I had been meaning to do this one for awhile, but never got around to doing all the number crunching… hopefully you guys will find this entry interesting, cause it took a fair bit of work.
As you have likely deduced, that is a graph of the historical average residential price from January 1962 right through February ’09. Looks rather dull until 2006 when suddenly things went crazy. Prior peaks and troughs look quite gradual, and the big boom/bust in the late ’70′s early 80′s doesn’t seem so big.
But when we adjust for inflation…
That tells a bit of a different story, eh?
For those curious, I used the Bank of Canada’s inflation calculator, and did all the calculations in 2009 dollars, since that’s what we’re dealing with today.
As you can see from that graph, when adjusting for inflation, those that bought at the peak of the prior bubble, didn’t recover their initial investment for 25-30 years… coincidentally just after the current boom really kicked in.
That’s some very unsettling news for those first time buyers that bought in in the last two years. Also a reality check for all the young people who thought real estate never goes down… it can, has, and has done it right here in Edmonton.
The late ’70′s bubble was a bit of a different beast then the current one. The run up took about 5 years… things levelled off for about 5 years…. then declined for about 5 years. Quite gradual compared to the relatively explosive run up from January ’06 through mid ’07… then the decline started almost immediately.
I plan on doing a comparison of the two bubbles later, so I’ll move on to something else. But there is a lot interesting stuff in there.
Here we see the inflation adjusted prices, against a curve of anticipated prices assuming 1.8% growth above inflation. The 1.8% figure is somewhat arbitrary, I just took the prices from 1962 and 2005 and calculated the annual growth, since it seemed the market was reasonably balanced in both years. The curve also nicely dissects the other one, so I’d say it’s a plausible figure to go with.
In any case, we can see that the peaks and troughs always return to the anticipated curve. The bubbles far exceed the line, while the troughs tend to follow it a bit closer. It’s interesting to note that the largest trough (late 90′s through early 00′s) was not so much caused by dropping prices, but instead by stagnant ones.
This is a behaviour that I wouldn’t be surprised to see repeat itself once our current bubble has returned to Earth.
What should be a very startling observation from that graph for first time buyers is that even as far as prices have already fallen, they’re still ~$100,000 higher then the anticipated curve. That’s a rather scary prospective fall, and surprised even me when I first noticed it.
Here is one more graph just for a little bit more food-for-thought.
This one is just something of a melding of the aforementioned. This is the actual unadjusted average residential price from graph one, plotted against the anticipated curve from graph three with prices adjusted for their times.
You’ll notice the anticipated curve in this case isn’t nearly as smooth as in the prior graph, that’s because inflation varies from year to year, and that curve is of inflation + 1.8%.
Again, because the numbers are unadjusted for inflation, everything appears muted compared to the adjusted figures. So, while the current bubble looks quite extreme currently, should we have another boom in 30 or 40 years our current one will look much less extreme, and the one from the 70′s probably won’t even register.
Anywho, hope you found this somewhat interesting and could follow along. I was just hoping to convey that looking at raw numbers can be misleading over a long time span, and thus how important it is to account for inflation.
It’s quite sobering to realize that those who bought during the peak of the last bubble took at least 25 years to see their property values recover to what they paid for them when accounting for inflation. It should also serve as a warning to those looking to buy into the current market, as prices are still well above historical measures.
Great blog. Lot of hard work and research showing in the content. Thanks for the info.
Great work, very appreciated.
Always great when people take the time to put things like this together. The 100,000 figure makes a lot of sense.. Im kind of targeting a 250,000 purchase price for a modern SFH.. They are currently selling 330-350 for the kind of thing im looking for so pretty much bang on or slighty less.
Thank you very much for the hard work, great visual, which can shut some people who think here in Alberta we are better off than anyone else, and no crysis can hit us.
Great work. Well done. Thank you
That’s fantastic. Your blog is really informative!
Very interesting post. Although I'll be the first to admit that the market was grossly overpriced, I find your charts leaving a few questions.
I'd be interested to see a chart showing home prices vs. Edmonton's population as per their census. The rocket like trajectory of housing prices was due to a huge net migration of people moving to Alberta in 2005/06 (if I'm not mistaken). If I recall correctly, there was a net migration of 15,000+. Look at the number of areas developed – especially in NE & SW Edmonton – whole areas that were farmland became new developments.
One misleading factor that, while hard to predict in the short term, will ultimately come into play in the next few years is the price of oil. As oil has lost over $100/bbl since June of 2008, many may think that the boom is over. In fact it isn't. China's demand for resources is still huge and is alive and well. If that weren't enough, there are many state owned oil companies in countries like Iran, Venezuela, Mexico, etc that have diverted oil profits into social programs.
