Shiller – “The idea that buying a home is such a great idea is just wrong. Home prices may well decline for the next 30 years, in real terms.”

Interviewer (Morgan Housel, Motley Fool): “Is that what homeowners should expect, that their house will give them a place to live, that it will keep up with inflation, and nothing else?… Is that the basic model that homeowners should think about?”
Robert Shiller: “I think it’s a reasonable first approximation to assume that home prices would just keep up with inflation… [But they can go down too, they went down for the first 50 years of the 20th century] … The idea that buying a home is such a great idea is just wrong.. They may well decline for the next 30 years .. in real terms.”
– from ‘Robert Shiller on Why Home Prices Could Fall for Several Decades’, Morgan Housel interview, Motley Fool, 23 Dec 2011

Shiller is describing the US market, where prices in many regions have dropped to the point that they are coming close to values as determined by fundamentals. In a market such as Vancouver’s, where we are starting with prices at 2 to 3 times fair value as determined by fundamentals such as rent, income and GDP, the chances are far and away that housing will underperform inflation over the next 30 years. Most local market participants would see that prospect as preposterous. – vreaa

26 responses to “Shiller – “The idea that buying a home is such a great idea is just wrong. Home prices may well decline for the next 30 years, in real terms.”

  1. A close relative of mine just bought a house. She can’t imagine prices dropping in the slightest– a flattening is the worst that she considers to be possible.

  2. if prices did not rise in real terms for 30 years would I still buy one? Absof*ckinglutely. Buying a home to raise your family in a secure, stable environment isn’t something you can put a $/cents figure on. People bought properties for centuries without prices rising in real terms; they will continue to.

    • I’d consider buying too, if the price was reasonable based on fundamentals when I purchase such as many locations in the US today. My company has asked me whether I would consider transferring to Texas and if I go, I will probably buy based on the research I have done regarding housing in the Houston area. Similarly, if prices drop 50% or more in Vancouver, I would consider buying even if there was minimal chance of appreciation. I look at housing as shelter, not investment, and I will pay a slight premium for stability – I will not pay a 100-300% premium that I believe Vancouver housing is demanding today.

    • formula1, you are a good example of a person who absof*ckinglutely doesn’t think, but instead acts on emotions and impulses.
      Good job!

    • 4SlicesofCheese

      Prices not rising in real terms over 30 years is different from losing a big portion or all of your downpayment/equity.

  3. “if prices did not rise in real terms for 30 years would I still buy one? Absof*ckinglutely.”

    Yes but would you buy 2 or 3? Would you put all of your money into RE and forego investing in stocks/bonds/etc… or even simply saving? Because thats what folks are doing in Van and that is the crux of the problem. This market is going to change radically when Van buyers ask themselves that very fundamental question. As vreaa notes, most buyers today think it preposterous.

  4. “Most local market participants would see that prospect as preposterous.” – VREAA…

    Funny you should say that, VREAA…. as there’s rather a lot of that sentiment going around…

    “Despite shrinking income, a horrific economy, a disconnect between certification and practice, as well as a disparity between the female dominated practitioners and a male dominated leadership suite, the bottom line is that Realtors are confident that they will still be in business in two years.”….

    [AGBeat] – Realtors new to the business earn less than minimum wage

    “…those in the business for less than two years earned a median gross income of $8,900. That’s eight thousand nine hundred dollars… a year. If an agent works 40 hours per week at that rate, they earn roughly $4 per hour, well under minimum salary.”…

    http://tinyurl.com/7gojyun

    DeliciousAfterthought! – did the following NAR institutional promo/branding exercise fall victim to a cheeky copywriter?

    http://tinyurl.com/24lzh8

  5. pssst, ED – there’s one stuck in the BlogWerks…

    • Thanks for the heads-up… anything with more than one link gets held for moderation.
      All the best for 2012.

      • More than one link?… It used to be two! That’s positively deflationary, ED! As for 2012, and I’d better do this now (cause I know I ain’t gonna get around to it @ MidNight)… here’s your CrypticNewYear’s 2012 message, DearReaders and, of course, IllustriousEd… Three little words. May you all hear them in 2012. Constantly and/or as needed…

        http://tinyurl.com/cbf5zdu

        Aside: ‘Nem’ looks more like Chico but he absolutely talks like Groucho… and, speaking of which, re: PartingShots/Quote ‘o TheDay! – was Groucho referencing the YVR RE Bubble in that clip when he said: “I’ve got to stay here. But there’s no reason why you folks shouldn’t go out into the lobby until this thing blows over.”

