to the housing market itself. Based on the data I’m presenting here, I’m going to use 3.62%, the real growth rate between 1960 and 2001, as the baseline for house price appreciation in Vancouver.

It’s worth noting that a real growth rate of 3.62% in excess of the rate of inflation is significantly greater than the 0.5% above inflation that I think Robert Shiller has demonstrated for American houses, long-term. (Feel free to correct me if I’m wrong about the details of Shiller’s finding.) In other words, even using the most conservative baseline for Vancouver house price appreciation puts us well beyond most other places in North America. That’s how Vancouver became the city with the most expensive residential real estate in Canada even before this latest bubble began to inflate in 2002.

Prognostications

There’s no guarantee that the current bubble will follow a pattern similar to the pattern of the previous two bubbles, or price bubbles generally, but if it does, this second chart shows some possible outcomes. The chart also shows that real house prices are currently 40% overvalued when compared to the 1960-to-2001 mean, and were almost 50% overvalued at the end of 2011.

Van_house_price_1960_2022_mean_reversion

  • Crash — Reversion to the mean takes 4 years, and occurs in 2015. Over the entire period, real price decreases 22.53% from $762,304 to $590,547. Nominal price decreases 17.11% from $921,625 to $763,939.
  • Current Trajectory — Reversion to the mean takes 7 years, and occurs in 2018. Over the entire period, real price decreases 13.92% from $762,304 to $656,215. Nominal price decreases 2.25% from $921,625 to $900,847.
  • Slow Grind — Reversion to the mean takes 11 years, and occurs in 2022. Over the entire period, real price decreases 0.71% from $762,304 to $756,856. Nominal price increases 22.00% from $921,625 to $1,124,654 (not a typo — read on).

These projections assume inflation remains stable over the next decade at approximately 2% a year. So a house price that remains constant in nominal terms from one year to the next has decreased in real terms by approximately 2%. In other words, the house has lost value because it hasn’t kept pace with inflation. Which partially explains the seeming anomaly of some prices decreasing only modestly, or in one case even increasing, while the bubble deflates — the modest decreases are added to by the loss against inflation, and the increase only keeps pace with the 2% annual inflation rate, whereas the mean line is increasing at 3.62% above the inflation rate. The other key factor is that the modest decreases and the increase take place over longer time periods than the decreases in the crash scenario, which gives the mean line, increasing at 3.62% annually (compounded), the chance to catch up to a more slowly deflating bubble line.

Almost certainly, the actual unwinding of this current bubble will not be as regular as any of my three posited scenarios. It will likely be a much more jagged affair, in what has traditionally been Canada’s most volatile real estate market. I’m not sure if the head-and-shoulders pattern from the stock market is truly applicable to real estate, but the two previous bubbles certainly have something resembling that shape. A quick, partial crash in the next two or three years, followed by a rebound (the right shoulder) as unwary early vultures pick up houses at what they consider bargain prices, certainly seems plausible — followed by a second leg down, perhaps less steep but longer, as that initial, relatively shallow wave of buyers exhausts itself.

One other interesting observation made possible by the second chart: from 1972 onward, Vancouver has experienced a closely spaced succession of residential real estate bubbles. For almost the entire 40-year period, a bubble has been either inflating or deflating, with only a couple of years during which the market actually closely tracked the mean. Which suggests that most Vancouverites have never known a stable real estate market in this city. They don’t know what one feels like. I haven’t studied the real estate markets of other cities so I don’t know if this is the norm or not, but I suspect in many cases it’s not. It may help explain the somewhat neurotic, love-hate relation many locals have with real estate. Like junkies, we’re either floating upward, or coming down hard.

Still too damn high

There is a crucial consideration that this technical analysis, such as it is, ignores. Even with a reversion to the most conservative long-term mean that can be extracted from the first 41 years of data, houses in Metro Vancouver will still be too damn expensive for average families. I think there might come a point when absolute or nominal prices become so overwhelmingly high that they break the model, even with a mean reversion. I wonder if Vancouver has gotten there. A growth rate of 3.62% above the rate of inflation is probably not sustainable indefinitely. Because it’s a compounding rate, that mean growth line is exponential, becoming increasingly steep. Like an aircraft, it may eventually stall.

The growth rate of Vancouver house prices has meant that when this latest bubble began inflating, it was inflating a benchmark house price in 2001 of about $350K, which was already the highest in Canada by a large measure. A reversion to the historical mean may not do it this time around. The entire housing market in the city may need a 50-year reboot that creates a new historical mean that’s a lot lower than the current one. Who knows? When the 1981 bubble collapsed, real prices were chopped in half, and nominal prices weren’t far behind. It could happen again. The worst of that earlier bubble was a quick, four-year spike and plummet, so far fewer people would have been affected than are affected now. The dimensions are so much larger this time that the results of a similar implosion truly would be spectacular.

One long boom?

A suggestion I’ve read on several occasions is that Vancouver has been in one long boom of varying intensity for several decades — certainly post-Expo 86. For perspective, I’ve taken the real growth rate for Toronto houses from 1966 to 2001, and from 1966 to 2012 — in other words, excluding and including Toronto’s own bubble — and applied them to the Vancouver chart, using Vancouver’s 1960 price as a starting point. The difference is striking. By Toronto’s standards, we’ve been in a bubble since 1972. I have my doubts that Vancouver’s real growth rate can continue to outstrip Toronto’s by a percentage point or more indefinitely. You’d think that Vancouver mean line would eventually have to lose some altitude. For that to happen, real prices would have to traverse the mean line and stay below it for prolonged periods. In other words, a true crash, and a permanent reassignment downward of the growth rate of Vancouver house prices.