As they have failed to keep up with exploration and their reserves are falling, they will go from becoming net exporters to net importers within the next 4 to 5 years. This will have a huge impact on the price of oil and Alberta's projects will be ramped up to keep up with global demand, despite the "dirty oil" moniker.
I agree that housing prices will continue in a downward trend for the next 12-24months, but I would by no means call it a bust. Global demand for resources is still very much alive and unlike the 80's, we don't have a glut of oil and the world is a much smaller place with the advancements in technology over the past 25 years.
I love your blog and enjoy comparing it to another website run by a couple of real estate agents in the city. While I don't entirely agree with your viewpoint, I do enjoy your perspective and agree that houses are overpriced, but I disagree that the downward trend will continue beyond 2011.
Best of luck.
Anonymous: You may wish to note that China’s biggest customer is sick, and getting sicker.
Obviously, Mr. Head-In-The-Sand bought a house in the last year or two…
Concerning China’s demand for oil:
If you have a chance to get your hands on the past few issues of “The Economist”, you will find the following feature articles:
- The collapse of manufacturing
- Asia’s shock
- China and India: A tale of 2 vulnerable economies
The short of it is that China and India’s demand for oil is not as bulletproof as one earlier comment seemed to suggest. These two countries are net exporters of goods, thus, their appetite for resources is fueled by foreign demand, as opposed to internal.
It has been suggested that internal demand in the developing world is almost entirely sustained by their new (and formerly expanding) middle classes. Currently, external demand for Chinese goods has tanked, and will not pick up until the global recession/re-pression is over. The only other alternative to revive the Chinese production machine is hence internal demand.
Unfortunately, millions of Chinese workers have been laid off and have promptly returned to their small villages. Why would they do that? Well, at least 67,000 factories have closed in China since Q4, 2008, and many more will fail before this crisis is over, putting more and more novice middle-class people out of work. Unemployed people do not purchase fancy electronics, clothes, or much of anything.
So, how can Chinese demand for oil be “huge, alive, and well” when: a) foreign demand for its goods has evaporated, b) internal demand (which was minuscule before the recession exploded) is non-existent, and c) its incipient middle class is getting wiped out during the slowdown?
Also, how are we going to ship AB oil to China or Asia for that matter? There was talk of a pipeline to the BC coast a few years ago, but as far as I know, it has not been built yet and there are no firm plans for one.
Concerning the oil producing countries that are presumably going to drive oil demand up due to social programs: Have you considered the possibility that instead of buying foreign oil, they will simply produce more of it themselves to finance their development? Iran has no shortage of oil, Mexico’s reserves are less spectacular, and I don’t know much about Venezuela, but what would happen if these countries decide to expand their social program spending and finance it with petro-dollars? Wouldn’t this *increase* supply, and thus drive oil prices down?
BTW, a recent study by CERI states that oil prices in the $80-$85/bbl range are needed to make new SAGD projects financially viable in AB… Do the math, and you will see why we are in a bit of a pickle here in AB, if we depend on oilmighty petroleum to lift us out of this RE bubble we so happily and recklessly dug ourselves into.
Expect RE prices to continue their slide for 2-3 years, minimum. Of course we will see some sucker rallies along the way, but year-over-year prices have only one direction to go: down to earth.
Kevin, I forgot to say thanks for the posting; great stuff and highly appreciated.
Population growth can’t be considered to have a long-lasting impact…there will always be fluctuations. If you look at the effects of net immigration into EDM through to 2007, then you have to take into the account the effects of net emmigration from 2008 ON. It’s happening. Look at the stats…..it’s the same here in Calgary. Population fluctuations cause a quicker/slower rise and fall, but in the end, the market values shown in the graph balance.
Wow, 12 comments already… if only I could finally get some hate mail I’d feel like a real blogger! lol
Thanks everyone for your comments.
In response to one of the anonymous commenters who felt that migration was the trigger of the price run up, etc.
Migration certainly added fuel to the fire, as we sort of had that big pinch when supply was super low in ’06 and a lot of people were moving here… but I think there were many factors… Low interest rates, easy credit, speculative buying, rising wages and just good ole irrational exuberance were all in that mix to make something of a perfect storm for the price explosion.
High oil prices certainly play into that, indirectly though as they’d lead to higher salaries, and not just in that industry but throughout the local economy as the money flows through.
