What Can Housing Bubbles Teach? Often a home is the biggest investment people ever make. Real estate is always a good investment has been widely believed, but that belief is utterly false. I worked in banking through the 80-82 correction shown in the graph below and saw lots lose their home. I wrote about the importance of picking a good entry point in my post “Saving for Retirement,” (http://makingsenseofmyworld.blogspot.com/2007/01/article-copied-atbottom-caught-my.html), and my own home buying experience in 93. Not every community in a city reaches a top at the same time. This is probably also an important consideration. Where I bought the top was reached in 94. We sold in 95 for a bit more than we paid in 93, but 10% down from the 94-top. Meanwhile, we bought at a true top. The prices had been 10-15% less in 94. Around 99 there was a home that sold for 13% less than we paid. No home in my neighbourhood sold for 25% less like the graph suggests, but if you correct for “inflation”, in real dollars it was close to 25% less. The next graph shows the price increase in real terms. That means that inflation has been included. With say 2.5% inflation from the 85-bottom the prices were actually up about 146%, or a price index of 246 in nominal terms. I would suggest that already in the early 80s some wages were already declining. In 82 my wage was in the bottom 20% of tellers in banking, and I was making 10% less in 85. All the banking institutions I worked for went under. At least 5 different companies I worked for in the 80s went under… The next graph picks up with the same cities again in 2001, so data for one year connecting them is missing. I will assume there were not major relative changes. By resetting the price index the degree of the ascent of the price increase is destroyed. There is no question that the graph is suggesting that between 2001 and 2005 home prices increased by almost 40% in Vancouver, but look at the following graph where the index is not reset. As Ottawa, Montreal and Quebec were reasonably close to 100, I have not included them. Quebec at almost exact 100 would be at 140 in 2005. Montreal would be at about 170 and Ottawa would be at about 126. How did they get Quebec and Montreal catching up? A price index is a percent increase and resetting the data when the relative changes to each other are already so insanely out of whack makes utter nonsense of what is really happening. You have little sense of how steep the price increase really are in Vancouver. And this kind of nonsense data is used against workers in bargaining for wage increases. The Statcan data actually shows the cost of living going up slower in Vancouver than many other places. Any resetting of the price index loses the exceptionally high cost of living increases in the region that occurred in the late 80s, early 90s. Indeed, reset these indexes at the top of a bubble and they can be used to show the cost of living is declining. In my earlier blog I linked I stated that the best time to buy a home is 4-7 years after a peak. The Vancouver 81 peak shows the best time to have gotten into the market after that peak was from 84 to 87. The Toronto 89 peak show the best time to get in after that peak was 95 to 97. The Vancouver 95 peak show the best time to get in after it was 2001-2003. Japan’s housing bubble shows different. I pinched the following graph from Mish, http://globaleconomicanalysis.blogspot.com/2005/03/its-totally-new-paradigm.html. In 2005 Mish started a series on the housing bubble relative to Japan. This chart is updated and the most recent update was in February. http://globaleconomicanalysis.blogspot.com/2008/02/housing-bottom-nowhere-insight.html This graph shows the 91 top bottoming 13 years later. The 80-82 Vancouver bubble corrected quickly because interest rates were high and it had no choice but to correct. Along with the increasing price interest rates pretty much doubled. Interest rates were about 8-9% for the 95 bubble, less if you took a term to renew in a year. Interest rates have been slowly declining care of the Greenspan put. For Vancouver, housing barely reached affordable levels for the 2000 bottom. More like a 2 bedroom condo, maybe a 3 bedroom townhouse in some regions, was affordable for a working couple. A house was still unlikely for first time buyers, except for 50+ year old homes that need serious renovations an hour commute from jobs. Vancouver had fairly steady wealthy immigration through the 90s due to Hong Kong being reclaimed by China and the high uncertainty around it. Vancouver has also become a port city to Asian countries. For the Toronto bubble rates were still higher a little, about 9-10%. Free Trade came in and there were mass job losses to the US that hit Ontario particularly hard. Japan has had reasonably strong exports to keep their economy going and they lowered interest rates. It appears that interest rates, immigration/emigration, and job prospects affect how quickly a bubble resets. The job market in Vancouver for the 80-82 bubble was awful. I knew that my references for job prospects seemed to disappear as fast as I moved to new jobs due to the companies going out of business, but it only occurred to me now how amazing it is that I worked for 5 companies in the 80s that didn’t exist by the 90s, and additionally, the department I worked for in a large company was also dissolved. Housing bubbles create enormous discrepancy in wealth. Those that are in early win a housing lottery. Those that are in late become over burdened with debt and debt slaves. As costs skyrocket in the rest of the economy due to carrying costs of businesses that also have higher business costs, those not in the housing market have no buffer to protect against increases. Those that got in when it wasn’t affordable also lack a buffer to protect them. They also tend to make the job market very sluggish and challenging afterwards.