Afraid of falling prices? Just don’t sell!

There’s a funny comfort meme in the media now that house and condo prices are falling.

Its a strange interpretation of ‘supply and demand’ that says if demand is dropping dramatically we’ll just cut back on supply to match and prices will stay stable.

Soft landing here we come!

There are a number of talking heads in the media espousing this viewpoint at the moment and If you don’t think about it too hard it kind of makes sense.

Here’s just one recent example:

Don Lawby, chief executive of the Century 21 Canada, and a charter member of the club that doesn’t see home prices dropping anytime soon, can’t see any desperation from sellers.

“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”

If people don’t have to sell, then they’ll just take their homes off the market and there’s one less property on the supply side right?

..Of course if you start thinking about it a little bit it doesn’t make as much sense. As Patriotz points out:

..most discretionary sellers are planning to buy another property, so if they decide not to sell they are also deciding not to buy.

So for those of you keeping score, that’s one less seller AND one less buyer. Kind of cancels itself out doesn’t it?

The other point that has been repeated ad nauseum but always seems to get ignored in these articles: the seller that doesn’t sell has zero affect on the market.  The ONLY activity that affects the market are the sales that take place and what price the exchange happens at.  That sale then sets the comp price for all neighbouring properties.

So what really drives the market?

What buyers are willing and able to pay for their desired property from buyers who either need or want to sell.

In a falling market buyers are willing to pay less, because they aren’t completely stupid.  They know it doesn’t make sense to bid high on a purchase that is falling in value each month.

And how fast are Vancouver property prices falling right now?  Apparently even faster than the US bubble markets were falling at their peak.

So there’s that.

But possibly even more important is the buyers ability to pay.  Even if someone really wants to buy that million dollar house and thinks it’s a great deal they might not be able to.  If the credit isn’t available that sale will not happen.

Recent moderation in the mortgage market will have some effect here as we return to the historical standard 25 year amortization on CMHC insured mortgages.  As CMHC hits it’s mortgage cap it is also pumping less credit into the housing market now than it has been for the last few years.

Every time you read another expert talking about the lack of a ‘trigger’ to cause a collapse in the housing market it’s worth thinking about what the trigger in the US or Spain or Ireland was.

The US housing market started to collapse in 2006.  2 years later financial markets collapsed.  The ‘trigger’ for the US real estate collapse was simply this: House prices were too high.

 

 

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VHB
Member
VHB
Total days	21
Days elapsed so far	10
Weekends / holidays	5
Days missing	0
Days remaining	11
7 Day Moving Average: Sales	49
7 Day Moving Average: Listings	238
SALES	
Sales so far	555
Projection for rest of month (using 7day MA)	535
Projected month end total	1090
NEW LISTINGS	
Listings so far	2306
Projection for rest of month (using 7day MA)	2620
Projected month end total	4926
Sell-list so far	24.1%
Projected month-end sell-list	22.1%
MONTHS OF INVENTORY	
Inventory as of Jan 15, 2013	12961
MoI at this sales pace	11.90
604 Receding Gains
Member
604 Receding Gains

@Jesse

The macro data isn’t detailed enough. I’ve seen CMHC data that breaks down demand for housing by type and links this to age demographics. the conclusion was immigration was essential otherwise the natural rate of growth and inter-provincial migration would not be enough to sustain housing demand (ie household formation would drop).

Groundhog
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Groundhog

@RealityCheck

“A Renter would have nothing after 26 years.”

Ha!

Island Guy
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Island Guy

Reality Check “For those touting the its cheaper to rent than buy…consider: Well, in year 1, 50% of your payment is going towards paying off principal, in year 16 majority of your payment is going towards principal, in year 26 you can leave a paid off house for your kids. A Renter would have nothing after 26 years. His/Her kids would have to start from scratch with respect to housing.” Well, I may be an anomaly, but with just under 300k in the bank and solid job prospects going forward, I am not really concerned about a “brick and mortar” legacy for my kids. I am focusing on giving them a nice portfolio for them to manage and grow. My kids will learn the freedom of liquidity, and the importance of vultching on good investment opportunities. My wife’s parents vultched… Read more »

jesse
Member

BC Stats released their population estimates for BC CMAs and census agglomerations. There are two interesting graphs to consider: http://twitpic.com/bvmall http://twitpic.com/bvmbl0 The first is population changes as measured mid-year, updated to 2012 for major CMAs and the rest of BC. The second is under construction for major BC CMAs, updated to November 2012. Vancouver CMA has seen an increase in under construction and has bucked the trend when it comes to population growth in 2012 compared to the rest of the province. This should not be surprising. As under construction increases, this will be a draw for those seeking construction and related employment. Vancouver population growth has remained relatively robust through 2011-2012 compared to the early part of last decade. This has been at the expense of the rest of the province that has been hurting on the RE front,… Read more »

BLISTINGAGENT
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BLISTINGAGENT

CBC National leading with a story on how house prices are staying high while sales crater.

RealityCheck
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RealityCheck

For those touting the its cheaper to rent than buy…consider: Well, in year 1, 50% of your payment is going towards paying off principal, in year 16 majority of your payment is going towards principal, in year 26 you can leave a paid off house for your kids. A Renter would have nothing after 26 years. His/Her kids would have to start from scratch with respect to housing. This is the cultural shift that has happened in Vancouver. I’d rather my kids have the advantage of paid off shelter at age 30 rather than struggling through life trying to obtain paid off shelter. For those, who’d like their kids to learn life’s rope and earn their way —> Well, all I got to say is good for you. They’ll be on this blog in 30 years time while the owners… Read more »

Anonymous
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Anonymous

“This realtor started a blog about prices dropping. What do you think his objective is?
How about you being honest (I know it’s difficult for a realtor) and telling everybody it’s your blog? I can see you’ve been promoting it on Garth’s blog as well…”

LOL so obvious.