But as high as oil got, salaries only went up 30%… I say only in their relation to prices, as a 30% increase in incomes over a short period is tremendous, and would have easily justified real estate prices going up 30% or so in their own right. Incomes and home prices have long been tied together despite their differences in magnitude, as housing is often peoples largest monthly expense, and by no small margin.
A 30% increase over three years or so in real estate would have been tremendous, and even sustainable since incomes came with it… problem was that things got out of hand and prices of SFH’s more then doubled from January ’05 and June ’07.
So a bust is virtually inevitable. Even as good as things were, prices got WAY out of line with affordability… prices for houses were already dropping long before oil dropped and the stock markets hit the skids. Prices were dropping while the economy was still booming.
Worrying about migration and population in a place like Edmonton isn’t really a long term concern. This isn’t Manhattan, for all intents and purposes we could build as far as the eye can see in every direction.
Land isn’t an issue, it’s just a matter of having enough buildings… and as we’ve been finding out for the last year, we already have more then we actually need. When supply was pinched back in ’06 everyone got excited and now we’re overbuilt… and with the economy cooling that’s only making it more apparent… and lets not forget there is another 10,000+ units under construction that will be complete in short order.
Edmonton is now big time over built, and even if the economy suddenly turns around and booms again it’s still going to take years to fill the current supply.
As per you final contention, I’m not sure where you got that I thought prices would decline past 2011. I actually think that’s about when they will bottom out, though with the worldwide economy how it is, all bets are off.
I recall an economist once quipping that if you give a date, don’t give a value… and if you give a value, don’t give a date when it came to forecasting. lol
I think as far as I’ve ventured out is saying I figure we still have another 25-30% to drop in total… and that I thought we’d see about 15% of that this year. So another 10-15 in 2010, and yeah, I’d say 2011 is as good a pick as any at this point.
Once we have dropped I don’t see another run up for a good while though. We’ll have about a decade where potential first time buyers witnessed the carnage and are a little wary, and many that bought in the last three years who will get stuck in a negative equity trap so they can’t move up the property ladder.
I imagine once we get back to historical norms, things will probably stagnate for a good while… then eventually we’ll get back to moderate, regular, healthy growth.
But then again, there is also the pending retirement of all the baby boomers, and that could cause some more chaos as they downsize or move… but the recession seems to have put a wrench in those plans, so we’ll be spared that for a few more years anyway.
Oh yeah, and for those who post as “anonymous”, if you click on that “Comment as:” drop down menu you can pick “Name/URL” and then just enter any name you like and post under it, no need to register or anything.
It would make it easier to discuss amongst ourselves rather then having so many with the same name
@Kevin: I think I pretty much agree bang on with all of your comments.
$280,000 homes here in Calgary would put us
A) in line with historical pace of housing prices
(btw, have you ever seen this post over at Calgary Real Estate Market blog?
http://calgaryrealestatemarketblog.wordpress.com/2008/01/13/long-term-trends-in-calgary-real-estate/
It reaches pretty much the same conclusions as yours. According to him, prices have increased about 1.2% above inflation in Calgary. I noticed you picked 1.8%, which is in the same ballpark.
B) back to the commonly accepted view that home prices are affordable when they are 3X the household income. Which, from what I understand, are somewhere between 80-90k in Calgary.
C) 280k would be approximately a 33% drop from the current 415k average.
This website here predicts a price support of $265k for Calgary (currently on pace to reach this by June of 2011). For Edmonton the calculated price support is $205k, on pace to be reached by June 2012.
I certainly wouldn’t be surprised if we overshoot the historical pace, just like the last bust.
If this bust is ‘only’ as severe as the last one, house prices will bottom out at 56% of their peak (putting Calgary, again, at the 280k market).
Personally, I feel this bust certainly has the potential to be worse than ’82, because not only is the energy sector crashing, but so is everything else.
http://www.canadian-housing-price-charts.235.ca/
^^^ website I was referring to in comment above
Hey Jay!
I had seen that graph at the Calgary blog, and was somewhat expecting to see the same thing with my results… and did.
The line on his though is a best-fit trendline, which is a more statistical measure. Whereas mine was more based on my intuition of the market… or to hear a statistician would word it, I pretty much pulled it out of my ass… though an economist would probably be far more friendly to it lol.
So comparing his finding of 1.2% to mine of 1.8% is comparing apples to oranges… but tomorrow I’ll try to do a follow up since it is worth comparing the two cities.
I haven’t run the numbers fully, but after a quick look doing a similar linear best-fit trendline of the Edmonton data 1962-current it would yield an annual yield of 1.55%, obviously even closer to Calgary’s 1.2%
In addition, his data didn’t start until 1973, when prices were starting to pick up after a sluggish 60′s… so I expect if I ran Edmonton from the same period that they actually are even closer. But that will have to wait until tomorrow.