Van_house_price_with_TO_mean

Plastic-folding-chair economist

In one of the early episodes of The Froogle Scott Chronicles I stated that I’m not even an armchair economist. Let me reinforce that now. I’m not even a plastic-folding-chair economist. I could well have made some blunders in my analysis. If so, I won’t resent having them pointed out by anyone with greater expertise in these matters.

Happy continued bubble watching to all…

About the data

Okay, so hold on to your shirts. The numbers for 1960 to 1973 come from an article that Ozzie Jurock published in the Calgary Herald: “Price rise history defies naysayers” (July 28, 2007). I consider the argument that Jurock puts forth in the article, regarding the financial return on houses, arithmetically far-fetched. However, I think the house price data is probably legitimate. Being the suspicious type, I compared the Jurock data to the other Vancouver house price data I could find, to make sure that it aligned reasonably, and for the years in common it does.

The numbers for 1974 to 2012 come from the Royal LePage House Price Survey, which is referenced by the Bank of Canada, and UBC’s Centre for Urban Economics and Real Estate, so I’m assuming the data is valid. I followed the BOC and CUER practice and averaged the prices for Royal LePage’s Detached Bungalow and Executive Detached Two-Storey categories, which probably approximates the REBGV’s Detached Benchmark category.  And I averaged prices for all municipalities in Royal LePage’s “British Columbia, Vancouver Area”.

The Jurock data continues to 2007, but beginning in 1974 it mixes houses and condos, so I switched to the Royal LePage data, which luckily begins in 1974 — although it is somewhat spotty in the earlier years.

This final chart shows how the various data sources align. For the REBGV Detached Average data, I harvested what I could from REBGV news releases. For years prior to 2001, I estimated prices using the REBGV Residential Average Sales Prices chart. All numbers are for December of each year.

As an additional check, I included the REBGV Detached Benchmark, and I also applied the Teranet HPI to the Detached Benchmark, using the 1996 benchmark price as a starting point. As you can see, all lines are strongly correlated, with the exception of the more recent years of the average line, skewed higher by the stratospheric prices at the top end of the market, and the more recent years of the Jurock line, which mixes houses and condos. Single family home and condo prices have increasingly diverged in recent years, so mixing in condos pulls the line lower.

In general, I find searching for Vancouver house price data on the web a frustrating experience. I’m not a conspiracy theorist, but I do get the sense the local real estate industry releases only the data they want to, and controls the vast amount of information at their disposal very carefully.

If anyone can point me to other sources of Vancouver house price data, I’d be most appreciative. For example, I haven’t been able to find the MLS HPI and average price data going back to 1980 that Ben Rabidoux, and Kevin at Saskatoon Housing Bubble, often use for their charts.

Van_house_price_with_data_comparison

Things can go missing from the web, so I’ve replicated the data from the Jurock article below. I’m assuming other commentators may want to include it in their own analyses. The year 1991 was missing from the data, so I averaged the prices for 1990 and 1992.

Year & Avg. sales price Year & Avg. sales price Year & Avg. sales price
1960  $13,105 1961  $12,348 1962  $12,518
1963  $12,636 1964  $13,202 1965  $12,964
1966  $15,200 1967  $17,836 1968  $20,595
1969  $23,939 1970  $24,239 1971  $26,471
1972  $31,465 1973  $41,505 1974  $57,861
1975  $64,471 1976  $68,694 1977  $64,556
1978  $66,243 1979  $70,888 1980  $100,087
1981  $148,860 1982  $107,829 1983  $114,618
1984  $113,722 1985  $112,737 1986  $120,035
1987  $132,658 1988  $160,375 1989  $209,670
1990  $230,641 1991  $237,921 1992  $245,200
1993  $279,800 1994  $305,600 1995  $309,500
1996  $288,200 1997  $287,000 1998  $278,600
1999  $281,100 2000  $295,977 2001  $285,900
2002  $301,500 2003  $329,500 2004  $362,800
2005  $395,400 2006  $482,000 2007  $540,100

In further communication after writing the above article, Froogle added the following thoughts:

- The e10 data still only goes back to 1960. If we had Vancouver house price data for the entire 20th century, what sort of trend line would emerge? That the average price for a house was only $13K in 1960 would suggest that the trend line was probably considerably less steep in the first half of the century.

- Did something start to happen in 1972 that has been continuing ever since, causing at least a portion of the baseline elevation? The thing that comes most immediately to mind is that the first of the boomers began hitting the earliest of the prime house-buying years. Forty year later, the last of the boomers, people our age, are perhaps now exiting the last of the prime house-buying years.

- Even bears would have to agree that the fundamental nature of Vancouver has changed. Not an “it’s different here” argument, but rather that Vancouver has shifted from being a resource-economy-based provincial outpost to being an Asia-Pacific-facing metropolitan region of a certain magnitude. World-class or global city? No. But certainly no longer a provincial backwater, either. Which means the trend line for house price appreciation for modern-day Vancouver should probably be compared to other cities of equal stature, not to earlier-times Vancouver.
—————–

Thanks very much for all this, Froogle Scott. Here follows my discussion. – vreaa

DISCUSSION:

Reversion to which mean?

