We’ve been hearing about the successful soft landing, the “there is no bubble to pop”, it’s a flat market or some moderate price drops from the usual suspects in the real estate industry. The Americans just wish that they could have engineered a brilliant soft landing but unfortunately, unlike us, they are not brilliant. Additionally, it’s different here, no more land, billions of rich asians want to buy every multi million dollar crack shack etc etc. If only we could compare our performance to all of the American cities that went through their housing bubble so that we can have empirical evidence of our soft landing. Well here it is:
The following chart shows 14 US cities that were shown in the Case Shiller calculations here: US HPI Data They actually profile 20 cities but I eliminated 6 that did not increase by at least 40% during the run up from 2000 on. Take Dallas which only gained 25% in value in 7 years before dropping about 10% and then pulling back close to previous highs. Vancouver by comparison has increased by over 150% since 2000.
What I did for each of these cities is determine the peak price month according to the pricing index and then measure the index price drops in 6 month intervals. With that information we can compare against Vancouver’s stable, moderate, flat non event as described in the main stream media.
Now, where does the Vancouver West detached home sit in comparison to these numbers? First of all, if you are a home owner like myself then you should probably sit down. OK, ready? Our peak month according to the MLS Home Price Index was April 2012 and 6 months later we were down 8.6%, so 50% HIGHER THAN ANY AMERICAN CITY. After 8 months we are now down 11.1% which, with 4 months to go in the period, is much higher than all US cities other than Miami. THIS IS NOT FLAT!!! THIS IS NOT A SOFT LANDING!!!
So where are we heading over the next months and years? Well you never know… If I pulled up this same chart in early 2009 the conclusion would be the same and yet the market recovered very quickly and continued to its new meteoric heights. Of course things are much different now – debt is at all time highs, mortgage rates at all time lows and poised to begin increasing, banks are tightening up their credit, “asian investors” have left the building not to mention the boomer trigger. It was a trillion dollars of cheap credit that saved this mess in 2009 but the fun is over. Just to get back to long term over-priced Vancouver trend lines we are in for a 40% drop although bubbles never stop at the trend line, they always overshoot it. If you look at price/rent or price/income ratios we’re due for a 50%+ drop. If you want to compare similar properties in Vancouver and Southern California we’ll need to drop 75% and trade our rain for sunshine. It’s not looking good.
One thing to keep in mind is the nature of the drop over time using the US as a template. These are the periods following peak price along with the average drop in % for that 6 month period
We are currently entering month 9 from the peak and can probably expect similar monthly drops of over 1% per month. After 12 months of that, reality seems to set in that the bubble is popping and prices could potentially free fall. In the US the average city price descent tripled its pace for 18 months before their “soft landing”.
This is not a soft landing.