Wednesday, December 15, 2010
Saskatoon housing prices inflation adjusted 1980-2010
If Saskatoon housing followed inflation step for step since 1980, the average house price would be about 162k for 2010. We all know that the average house price for 2010 is about 300k. (Sorry for the rude additions to the chart.)
The launch to the top is much like what the US housing market did. And now the US is in free fall. Are Canada and Saskatoon just a few years behind the States or is it different here?
Robert Shiller in 2007 "From 1890 through 1990, the return on residential real estate was just about zero after inflation.In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end. "
A couple more articles from Shiller that are must reads, he is the Wayne Gretzky of real estate economics.
Canada may face housing bust: Shiller ( it has not come true...yet)
Mean Reversion"Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. "
"Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. Home prices might fall (or rise) quickly to a point that puts them back in line with the long-term average, or they might stay constant until the long-term average catches up with them."
At first, it is hard to imagine a drop from 300k to 160k for an average Saskatoon house price. But then again, it was only 4 years ago the average house price was 160k. Clearly prices are not supported by the long term fundamentals, but are mostly supported by credit and are ripe to fall. Will prices go all the way back to the mean reversion? I don't think so and I don't hope so, but I do expect prices to fall towards the mean reversion in a significant way. When the bubble bursts, how far it drops and how long it lasts are questions which still remain unanswered.