Froogle Scott has sourced earlier price data, and given us a welcome analysis and discussion of the possible targets of a price reversion. The trend-line derived from data as far back as 1960, and the comparison with the long term Toronto price trend-line are healthy food for thought. If prices do ‘revert to the mean’, to which mean do we expect them to revert?

There could be arguments for the validity of any one of the following trendlines:

1. Trend-line determined by 2001-2011 rate of price increase (7.8% p.a. real)

2. Trend-line determined by longer-term 1960-2001 rate of price increase (3.63% p.a. real).

[2.5. Something in-between 2 and 3. More about this later.]

3. Trend-line determined by nominal prices rising at the same rate as long term wage inflation; little more than 0% real growth.

Trend-line #1 is the bullish case, where the very large annual gains of the last ten years continue indefinitely. By this logic, the current ‘correction’ in Vancouver RE prices would be argued to be over. We’d say at the outset that this represents particularly wishful thinking from those ‘long housing’, that 7.8%-real p.a. increases are preposterously large, and that we will soon find out that rate is far from sustainable.

The most pertinent debate that emerges from Froogle Scott’s analysis is whether we’d expect long-term support at the longer-term 1960-2001 trend-line, at a rate of 3.63% p.a. real. Even though 3.63% p.a. real growth rate may seem low to participants who are now accustomed to the 7.8% real p.a. increases of the last decade, I think we have to question whether a long term 3.63% rate is in any way typical, normal, or sustainable.

At what rate should we expect real prices in any given city to increase over the long-term?

Shiller’s very long term analysis suggests that housing prices should revert to long term means determined by long term wage inflation; by his findings, about 0.5% real growth.

Measures like income growth, population growth, and GDP growth are likely the best indicators of expected long term RE price growth.

“In Canada, as in other countries, movements in land and house prices over long time horizons are driven primarily by changes in population and per capita income. Over shorter horizons—a decade or less—house prices may outpace population and income in some periods and lag behind them in others.” – BOC Review, Winter 2011-2012

Here are some recent indicators of what rates of growth we can expect from these drivers:

Metro Vancouver’s population increased by 9.3% over the five years between the 2006 and 2011 census, an annual compound rate of 1.79%. (source: Statistics Canada)
From 1981 to 2011, the population grew from 1,300,000 to 2,313,000, for an annual compound rate of growth of 1.94%. (source: Metro Vancouver)

Median total family income in Vancouver increased from $62.9K in 2006 to $67.1K in 2010, an annual compound rate of 1.63%. (source: Statistics Canada)
Real income per person increased by slightly less than 1% per year in the 1980′s, actually decreased in the 1990s, and rose by 1.61% per year in the 2000s. (Source: Business Council of BC)

GDP in British Columbia increased from $197.0B in 2007 to $217.8B in 2011, an annual compound rate of 2.54%. (Source: BCStats)
GDP increased at annual rates of 2.12% in the 1980′s, 2.72% in the 1990′s, and 2.36% in the 2001-2010 decade. (Source: Business Council of BC)

Froogle surmises that 3.6% real p.a. growth is “probably not sustainable indefinitely”, and I would strongly agree. Why would we expect Vancouver RE prices to continue to increase at well above the current rate of inflation, at a rate greater than population growth, income growth, or GDP growth? Why should Vancouver RE prices continuously increase at greater than the rate of a city like Toronto, decade after decade? (Note that this is not a question about absolute price levels.. Yes, we can accept that Vancouver commands a ‘mild weather/beautiful vista’ premium.. but that premium is ‘priced in’; it explains why there may be a baseline difference in prices, not why prices should increase each year at about a 35% greater rate in Vancouver vs Toronto.)

The lack of convincing answers to these questions, as well as other factors concerning asset price bubbles that are mentioned below, lead me to believe that prices will go a lot lower than support determined by the 1960-2001 3.63%-real trend-line level.

It may be no coincidence that the nearby support as calculated using this 3.63%-real trend-line is also soon to be in the vicinity of the early 2009 price lows, those that resulted from the quick 15% pullback of 2008-2009. I have previously predicted there would be support at those levels for technical and psychological reasons (which technical analysis aficionados will know to be the same thing). I’d expect a temporary increase in buying interest at those prices, as it is likely that a group of prospective buyers will be expecting a floor at the 2009 lows. It wouldn’t be at all surprising to therefore get some support at those levels, and perhaps a bounce. This would result in the ‘right shoulder’ to which Froogle refers. I’d then expect that such support would fail in the months thereafter.

There are at least two other lines of argument that would suggest that price corrections are going to be more extreme than the worst-case 22.5%-drop scenario predicted by the 3.63%-growth trend line:

A. Fundamental analysis.
Prices in Vancouver have very clearly overextended from those determined by fundamental underpinnings. By price:rent and price:income ratios, Vancouver RE was two to three times overvalued at the peak. The average home price is more than 10 times the average income, where international standards judge 3.5 times average income to already represent an overpriced market. As Froogle puts it, even with a 22.5% drop, “houses in Metro Vancouver will still be too damn expensive for average families”. The thing is, no speculative mania ends with such a scenario. In fact, if anything, one would expect that the price correction will take values to levels where families can afford to buy. Long term sustainable prices should be at levels determined by rental yield, plus a modest ownership premium. Vancouver will never be cheap, but it will be a lot less expensive than two to three times fair value.