        For the more practically minded, Nem’s GlobalMacro ‘call’ on 2012? – reference Jackie DeShannon, “What The World Needs Now…” – vis a vis the levers of power pivoting on the fulcrum of history… HInt: 2012 may be many things, but dull won’t be one ‘o them.

  6. formula1 -> “Buying a home to raise your family in a secure, stable environment isn’t something you can put a $/cents figure on. ”

    1. Well… a nice attempt to take the “I care for my family more than you” moral high ground, but, actually, you can put a price on this. Think about it… Surely there is some price at which you would simply say “enough, too expensive, I’ll have to make another plan for myself and my family”. Correct? Thus, you can “put a $/cents figure” on it: It’s somewhere between that price, and good value.

    2. The statement conflates two issues: buying a house, and caring for one’s family. Providing a home for your family is important, yes, but nobody says you have to buy it.

    3. The statement ignores the risk to one’s family of ‘purchasing’ an overvalued home. In the coming bust in Vancouver, many families who are overexposed to RE will go through periods of extreme financial distress; some will never recover.

    • bottom line, i missed it, i cannot afford it, but i dont wanna to admit it, so i am gonna find all the reasons in the world to justfify my situation! Just saying…

      Hope VREAA has a new year event to attend the celebration, but not spend countless hours digging through Garth’s blog to find something to headline. Dont worry, it’s not the end of the world. Cheers Up!

      • Renters Revenge

        Fred, me thinks you might be one of those people who chose to rent a huge pile of money from the bank and you’re just a bit worried about spending the rest of your natural life struggling to pay it back. Don’t be so smug, we are all renters – some just more prudent about it than others.

      • Fred, I believe this is the blog about current state of RE, including making smart decisions today about RE.

        You’re probably looking for the blog about whether buying Vancouver RE 10 years ago was a good decision or not. I would post the URL for that one, but unfortunately I never bookmarked it since it was a bit dull, everyone agreed, apart from a few OT discussions about whether to sell now to “lock in the gains”.

      • 10 years from now you’ll look back and wish you bought 10 years eariler

    • Thank you for responding to that obnoxious comment far more eloquently than I ever would be able to.

      I can only pray my children forgive me for raising them in an unstable, insecure hovel when when they are gifted with maxed-out RESPs in 17 years.

  7. Experts weigh in on Metro Vancouver housing market forecasts for 2012
    By Carlito Pablo, December 28, 2011

    Tsur Somerville may be the director of UBC’s Centre for Urban Economics and Real Estate, but he gave a rather surprising answer when asked about the prospects for Metro Vancouver’s housing market in 2012.

    “We start off by saying I have no idea,” Somerville told the Georgia Straight in a phone interview. For him, forecasting is a risky business because “you’re wrong more often, even if you’re intelligent”.

    An economist who earned his PhD from Harvard University, Somerville said that he prefers to evaluate what others have projected for the new year.

    “The general trend seems to be that it’s going to be a slower market than 2011, and I think the combination of lingering economic unease and uncertainty is consistent with that,” the UBC academic explained. “The other thing is 2011—if you take away Richmond, the West Side [of Vancouver], and West Vancouver—was not some amazing prices-going-through-the-ceiling kind of year. In general for most places, things are going to look like 2011. Maybe a little bit slower.”

    Asked about the biggest risk to the market, Somerville responded: “The economy, the economy, and the economy.”

    He referred mainly to global hazards like the financial crisis in Europe and the lingering malaise in the U.S., although some recovery has been observed in the American economy. “The other thing, and it’s tied to that, is people’s concerns about their own debt loads,” Somerville said. “The more you’re worried about your debt load, the more you’re worried about the economy.”

    Another economist interviewed by the Straight also doesn’t anticipate any major surprises in 2012.

    “I don’t see any major drop in the housing market,” Helmut Pastrick said in a phone interview. “I don’t see any major upsurge either.”

