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Since the previous topic got some conversation flowing, let's go back to the watercooler.

Today, I want to discuss what the benefit is to calling the top*, if you want to buy. Specifically, is there any point in waiting for housing to peak before buying? What if this is an escalator, and it just keeps going up?

Housing bulls sometimes like to point out that if one intends to live in a house for a number of years, the affordability of your payments and your satisfaction with your purchase are more important than the price - after all, whether up or down, while you are using and enjoying your home, the price paid was just your ticket into the game. Trying to time a market could leave you out of the housing game for years - and in the long run, housing always goes up.

Plus, during the intervening period, money that might otherwise be spent on rent could be better spent paying down a mortgage. Let's test that thesis for the local market.

First off, a nominal housing market top requires nominal prices to go down in the year(s) afterwards. Looking at the Victoria market, there are two instances when this happened in the past 30 years. The most recent was 13 years ago, from 1994-1995. Before that was back in 1981-1982 - VREB source data.

Let's look at the more recent case first. In 1994, the average price of a home in the VREB area reached $256,025. By 1995, the average price dropped around 6% in nominal terms, to $242,012. Prices dropped another thousand dollars in 1996, and then started increasing again. However, it took until 2001 for prices to recover from this relatively minor nominal drop, back to $259,138. Taking inflation into account, the nominal price paid for an average home in 1994 was not equaled until sometime between 2002 - 2003, when the average nominal price went from $280,218 to $328,005.

Another factor worth noting about this boom and bust was that the bust was relatively brief - two years - followed by increases every year from 1996 to 2007 - a twelve year boom. By this measure, the current boom has already outlasted the previous one, in length, and also magnitude.

The earlier boom ran from 1985 to 1994 - a ten year boom.

Average house prices in 2007 are now around $560,00 in Greater Victoria - an astonishing sum of money, even taking inflation into account.

In the present case, if this is the top* during summer 2007, and it is followed by a 2 year drop similar to the one back in the mid 1990s, how much money can be saved by waiting until 2008-2009 to buy?

Well, if a dip matches what happened last time, the nominal savings should be around $35,000 - $40,000 (6-7%) on average, if a buyer waits a year or two.

But maybe it won't work like that, what happens if 2007 is the top*, and the correction follows a script more like the one written back in the early 1980s?

In 1981-1982, house prices dropped from $126,776 to $105,023 in a single year - a drop of around 20%. In the early 1980s, it took longer for the market to recover, and houses continued to lose nominal value, eventually dropping almost 35% by 1985. In inflation adjusted terms, it took more than 11 years for prices to recover to the level they reached in 1981 - this finally happened in 1992, when average house prices in the VREB reached $222,415.

So there is no question that, despite some sustained booms in the last 30 years, there have been extended periods of lacklustre performance. Of course, these were probably the best times to buy, if one subscribes to the theory that it is worth timing a real estate purchase.

Since the interest expense on $100,000 is around $6,000 per year, patience would be doubly rewarded, if a correction of that magnitude occurs.

Of course, any dip in prices is likely to follow a different course this time. While there are similarities in the previous two busts - both followed extended periods of rising nominal prices - the reality is that whatever happens next won't follow a script. For instance, sellers are not going to offer big discounts unless something forces their hand. Could that be interest rates, like back in the early 1980s?

Maybe the correction will play out somewhere between the extremes of the two previous examples: not as bad as the early 1980s, but not as benign as the mid 1990s. That's possible, too.

Or it could be worse. For a truly sobering look at how a housing market can fall apart, look at the chart below from Twist and Housing Doom. This is the housing market in Phoenix, a market overwhelmed by overbuilding and speculation. The green lines represent monthly inventory, and the red lines show monthly sales.

Why do I point to such a dramatic reversal in a US market? It's all about the inventory, and in Victoria, inventory continues to increase . It may take awhile, but as long as inventory is growing locally, the Phoenix chart shows what the ultimate housing doom can be.

One more similarity with the previous two busts - we now find ourselves in a situation where nominal prices have been rising since 1996 - a twelve year period. The past boom patterns suggest this one can't continue much longer.

Next time, come back to the watercooler to discuss whether this really is the top*. Because if it isn't, prices aren't going down in 2008.

*not investment advice on when to sell or buy a particular house, of course - draw your own conclusions on that matter!