B. Sentiment.
Some people would be pretty miffed by a 22.5%-real price pullback. But ‘some’ and ‘miffed’ aren’t extreme enough words to herald the end of a decade long mania that has doubled or trebled prices. If such a modest pullback were to represent the end of the mania, that would mean that market participants would still have been rewarded with years of 3.63% per annum growth, over and above the rate of inflation. All this when fixed income rates have been very low. The point is, this would be a mere rap on the knuckles, and speculative manias always, always, end with holders being punished more than that. Manias resolve when speculation is completely ‘wrung out’, and a good proportion of participants are exhausted and disgusted. The bottom arrives with the proverbial ‘whimper’. After such a large and broad mania, sentiment will have to get particularly poor before we hit a final trough, and 22.5%-off simply won’t do the work necessary to achieve that goal.

Obviously, we can’t know with any certainty what trend-line we’ll revert to, or what the sustainable rate of price growth for Vancouver RE will end up being. Our best guesstimate is that Vancouver RE will find a long term trend-line below the 3.63%-real p.a. growth, but above the 0.5%-real predicted by Shiller. This still represents a very broad range, and consequently is not of much use in predicting price targets. Population-growth, income-growth and GDP-growth suggest that we’d quite likely reverting to a more modest 2%- to 2.5%-real long term growth in RE prices. That might not sound like much of a difference, the difference between 3.63% and 2%-2.5%, but it actually has profound effects on price targets: support determined by long-term 2%- to 2.5%-real growth would require prices to drop by about 55%- to 65%-real from current levels.

- vreaa

Postscript:

Caveats/Intricacies/Other:

(a) Whatever trend-line ends up being valid, we’d expect there to be overshoot to the downside to produce the final bear-market trough.

(b) Froogle asks in correspondence: “Did something start to happen in 1972 that has been continuing ever since, causing at least a portion of the baseline elevation?” We know that gold-bugs are going to be hopping up and down on hearing this question, eager to point out that Nixon closed the gold window in 1971. CPI began to rise at that point (see US chart below). But why should real prices start to rise at an even greater rate? The argument would be that there may have been hidden inflation for some assets. In other words, has there been a change due to ‘non-headline’ inflation of hard assets? This argument would still have to explain why prices have run so far ahead of rents.
Take a look at the 1972 effect on CPI in this US chart:
us national price index

(c) Concerning the argument that something may have changed about the way the world sees Vancouver; that Expo and the Olympics and other such forces moved Vancouver from a sleepy provincial port to a 3rd tiered city in global terms, and that such change merits RE price increases. If this were the case, why wouldn’t rents have increased at the same rate as prices, to reflect the argued increased desirability of the city?

(d) In the discussion of the 2010 ‘Fives Charts’ post at VREAA, commenter ‘Best Place On Meth’ stated: “I’m wondering if the entire past quarter century [of RE price growth] has been an aberration.” Indeed, it is even possible that the last half century could represent an aberration. Shiller would suggest that this could be the case (and would likely also point out that such periods of price distortion come and go over the centuries).
Did our bubble actually start much earlier than 2003?
Does the 2001-2012 spec mania action just represent the last two or three stages of a larger bubble blow-off, as the curve became steeper (2001) and steeper (2003) and steeper (2006; 2009-2011)?

Other articles pertaining to the trendline/price-support discussion include:

‘Five Charts: Predicting Future Vancouver Housing Prices’, VREAA, 11 Sep 2010

‘Vancouver Teranet HPI Trendline Analysis’, Jesse [YVRHousing] at Housing Analysis, 30 Mar 2012
Chart from jesse/YVRHousing’s article:
Teranet trend

Froogle Scott – “By systematically promoting only one side of the opinion and emotion, Vancouver’s MSM is participating in the manipulation of the citizenry.”

“Over the past few weeks I’ve had some interaction with two couples, both of whom are currently renting, and are contemplating house purchases. I’ve outlined the bear/bubble case for one couple, and hinted to the other couple, in more muted terms, that they could be buying at or near the peak. Everyone has been polite, but you can feel how uptight it makes people to hear these opinions. Including other people present at these conversations. It’s as if you’re the dinner party guest pushing your personal religious, political, or social beliefs onto others. It obviously makes people uncomfortable.
That’s the problem with the unbalanced and unethical MSM coverage of real estate in Vancouver. It conditions the vast majority of people to believe exactly what the vested interests want them to believe. And it makes people uncomfortable with legitimate and healthy debate. It’s all opinion, it’s all emotion, but by systematically promoting only one side of the opinion and emotion, Vancouver’s MSM is participating in the manipulation of the citizenry.”

- Froogle Scott, at VREAA, 27 May 2012 12:31pm

Those of you who don’t already know Froogle’s epic Vancouver RE story are encouraged to check out ‘The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise’.

“Just had a switchover of tenants, nothing major to fix, but just the painting, cleaning, and dealing with general wear-and-tear chewed up all my spare time for a month and left me exhausted.”