As per Brian Ripleys national site, I have looked around it too (he also did an interesting interview with BNN last week http://watch.bnn.ca/monday/#clip142895), and I’m not real sure how he figures out that price support figure, but Edmonton’s seems a little low.
Edmonton’s should certainly be a bit below Calgary’s, but using the 3X rule I’d put Edmonton closer to 230K-240K for SFH’s, but that’s just me and I don’t know his methodology.
Thanks for the great comment!
Great Blog with solid research and good insight. Keep it up.
Thanks
Phenomenal work Kevin. Nice to see your work paying dividends in comments. Keep it up.
Hi Kevin,
Regarding Calgary vs Edmonton, maybe you could run a quick analysis on what the historical price ratio has been between the two cities ?
I did one last week between Calgary and Houston, and came up with a number that suggested Calgary homes have historically been worth 1.2X Houston homes. This number didn’t account for currency differences though, and was just a real rough estimate. I can say though, right now we’re nowhere near that ratio!
That’s a good idea, I should really do a more complete comparison of the two cities. Don’t think I’ll be able to get that all done today, but I’ll work on it over the weekend.
I should correct my comment from last night, upon taking another look at the Calgary graph, he used a exponential best-fit line, not a linear one… thus the 1.55% annual yield I cited, should actually be 1.45% for Edmonton from ’63 through current.
I shouldn’t have made that mistake, I was even wondering aloud why he would use a linear one in the first place… and as it turns out, he didn’t.
In any case, my bad. Just thought I should clarify.
Wow, just discovered this site a short time ago. Bought in 2005 (Thankfully) and quite happy for the next 10 years in my modestbungalow.
with that being said, Is there a way to take into account new homw prices into this mix or are these stats already included. I ask this because in one edmonton paper on Saturdays you can see the average asking price on new homes versus resale. What i find extremely odd is over the last 3 years the gap between buying new and resale has grown from under 100,000 to over 200, 000. Does this mean that it does not make any sense to buy new? Secondly, if these numbers are not part of the data, would this not skew things even further if taken into account?
All the stats in this post are for resale. Can’t say I’ve really looked all that deeply into new sales, but the CMHC does release figures for them every month in their Housing Now reports.
New sales are something of an entity onto themselves, as there are factors like sales tax and warranty’s that play into the mix… but their sales tally certainly merit discussion, as they are a sizeable part of the market.
One day I’ll try to take a look at that, it definitely sounds interesting.
Whether one buys new or resale is really a personal decision. But this even plays into resale, as there are a lot of recently built homes on the market now. There are advantages to buying new… but, at least from my own experiences, one thing that really scares me about newer homes currently is the quality of construction, particularly during the recent labour shortage. Of course you can get stuck with a lemon of any age, but there just seemed to be a disproportionate amount slapped together in the last couple years when builders were trying to take advantage of the hot market.
As per whether it skews the data… not really. These numbers like residential average only have meaning in comparison to itself. It would only be skewed if the criteria changed somewhere along the line and past values were not reviewed in light of said change.
Ultimately they’re just numbers, they don’t really have any inherent meaning.
Response to Anonymous on March 5, following real estate blog: is this http://www.edmontonrealestateblog.com? I have enjoyed their blog for a few months, and have just stumbled onto this one today. I am really enjoying reading Kevin’s dialogue and awesome graphs. I was seriously considering buying a house, but think I’ll hold off for a while now and wait…
I am sure it doesn’t look like a best-fit line… it’s not one. If you read the post you should have picked that up.
I did do one with a best fit line later (attatched), but fwiw, it was actually less steep.
And this had nothing to do with square footage. While such information would be interesting, it’s not available, at least not to the public.
http://dynamic-evolution.com/ehb/090309-7.jpg
Hi Kevin,
Great work. I have done [replicated] many of your graphs without knowing about your blog – I got similar results – thank you again for sharing your results with us.
I just stumbled today here searching for some historical [per sq meter]land prices in the Edmonton area.
Looking on your data/graphs and mine I cannot help to recognize a technical trading pattern, that MAY develop before the market correction. The 2006-2007 bubble looks like it correcting itself and a downwards "J", or can develop first a "double top".
Just my 2 cent
Regards
Ref
Where do you get your data? Is the same kind of data easily accessible for other cities or regions?
I try to include the sources in the bottom right corner of the graphs. As per it's accessibility for other centres, it's out there for most of the major centres, sometimes you need to do a lot of digging though.