Now that the correction has started, the only questions that remain are its depth and when we get there. Or more simply, when does one buy?
There are a lot of different ways of evaluating real estate prices and many of us are aware of the traditional metrics. I won’t repeat this analysis because it has been said before and is readily available. Most results would place fair value anywhere from current levels to another 20 to 30% on the downside (and even more by some).
Another way of evaluating expected prices is technical analysis, which is simply looking at past trends and assuming history will repeat itself. Real estate has appreciated at approximately 5.5% per year over the long term. Using 1983 prices (the bottom of the last crash) as a baseline, this would give an expected bottom of $630k for the average Greater Vancouver SFH. Using a similar approach, fair value was estimated at $730k, not accounting that markets tend to overshoot fair value. Considering this, I think $630k is a reasonable expectation for the bottom (based on technical analysis).
Based on the November 2008 average SFH prices of $750k, I think we have another $120k to go on the downside, or roughly another 15% drop on top of what we had to date. Considering the rate of the correction, it shouldn’t take long for us to get there. It might only take another 6 months.
But with all that said… who cares? Why are so many people consumed with buying at the absolute bottom? I think we are asking ourselves the wrong questions because none of us really know where the market will go (a known unknown). I think the following three questions are more important, partly because they can be answered (known knowns):
1. Can I afford it?
2. Do I like the product and the location?
3. Will I live there for a reasonable period of time (at least 5 years)?
If the answer to all these questions is yes, then it just might be the right time for you to buy.
Dave