“We’re landlords, and the tenants live beneath us in a ground-floor suite. Just had a switchover of tenants, nothing major to fix, but just painting, cleaning, and dealing with general wear-and-tear chewed up all my spare time for a month, and left me exhausted. The kind of thing realtors don’t mention when they throw around that “mortgage helper” catchphrase.
I can understand people not wanting to bother with running a rental suite. It’s certainly not the ideal situation. We’ll probably get sick of it eventually, and hopefully the numbers will work for us by then so we can look at other options.”

- Froogle Scott at VREAA 13 May 2012 6:50pm

Read of earlier events in Froogle’s epic story here:
‘The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise’.

Froogle Scott – “Some interesting comments from our banker this morning. They’re wondering what might happen if prices go down 20 or 30 percent.”

“Some interesting comments from our banker this morning. My wife and I were in the bank switching our variable rate mortgage to one of the low fixed rate mortgages the banks began offering last week. (The switch is a bit of a gamble, but not one with a lot of downside risk.) Our banker said that because we have a good credit rating, we could also apply to have our HELOC credit limit raised and we’d be approved. But as of two weeks ago, customers with a ‘C’ rating, if they want a raised limit, must have their house reappraised, at their expense, and also provide a proof-of-income letter from their employer. I asked if this was because the bank was getting worried about house prices. Our banker said, “Yes. They’re wondering what might happen if prices go down 20 or 30 percent.” She then went on to say that my wife and I are among the few clients who have been significantly paying down the principal on their mortgage. A number of her clients have been “bumping up,” and she feels some of them could be caught if the market drops.”
“Interesting on several levels. The bank quietly enacting some defensive measures. Clients with good credit and steadily shrinking mortgage balances — i.e., ‘safer’ — invited to increase their credit limit. 20 or 30 percent – her numbers, the ones that I assume are circulating in the bank at the moment. Plenty of people still increasing their debt, fiddling while elsewhere Rome burns, assuming the flames will never reach them, or not even aware there’s a fire. As for credit rating, apparently all it takes to get on the bank’s shit list is a couple of missed credit card payments.”

- from Froogle Scott, via e-mail to vreaa, 24 Jan 2012

Interesting. Many thanks for the story, Froogle.
If prices do fall 30%, what’s to stop them falling 50%?
Do we expect there to be buyers stepping in at 30%-off levels given what such a fall is likely to do to wages, the economy, lending criteria, and sentiment? We will have lost all momentum buyers, of course. And would we expect value buyers to step in when prices, albeit lower, would still be significantly overvalued by fundamental measures?


PS: All Froogle Scott fans will be pleased to hear that he is, in his characteristic painstakingly thorough fashion, putting together an analysis of the actual cost of home ownership. He plans to share this with us soon. We eagerly await it.
- vreaa

The Disinvested – A Few Disparate Thoughts On The Vancouver Riots

by Froogle Scott, VREAA, 16 June 2011 -

Rioters = people less invested in a society, or at least capable of being less invested for an evening, when fueled with booze and testosterone.

Interesting that the typical riot shot or ‘riot pose’ adopted by the young male participants, is one with arms thrust upward and outward in a V, as if proclaiming some kind of victory, or drawing power from the carnage behind. Ergo, these are people who spend most of their time walking around feeling powerless?

The boutique and upscale display window, the BMW or Hummer, is the magnet for trashing, upscale consumer goods the key item for looting.

The riot appears to be a fun event for the participants, but also something that helps define them, assert their individuality — ironically, while part of a mob. The Canucks fail to make them feel good about themselves, so they take matters into their own hands. Surreal to see “Kesler” and “Luongo” and “Sedin” running around inside the Bay and outside smashing and looting. If the real Luongo can’t get it done, I’ll just do it myself.

A few disparate thoughts, perhaps held together by the notion of ‘investment’ — the various meanings of that term, the lack of it, and perhaps the distortion of its meaning by the broader Vancouver society. We feel invested if we own a house or a condo, or earn enough to buy $500 hockey tickets, or designer handbags and shoes, or fancy automobiles. As the society has become increasingly focused on consumerism and sensory experience, on houses and home renovation, and the price of admission to that society climbs increasingly higher, the notion of what constitutes a healthy society in which everyone can feel invested becomes increasingly murky.

I don’t think the rioters are ‘dispossessed’ in any real sense of that word, but I do think that a riot of disaffected, bored bottom-feeders in a consumerist hierarchy tells you something about the nature of the broader society.

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 9j: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

Part 9j: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

[The final instalment of Part 9; thirty suggestions over 10 sub-parts. Download the collector’s-edition pdf of the entire Part 9 here. Also available through the Froogle Scott sidebar. -ed.]

29. Think about what constitutes quality

Before our renovation, my wife and I referred to our house, somewhat affectionately and ironically, as “our East Van shitbox.” We seem to have stopped the practice, perhaps because the house doesn’t seem so shitboxy anymore. If I ask myself why it doesn’t, the thing that comes most immediately to mind is the dramatic transformation of the exterior. When we bought the house in 2003 it had outdated two-tone stucco, and junky, single-pane aluminum windows with skinny little frames. The overall impression was dreary and depressing, a remuddling of the way the house would have looked when first built — nothing fancy, but at least neat and solid, with fiber cement shingle siding (possibly asbestos-containing) and wood-frame windows. Now the house looks neat and solid again, and attractive, with wood siding and trim, and windows, which although vinyl, have beefier frames and nicely balanced faux mullions (those little rectangles in the upper part of the window). The curb appeal, to use a term favoured by realtors, has been greatly improved. I actually like looking at our house now, while being under no illusions that it’s anything more than an attractive little 1940s bungalow. That the exterior is what I think of first would seem to contradict everything I’ve been saying about the importance of foundations and systems, but there’s no denying the psychological and emotional impact of exterior appearances. Human beings are visual creatures.

