Vancouver Real Estate - High Price Heresy
Posted September 11th, 2008 in R.E. Stories, Real Estate, Sharing the Experience
Who Dare’s to Speak
Recently the Vancouver Real Estate market has been subject to the opinions of many experts. Achieving some fame, is the latest discussion paper from the Sauder Business School at UBC.
Things Affect Us
Academics are held in esteem. To many, they represent the thinkers of our world and as such they lead the formulation of actions we take and the directions we follow. Their value lies in the ideals that uphold the responsibility to deliver truths founded in dedicated and rigorous research and analysis of things that affect us.
By Candle Light We Find Our Way
By its nature, esteem at times, pre-empts questioning the value of the proposer’s proposition value. As with all propositions a candle must be brought forward to cast light on that higher ground. The test resides in the expected knowledge within which, lies the goal of improving our passage through life. Yet, with all the internal peer road blocks to publication, not all of what is delivered from this group meets that objective.
The candle’s light must not only illuminate the proposition but must also allow us to see who it is that is making the proposal.
Who Is
According to Tsur Somerviglle’s web pageDr. Tsur Somerville is Director of the UBC Centre for Urban Economics and Real Estate, Associate Professor of Strategy & Business Economics, and holder of the Real Estate Foundation Professorship in Real Estate Finance at the Sauder School of Business at the University of British Columbia.
His current research interest focuses on real estate development and housing markets. Among the areas of active interest are the role of land assembly in urban redevelopment, the effects of housing quality and market uncertainty on real estate markets, real estate auctions and house pricing, and the economics of urban sprawl and sustainability.
The Discussion
This is the discussion that has created a lot of fuss in the Canadian Real Estate market place.
Are Canadian Housing Markets Overpriced
Some Reactions
Let’s Assume
Page three, paragraph two of Somerville’s paper includes a disclaimer which, in degrees, casts light on that proposition he puts forward. He generously writes of his methodology stating that “As with all economic analysis, this approach demands a large number of assumptions and conditions.”
Chicken Little
Fair enough!
Chicken Little thought the sky was falling!
Glib Counterpoint
Somerville’s credentials tell us he is a smart man and having read his 26 page document of which five and more are graphs to support the rationale derived from the research, I was almost ready to buy in to the discussion’s premise. A skeptic might however, use a counterpoint by referring to Mark Twain’s note that “There are three kinds of lies: lies, damned lies and statistics.”
In July of 2005, a Vancouver Sun reporter noted that Somerville is “reluctant to make exact predictions about when Vancouver’s hot housing market might begin to cool, he can’t help himself from making just one.”
Reticent to withhold, Somerville’s proposes to the reporter that “You’ll know when the market has hit its peak on the day that I buy a house.”
Feeling generous, I suspect Somerville’s tongue was firmly in cheek when he made that somewhat glib statement.
Valid
Is Somerville’s discussion in fact Chicken Little shouting? Does his paper propose a truth of near future reality or is it to become as valid as Chicken Little’s cry and to be relegated to coffee conversation?
Will The Moons Align
If you are from Missouri, then you like to be shown things. Of course, by then, assuming Somerville’s proposition, it will be too late for you to realize greater value from your home. Wait we must for the discussion is a proposition for the future based on past statistics with assumptions and conditions. Encompassed are many other dynamics that must bring the moons together to achieve the speculative result. So many possibilities suggest that your guess, which might be based on nothing more than a gut feeling or watching the moon, may be as valid as his proposition.
Impulsive Lemmings
The influence of Somerville’s paper may serve no further purpose than to spawn studies on crowd impluse. At question is whether the crowd buys into accepting his version of the market’s future. Assumption is that we might well expect events that reflect the instinctual pattern of lemmings? We must wait to see if the crowd under such influence jumps off the cliff with drastic price reductions?
Prediction
Regardless of the outcome one thing that is predictable. There will be much fodder for Yatter that Matters.
Got a Vancouver Real Estate question? Always happy to answer it. Call or send me an email or twitter me @yattermatters.
Larry
*Statistics Courtesy REBGV. While believe to be accurate they are not guaranteed. **Numbers provided may vary as they are dynamically posted by the REBGV.
Plenty of big assumptions in the Sauder report it is true. The ones which stand out for me are:
1) Todays highly inflated prices are assumed to be normal, rather then the result of a speculative bubble.
2) Inflation/appreciation is assumed to be 5.4% whereas general inflation is closer to 2%
3) Rent is assigned a value of $2290 per month. However, less then 10% of people living in the city of Vancouver have enough income to pay that much rent. Based on median income, median rent should be less then $1700.
So, if we recalculate using more reasonable - but still generous - numbers for rent (say $1900) and inflation (2.5%) we get $273,600 as the true value of a benchmark home in Vancouver.
I don’t know have enough data to know which values for these variables should be considered correct, but there must be an objective analysis out there somewhere.
Of course, all of this discounts all those rich foreigners who have been buying up all the real estate. But then, the Landcor reports show that those are an urban myth, less then 1% of buyers are from out-of-province.
[...] my Higher Price Heresy post, I alluded to the issue of Academic Ideals which exude the esteem of lofty, higher ground. [...]
I thought the report was very eye-opening and counter intuitive in terms of what we usually hear regarding the housing market. It really goes a long way in clearing up many misconceptions.