Anyway Jeff if you want to attract people to a blog you will need more than one post. Try providing insider information around here and you might get some hits.

Anonymous
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Anonymous

Devore: “so clearly something the numbers are not capturing is at work. ”

It sounds like you have not been paying attention. There have been many quantitative changes including CMHC rules, interest rates, house hold debt levels, ownership rates, etc that have pushed prices higher and now trending lower. There is no mystery to what is happening. It looked pretty similar in other real estate bubbles around the world.

Makaya
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Makaya

@goingdown
This realtor started a blog about prices dropping. What do you think his objective is?

How about you being honest (I know it’s difficult for a realtor) and telling everybody it’s your blog? I can see you’ve been promoting it on Garth’s blog as well…

BRITTANNY
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BRITTANNY

Dead Cat. No bounce.

Romeo Jordan
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Romeo Jordan

You ninnies.

“when will we see a spike in listings…”

it’s coming. hold onto your panties. the market is beginning to scream and writhe in pain.

ReadyToPop
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ReadyToPop

The way Jim Flaherty sees it, his July changes to Canada’s mortgage rules are having the desired effect on the housing market.

“Well, yeah,” the finance minister told The Globe and Mail. “I don’t mind prices coming down a bit, too.”

Jim Flaherty on home sales dive: ‘I don’t mind prices coming down a bit, too’

The question I’m asking is, why they were allowed to get so high in the first place?

604 Receding Gains
Member
604 Receding Gains

When does negative sentiment (which is seeping into most media) turn into panic and resulting spike in listings? We haven’t seen that yet. One theory: Financially stressed owners/sellers are staying cool right now and relying on their savings and HELOCs to carry mortgage debt. But let’s say they don’t blink and continue to either list at a high price or not list at all. As soon as this money runs dry then they basically switch into delinquent owner status. So there is one statistics for us to watch – a spike in mortgage delinquencies (instead of a spike in listings). Next comes the foreclosure notice and forced sale. That takes another 90 days or more in BC (maybe 180 days) so this could all take a long time to play-out before we see high-profile foreclosure news. Once we start seeing… Read more »

Devore
Member
Devore

“Being mostly a quantitative, numbers driven person I have to say….There is room for both, and both are equally important. ” Definitely room, and value, for both. Numbers tell us Vancouver has been overpriced since 2005 at least, but it still continues to be so, even more so, 7 years later, although prices and prospects seem to be sloping down, for the second time now, so clearly something the numbers are not capturing is at work. Like Austrian economics, the numbers are right, but the timing seems elusive and predictions are not bearing out in the real world, which is the second critical component of any economic analysis. Emotions, public opinion, sentiment, momentum, are all very important in markets. I am a value investor at heart, so I am happy with numbers. When something is undervalued, it is attractive, when… Read more »

goingdown
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goingdown

This realtor started a blog about prices dropping. What do you think his objective is?
jefffeaver.wordpress.com

Achilles HELOC
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Achilles HELOC

Well, you can lead a horse to water, but you can’t make him buy an overpriced condo

paulb
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New Listings 266
Price Changes 55
Sold Listings 61
TI:12961

http://www.paulboenisch.com

Vote Down The Facts
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Vote Down The Facts

“To predict the direction of the Vancouver real estate market based exclusively on your ratios and charts is impossible.”

Predicting the direction is quite possible, it’s just the timing that’s incredibly hard. Markets can remain irrational longer than you can remain solvent, or whatever.

pricedoutfornow
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pricedoutfornow

Couple people I`ve also seen who “need to sell“- they bought a SFH before selling their townhouse, and after listing over the summer with no sale, decided to rent the place out. I live in the same neighbourhood as both of these-1 I see still looks pretty vacant to me (blindd drawn in all windows whenever I walk by), the other looks like he`s back to advertising on craigslist-3 months later-except now his rental price is $300 MORE than what he originally wanted! Great strategy…looks like neither has had any luck with selling or renting…tough luck, I know they are both young families. Guess they should have sold before buying a SFH but some bloody realtor convinced them we live in such a `prime area`they would get whatever freakishly high price they asked for. Sad.

Bag it and tag it
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Bag it and tag it

154 Island Guy
Your price/rent ratio indicates that you are smart to be renting that place and not buying. The price/rent won’t tell you if you’re getting a good deal on your rent though. That can only be done by analyzing comparable rentals in the area.

An Observer
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Yeah, good deal. Even if your rent was double it would be a good deal for you to rent instead of buying.

Just consider his return. It’s likely around $10K/year after property tax, maintenance etc. On $490K that’s roughly 2% before tax. Even with double the rent it’s under a 5% before tax return

Island Guy
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Island Guy

Hoping for some help with the price to rent ratio for my place….

The 2012 assessment on the 3.5 bedroom, 2 bath, renovated, half acre place with waterfront views on the Island is $490,000…

I currently pay 1300 in rent….yes, I am on the Island and not in Vancouver.

I believe that on a monthly basis, the price to rent ratio is 376, or on a yearly basis, 31.

Its my understanding that if the monthly ratio is 150 or less its good to buy, and if the yearly is 15 or less its better to buy…

Just trying to get a sense if I have a good deal or not. Any comments would be extremely appreciated!

Bull! Bull! Bull!
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Bull! Bull! Bull!

The swiss guy delivers another great post! Ask your self… in these 4 pages of comments, how many are worth reading? H

Groundhog
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Groundhog

Being mostly a quantitative, numbers driven person I have to say….There is room for both, and both are equally important.

Now wheres PaulB with numbers?