I’d like to return to the comment Renting made about “a million dollar home in Vancouver [being] a piece of shit” (amusing in a surreal way, isn’t it?), a sentiment echoed by many commenters on Vancouver real estate bear blogs. It’s also a sentiment that exists among the broader population, perhaps owing to Vancouver’s widely publicized leaky condo crisis and the ongoing spectacle of entire buildings shrouded in tarpaulins, like giant crime scene victims. If we leave price aside, at the heart of Renting’s contention is the issue of quality. And quality in houses can be a tricky thing to define, because it can mean different things to different people, and can have multiple applications when talking about the seeming unity of a house.

Differentiating between quality of design, and quality of construction, can help clarify matters. Quality of design can be further broken down into aesthetic quality and functional quality (form versus function). Quality of construction can be broken down into quality of materials and quality of workmanship. If all four of these characteristics — form, function, materials, and workmanship — meet a good standard, that’s probably a good house, assuming the house has been well maintained, and the location is also at least reasonable. Erode any one of the four too much, or two or more of them somewhat, and that may be a house deserving of Renting’s description. But what, exactly, constitutes ‘good’? ‘Good’ is a highly subjective term, and one person’s ‘good’ may be another person’s ‘shit’.

Aesthetic quality is probably the most subjective of the four characteristics, and workmanship perhaps the least. The eye of the beholder has much to do with things. There are many forms of residential architecture, likely to appeal to or repel different people for different reasons. How does one compare the ornate turrets and verandahs of the late-nineteenth century Queen Anne style to the post-and-beam, mid-century modern, or either of these to a concrete condo or a vinyl-sided tract house? There’s such a difference of intention that comparison lacks enough common ground to be meaningful. We’re thrown back on to personal preference, which is fine, but it should be recognized as such. If we’re going to compare houses on aesthetic grounds, it’s probably more fruitful to compare individual houses within a particular form, having arrived at those forms that most appeal to us personally. A certain amount of objectivity comes into play when identifying the best examples of a particular form, and these more objective comparisons can be useful when it comes to making a purchase decision.

Aesthetic quality and functional quality can conflict. Some of us may love the way a stately Edwardian house looks from the street, but find the rabbit warren of little rooms inside quite unsuited to a modern lifestyle. The interior design of ‘ticky-tacky’ Vancouver Specials, and the older, rancher-style 1950s bungalows, makes very good use of available space, and facilitates good traffic flow patterns. These house are highly functional. However, for many Vancouverites — perhaps Anglo Vancouverites predominantly — Vancouver Specials typify lower quality, regardless of whether or not they are easy to live in and maintain, or are well constructed with good quality building materials. The main reason for this sentiment has nothing to do with quality of interior design or construction, but rather, lack of curb appeal. To many, these houses look like ugly, naked boxes.

By contrast, many people equate ‘character’ or ‘heritage’ houses, such as Swiss-chalet-style Craftsman bungalows in Kitsilano, with quality. They covet these houses and are willing to pay a handsome premium, even if interior layouts are less than optimal for current lifestyles and family configurations, and are difficult and expensive to reconfigure, building envelopes are sub-standard or failing, insulation and energy efficiency are poor, drafts blow in, and basements are low, dark, and damp, making for less than inspiring living conditions on the lower level. Prospective buyers, however, may be blind to these shortcomings because these houses have the architectural proportions and adornment, the ‘character’, the aesthetic quality, the beauty, that strongly appeals to them. In the minds of many, these houses hark back to an earlier time when things were better built — even if they may not have been any better built than more recent houses. It doesn’t matter. The patina of old wood, buffed by the hands and feet of generations, the quality of light through stained glass leaded windows, the muted gleam of brass doorknobs, gives many people that intangible feeling of solidity and security, of being connected with something physically and emotionally solid, with roots to a place, which in an increasingly mobile and globalizing society, and amid a built environment constantly in flux, can make people feel more psychologically and emotionally secure. You see yourself in a particular kind of house — getting back to that childhood stuff — and nothing else will do.


Swiss-chalet-style Craftsman bungalow, Kitsilano neighbourhood

Enter the heritage-style new house in Vancouver. Over the past decade, two styles have dominated new house construction in Vancouver: the boxy and unadorned new-style Vancouver Special, and the faux heritage house, sometimes built as a cleverly disguised front-and-back duplex. These new heritage houses blend aspects of different heritage architectural styles (which were often themselves an amalgam of even earlier styles) — the full two storeys of the Edwardian Box, the half timbering of the Tudor Revival, the roof brackets, tapered porch posts, and dentils of the California bungalow. A grab bag of Berelowitz’s “geegaws.” However, when it comes to materials, and workmanship, and building codes, these often spec-built houses are no different from the new-style Vancouver Specials they seem to be reacting against, or holding at bay. They’re the same house, with a different face. And they may be no better built, or even poorly built.

