Comparing Vancouver Real Estate Declines w. US Home Price Declines Off Peak Prices

Recently I decided to look at how the Vancouver real estate correction is progressing.  Vancouver real estate professionals acknowledge that the cumulative average of attached, detached and apartment prices peaked at the end of April 2011.  Real estate professionals in the US have pegged the US home price peak at the end of June 2006.

To measure the progress of Vancouver's real estate correction, I aligned the Vancouver real estate peak with the US real estate peak and measured pricing as the % off the peak price in the months before and after the official peak.   By using the US house price peak as a bench mark, we can develop a better understanding of the scope of Vancouver's correction.

As seen by the graphs, US home prices nearly revisited their peak price 12 months before and 12 months after the official peak.   Both Vancouver detached and apartment prices saw a sharper run up to the April 2011 peak while attached units have seen flatter prices before and after the peak.

Due to the much smaller size of the Vancouver real estate data relative to the total US market data, there is a higher degree of variance in Vancouver's month to month % off peak prices.  According to the data, both Vancouver attached and detached real estate prices have revisited their April 2011 peak price.   However, the general trend seems to indicate the behavior of the decline in Vancouver prices is mimicking the declines we saw in the US after prices peaked.

 
 

In his book, Irrational Exuberance, Robert notes that word of mouth tends to be a strong amplifier of information received by various forms of media. Shiller attributes the irrational rise of stock prices during the tech bubble to structural, cultural and psychological factors as follows:

Structural Factors:

1. Precipitating Factors: The internet, baby boom and other events
2. Amplification Mechanisms: Naturally occurring amplification ponzi processes such as word of mouth make information put before the media a particle of reality before the mass market voices reach.  Frequency of exposure reinforces the message. 

Cultural Factors:

1. The news media 
2. New era economic thinking. (Also occurred before the crash in 1929 and 1966)
3. New era economic thinking around the world. 

Psychological Factors:

1. Psychological anchors for the market.
2. Herd behavior and epidemics.

To understand how predictive modeling is affected by various behavioral factors, I took a look at what US and Cdn newspaper articles 18 months after prices peaked.  US papers at the time predicted prices would decline a total of 13% and bottom out in 2009.  Today, Canadian papers are predicting a 10% decline in housing prices over the next few years.

It's hard to say how severe the correction will be in Canada.  The biggest cracks appear to be in Vancouver where price to income ratio's are over 10 and Toronto where 94k apartment units are set to come into the market.  We've long reached the point where the fundamentals no longer make any sense.  Perhaps our market can best be understood by analyzing the behavioral factors that influence both buyers and sellers.