    The chief economist for Central 1 Credit Union, the trade association for credit unions in B.C. and Ontario, explained what this means for both buyers and sellers. “If you’re a buyer, it’s going to be a reasonably good market,” Pastrick said. “Interest rates will remain low. If you’re a seller, perhaps it’s not as rosy as it might be, but again, prices will remain fairly steady. It’s not a bad outcome either for sellers.”

    In early November, the Canada Mortgage and Housing Corporation issued its housing-market outlook for 2012.

    The national housing agency predicts a moderate growth in demand for new and resale homes in the Lower Mainland because of the region’s growing population and steady job market.

    According to CMHC, resales are likely to rise by nine percent in 2012, to 36,000 transactions.

    It also anticipates that the annual average price for all home types will settle at $788,000 in 2011, which is 17 percent over that of the previous year. For 2012, the average price is forecast to increase by two percent to $805,000.

    Before Christmas, a number of banks released their prognoses for the Canadian housing market in the new year.

    Scotiabank anticipates dampened demand because of economic uncertainty, although low interest rates will continue to attract buyers. The Royal Bank of Canada expects the same trend due to high personal-debt levels.

    TD Economics of the TD Bank Financial Group predicts a “tug-of-war action” in the Canadian real estate market between low interest rates and restrained prospects for economic growth. It expects sales on the national level to decline 2.4 percent in 2012 and 3.5 percent in 2013.

    Bank of America Merrill Lynch believes that Canadian home prices are overvalued by up to 10 percent. It predicts a five-percent drop in home prices in the first half of 2012. According to the bank, the market is “showing many of the signs of a classic bubble”.

    Although houses are expensive in Metro Vancouver, Central 1 Credit Union’s Pastrick doesn’t view the regional market as being in a bubble.

    “A bubble in real estate or in any asset market usually needs to have a fair amount of speculation present as well as very easy money,” Pastrick said. “Money is cheap but not easy. It’s not easy for a person to walk into a lender and have a weak credit rating and obtain loans. Lenders are fairly conscious of the risks involved and they’re quite conservative.”

  8. “A bubble in real estate or in any asset market usually needs to have a fair amount of speculation present as well as very easy money,” Pastrick said. “Money is cheap but not easy. It’s not easy for a person to walk into a lender and have a weak credit rating and obtain loans. Lenders are fairly conscious of the risks involved and they’re quite conservative.”

    As usual Pastrick is full of crap. The boat is over loaded with the spec money from the last 5 years with little, to no equity versus personal debt loads who are now getting jaded they haven’t “made it”. The first timer who keeps buying the low end is depleting on a daily basis because the signs are pointing to downward prices , an analyst on BNN even stated that the other day. With no first time buyer the food chain ends, and all the spec money and “get rich quick like my friends” is toast.

    Pastrick likes to go against all the major banks and economists with no bias attachment to the Credit Unions like he has , who will be the first to blow up in a real estate crash. He’s on life support praying for a transplant that ain’t coming.

  9. I got a kick out of Don Campbell on Global BC this morning proclaiming that the headlines of doom and gloom are not true and prices in Vancouver will go up next year. Maybe Campbell borrows from the Credit Union ?

  10. It’s interesting that the tides are changing, sentiment is shifting. Example I read earlier today in the Financial Post Family Finance column:

    “The couple’s largest asset is their duplex. If they decide to keep it rather than sell it, the combined cash flow before expenses of the two apartments would be $1,765. Take off mortgage interest of $607, taxes of $250 and insurance and maintenance charges of $150 per month and the net rent is $758 per month or $9,096 per year. That works out to a 2.3% cash yield. For all the trouble that being a landlord entails, they could do better with stocks with a 4% to 5% dividend. Of course, the house could appreciate, but then so could stocks.”

    http://business.financialpost.com/2011/12/30/walking-a-financial-tightrope/

  11. “me thinks you might be one of those people who chose to rent a huge pile of money from the bank ”

    ah no, not really. but i am not a sour renter, “renter revenge”, or bs blogger either.

    • It is apparent that there are many, many things that fred is ‘not’.

      Just had a quick glance back over fred’s prior comments, all 126 of them, and it seems that fred never, ever takes a definite stand on anything, just snipes from the bushes. It’d be far less tedious if he told us something more about his position, how he sees the markets, etc. Until then, a bit tedious.

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