In 2003, when my wife and I were house hunting, we toured a heritage-style half duplex in Strathcona, one of Vancouver’s oldest neighbourhoods, traditionally home to immigrants and blue-collar workers, but now undeniably gentrifying. This house looked good from the street but up close it didn’t bear much scrutiny: outside, the corner of the foundation revealed badly honeycombed concrete; after we took off our shoes, we could feel screw or nail heads through the thin carpet; when sighting down the drywall I could see nail or screw pops were already starting; and an exterior deck on the upper floor used cheap 2×2 material full of knots, already cracking underfoot. Materials and workmanship were quite obviously crap. If these deficiencies were in plain view, what lurked beneath? And the tall, narrow layout enforced by the front-and-back duplex on a standard lot, meant small rooms, lots of stairs, and some awkward little spaces. The developer had approximated quality of a particular form, but profit-driven and sloppy practices in the other three areas — function, workmanship, and materials — betrayed a lack of quality.

I suspect that for many prospective home buyers, and especially inexperienced ones, the importance, awareness, or visibility of the four basic characteristics of quality in houses, and associated notions of good, from most to least, goes something like this:

1. form
2. materials
3. function
4. workmanship

So in neighbourhoods like Strathcona, and Grandview, which is perhaps also undergoing a certain degree of gentrification, and experiencing a spillover of younger Anglo buyers priced out of the West Side, the faux heritage house, sided and trimmed with wood, attracts a lot of interest. The houses sell at a hefty price, even if the rooms are not optimally laid out, and on close inspection by someone with a base level of knowledge, or just a sharp eye for detail, the materials are revealed as run of the mill — essentially, spec builder grade — or even cheap, and the workmanship is slapdash, almost guaranteeing additional problems beneath.

My suggestion for a revised order of importance of quality and associated notion of good might be:

1. function
2. workmanship
3. materials
4. form

First and foremost, you live in a house. You need it to work for you on a moment-by-moment basis. That’s function. You need it to be well-built, durable. That’s a combination of workmanship and materials, although I’d place the greater emphasis on workmanship. Middling materials used well probably trump higher-end materials use less well. And ideally, a house should in some measure appeal to your soul. However, this last characteristic is probably the most negotiable, and the most subject to change. And yet, ironically, it’s the one that probably most influences most purchase decisions.

You can play with the four characteristics of quality, and perhaps come up with others, ordering and weighting them in accordance with your own beliefs and values. And location, both general within a city, and specific, as in site influences, can outweigh or overrule any of these considerations. The key is to understand that ‘quality’ isn’t a single thing, that it’s made up of several components, and that no one component should blind you to the others. As for what ultimately constitutes ‘good’, while I think there are some standards that most people would agree on regarding durability (workmanship + materials) and function, each person probably arrives at his or her own definition of what ‘good’ means.

30. Take pause, and ask yourself what’s important

Once you start, it’s easy to get caught up in the house battle. One thing inevitably leads to another. You renovate part of the house, and the unrenovated part looks miserable in comparison. You decide to have a new bathroom fixture installed, or a few electrical outlets, and find out all the plumbing or wiring is shot. You want to rearrange a few partition walls but an old masonry flue is in the way. You remove drywall and insulation and discover water is seeping through the building envelope. You learn something about the seismic inadequacy of most houses, and decide you need to act. You see someone else’s fantastic new kitchen or bathroom or storage solution and — human nature being what it is — you want something similar.

What you come to understand about houses is that the battle is never won. With effort and expense you can gain the upper hand, but entropy is always at work — whether the house is a hundred years old, or new. You must continue to expend a certain amount of effort and expense to keep disrepair and disintegration at bay. But how much of your life energy and your life earnings do you want to consume in this pursuit? Many people find renovation, or woodworking, or home maintenance and repair, or gardening, rewarding and satisfying, and an excellent way of staying active. I count myself among these people, but there are also plenty of other things not related to houses that I want to do with my life. Over the last few years I’ve been out of balance, the house sucking up too much of me — unavoidable, perhaps, given the scope of what we did, and still plan to do, but perhaps that scope needs to be reexamined, or should have been examined in a more circumspect fashion to begin with. At the moment, we’re taking a much-needed break from major renovation. A financial break that allows us to pay down debt — the money associated with home ownership and renovation and what it’s doing to retirement savings in this city is a big problem — and a psychological break that allows us to rejuvenate by doing other things. One of the reasons for writing this series is to reconnect with my writing, which was shoved to the side during the three years of the reno. When I’m not writing, I’m not happy, as my wife could tell you.

And that’s what it’s really about. Happiness. Satisfaction. Feeling a certain measure of security and calm in an uncertain world. People who think buying, or building, or renovating a dream home will give them this happiness and security are wrong. Too many North Americans have internalized this fairy tale. A dream home won’t fix them, or their relationships. It may do just the opposite. Approached with prudence and an appropriate degree of balance, what a reasonable home can do — whether it’s a house or a condo or an apartment, whether it’s owned or rented — is provide a stable foundation for the life you’ve already worked hard to achieve.

