CLICK TO ENLARGE House Price to Rents
According to The Economist: Canadian housing is 78% over valued;
while Japan is 37% under valued. Notice the U.S. housing market is tabled at 7% undervalued which is supporting the bullish argument to go long U.S. housing. But as we know, it's a market of markets and as trite as it sounds, location trumps price when it comes to comparables.
As The Economist concludes: "Misalignments with our gauges of fair value can persist for a long time, of course. That may spare countries where house prices have clearly overshot from a painful bust, but it may also mean that some markets end up mimicking Japan’s long descent and badly undershoot. At some point, central banks will have to take away the balm of easy money. If housing markets remain so fragile when they are getting so much help, they may break when it is removed." Read the complete article at The Economist.
Credit: Leith Wheeler Investment Counsel Ltd.
Probable 30% Drop Coming in Price to Income Ratio of Canadian Housing
This chart of the ratio of House Price to Income comes from Thomas Holloway & Marcela McBurney at Leith Wheeler Investment Counsel Ltd.
They identified 48 distinct peaks in national price-to-income from 1970 to 2012 in 21 OECD Countries. The same "tent" formation occurs if the ratio is changed to price-to-rent but the plot for Canada starts even lower at 35% below the peak. For the right side of the tent to unfurl for Canada, either prices fall or incomes (or rents) have to rise. As you can see from the Case Shiller plot of price-to-income (dashed blue line), the U.S. model had more price drops and less wage inflation on the right side journey down. You can watch Canadian income (earnings) here.
CLICK TO ENLARGE U.S. House Price Trend 2013
Nadeem Walayat over at the MarketOracle.com has a bullish argument for going long U.S. real estate.
His US House Prices Forecast Conclusion is: "The embryonic nominal bull market of 2012 is morphing into a real bull market for 2013 and with each subsequent year, expect an accelerating multi-year trend that will likely see average prices rise by over 30% by early 2016 (10% per year), which translates into a house price forecast based on the most recent Case-Shiller House Price Index (CSXR) of 158.8 (Oct 2012 - released 26th Dec 2012) targeting a rise to 207 by early 2016 (+30.4%)."
Nadeem bases his timing argument to go long U.S. real estate on:
Read Nadeem Walayat's full analysis here.
CHPC.biz readers will be aware I have been warning that the deflation risk is much greater than an inflationary one here in Canada and as I remarked in a Jan 10, 2013 BNN interview when asked where in Canada real estate investors should look, I replied; "Investors should apply the income approach when evaluating any potential buy to discover if there is a return on investment, and that is not in Toronto or Vancouver."
My advice would be the same to anyone looking in the U.S. Make sure the buy price is low enough and the net income stream is high enough to produce a real yield (get my free spreadsheet evaluator here). Otherwise if Nadeem is wrong about his inflation bet, you could wind up with a decaying illiquid asset that you have to subsidize.
An historic saga of betting against deflation and being on the wrong side of the inflation-deflation cycle is the Equitable Building in New York.
CLICK TO ENLARGE StockCharts $Lumber
Warning 5 days Later
Don't get too excited about the current U.S. housing rally. The Lumber Index has rolled over and broken the 20 Day EMA to the downside. There is still no sign of wage inflation in the U.S. and without it, any move up in real estate price is probably just a speculative mirage.
Thanks to The Vancouver Price Drop
Over at the The Vancouver Price Drop, "An Observer" documents Vancouver real estate price movements.
Their unique overlay of the initial Vancouver drop onto the Case Shiller long term U.S. cities Price Index drop shows that Vancouver is so far tracking Miami's descent which after 28 months from their peak was down in price nearly 50%.
The Vancouver Price Drop Observer uses a compilation overlay of the Price Index data for Vancouver West, Vancouver East, North Vancouver, West Vancouver, Richmond, Burnaby and New Westminster as a good representation of metro Vancouver and this select area is down 11% on the overlay chart in 8 months.
On the CHPC chart (Dec 2012 data) in the greater metro Vancouver area, average SFD's are down 15%, Townhouses are down 14% and Condos are down 12% from their peaks.
The Vancouver Price Drop, Observer remarks: "We are currently entering month 9 from the peak and can probably expect similar monthly drops (to U.S. cities) 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 (not) landing”.
Read the full report by "An Observer" over at The Vancouver Price Drop: Chart Here and Data Analysis Here (ps... the original Vancouver Price Drop chart on their site is in landscape aspect with conventional left-right and up-down axes. I portrait-ized the chart to fit this narrow CHPC blog template... the path remains the same)
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'