Next episode

Part 10: “Doom Blogs”

My early mornings with coffee are no longer spent on RealtyLink comparing the relative merits and prices of listed houses to our house, and speculating how high the price of our place might climb. Now my early mornings with coffee become an inversion, reading the doom blogs and speculating how far the price of houses, our place included, might crash, and wondering if we’ll stay above water, in positive equity territory, or if the money we’re bleeding on the reno, chewing away at our equity, will be compounded with a crash progressively shrinking the amount there is to chew…

Financial details — our house

Asking Price: $355,000 Sale Price: $355,000

Down payment: $88,750 Mortgage (at purchase, Sep 2003): $266,250

—–
Many thanks for a wonderful ‘Part 9′, Froogle Scott. We remain very grateful to Froogle for using VREAA as a portal through which to release his writings. When we’re doing renos, or even considering them, he’s our go-to guy — our ‘meta-contractor’. And, we’re looking forward to the rest of his Chronicles… – vreaa

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 9i: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

Part 9i: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival

[30 suggestions over 10 sub parts, starting with Part 9a. -ed.]

27. Make sure you’re on the same page as your partner

The renovation divorce is not urban myth — they happen. A friend of mine personally knows of two. My own feeling about renovation divorce is that the renovation is not the root cause of the divorce. Rather, a major renovation can act as a very effective stress test of a relationship, revealing any deep fissures that may exist, and splitting them wider. Or, conversely, it can serve as a grand diversion, a common purpose that occupies a couple, allowing them to avoid dealing with any issues in their relationship. A renovation, or the building of a new house, may even be undertaken as a symbolic fresh start. Once the renovation or house is complete, and the novelty wears off, the underlying issues crowd back in.

My wife and I survived our grinding, three-year renovation, and the upheaval of firing the first general contractor, battered but mostly intact. We each learned things about the other, and about ourselves. My transformation into Captain Ahab, monomaniacally pursuing his white whale, is a tendency I need to rein in. We adapted and made compromises along the way. But there were also nasty blowouts. Cooling off after these rough patches, I would reiterate to myself that the relationship was more important than the renovation. People are more important than things.

For couples considering a renovation for the first time, assume that you are not going to agree on everything. And assume that there are many renovation details that you don’t yet know about or understand that you are not going to agree on — decisions and conflict points that arise in the course of the project, once the pressure is on. In our case, one such decision was whether or not to spend an extra $15K or $20K on rainscreening and re-siding the house, once we discovered the original building envelope was beginning to fail.

As much as possible, partners should make sure they’re on the same page before embarking on the joint undertaking of a major renovation. A simple and well-known tool called ‘the project triangle’, explained in the next section, can give you an idea whether harmony or discord lie ahead, and allow you to work out differences in advance.

28. Fast, good, cheap — pick two

The project triangle illustrates the three basic characteristics of any project — speed of completion, quality of work, and cost — and suggests that realistically we can get the best of two, while the third characteristic will suffer. The overlapping areas in the diagram are the three different possibilities for any project.

For a major renovation, here’s how the project triangle can play out:

•    If it’s fast and good, like our reno once the competent general contractor took over, it won’t be cheap because you’re paying market price for a crew of true professionals. You may be willing to pay because you have a particular standard of quality in mind, and you don’t have the rest of your life to learn how to do the work well, and to do it yourself. You feel you are getting fair value. But does your partner have the same conception of ‘value’ that you have? Nothing causes more friction in couple relationships than money.

•    If it’s good and cheap, because you’re a skilled renovator and do large amounts of the work yourself, and act as the general contractor for the rest, there’s a high probability that you’ll be on the ten-year-plan, like our neighbours M and S. Some people derive a lot of satisfaction from an ongoing project that slowly comes to fruition, and may not mind living amid an ongoing renovation for years. Others may find that unacceptable. Or the demands of family life make it completely impractical.

•    If it’s cheap and fast, there’s a high likelihood that the quality is mediocre or poor, because it just isn’t feasible for one contractor or company to significantly and consistently underprice the competition, and beat them on completion dates, while maintaining comparable quality. You might get lucky from time to time, but on balance you’ll get what you pay for. And what you’re paying for, whether you understand it or not, is probably a superficial papering over of deeper problems, or something that’s going to fall apart, or look like crap in short order, or maybe even right away. Cheap and fast usually equates to quick and dirty, and there’s another little maxim about projects: long after quick is gone, dirty remains. What seemed cheap in terms of money will start to reveal itself as cheap in terms of quality. Which ultimately means it’s not cheaper in terms of money, because it will have to be replaced sooner.

The root of couple tension related to a renovation likely stems from two different renovation conceptions conflicting because they fall into different overlapping areas in the project triangle. Discovering this incompatibility before starting a renovation, and working to resolve it, can spare a couple a lot of grief. Resolving it requires that regardless of which of the project characteristics you value most highly, you have a shared definition of what you mean by each characteristic. Is $300K a reasonable amount to spend for what you want to do, or is that far beyond the bounds of what you’d ever consider? Is second-rate finish carpentry with joints that don’t always exactly meet not that big a deal, or does it make you cringe? Is three months of disruption the maximum you’re willing to put up with, or can you handle living in a renovation zone while you pick away at things for years?

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Coming soon: The tenth and final sub-part -
Part 9j: So You Want to Buy a House and Fix It Up? Thirty Suggestions for Survival – Suggestions 29 & 30.
Part 9 subsections are posted every Tuesday and Friday.
Read them all before you call Holmes. -ed.