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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Not much of a name...
Member
Not much of a name...

So what? Should people continue to overpay for RE just because everyone else is doing it? I’ll stick to my numbers, thanks.

Ludvig von Mises
Guest
Ludvig von Mises

“But these “qualitative” changes do not negate the simple fact that it is more expensive to buy than rent.”

True, but that doesn’t mean a thing if, for dog knows what reason, there has been a strong cultural shift toward valuing home ownership. Again, I’m not saying that has happened, but it could, and if you focus too hard on the price/rent ratio you would miss it.

Not much of a name...
Member
Not much of a name...

@LVM…

If you focus exclusively on numbers you might well lose sight of “qualitative” change, such as change in values and attitudes which affect the market you are trying to predict. I’m not saying that has happened in Vancouver, but it might, and you would likely miss it.

But these “qualitative” changes do not negate the simple fact that it is more expensive to buy than rent.

Ludvig von Mises
Guest
Ludvig von Mises

“People predicted the US crash using exactly the same methodology as we use.

What’s so special about Vancouver?”

Yeah, some people made predictions which happened to come true. Big deal! There is no denying that economic fortune telling is notoriously inaccurate, including any effort to predict the timing and magnitude of market or economic changes. Studies have shown the predictions of professional market analysts to be not much more accurate than monkeys throwing darts.

If you focus exclusively on numbers you might well lose sight of “qualitative” change, such as change in values and attitudes which affect the market you are trying to predict. I’m not saying that has happened in Vancouver, but it might, and you would likely miss it.

Best place on meth
Member
Best place on meth

I am absolutely confident that there will be at least 35 sales today.

No doubt about it.

Anonymous
Guest
Anonymous

A while back there was a post about some immigration policy that was recently cancelled. It involved immigrants giving the Canadian government a lump sum of money for a few years and in turn they were granted some rights. Does this sound familiar? If anyone recalls those details I would appreciate seeing that again.

patriotz
Member

Hat tip to happy renter at HHV:
Whistler real estate: a bargain?

Could it be that Whistler has become more than a ski and party destination, and is now a place to hang your hat year round?

Move over Squamish, they’re now selling Whistler as a commuter market.

And who is the writer?

Kerry Gold’s Summary

Feature writer; freelance journalist; ghost writer; author; business writer; real estate writer; pop culture columnist; music and entertainment specialist; news reporter; working on another book.

The plan is to continue writing for newspapers, magazines, and on-line. As well, I’ll continue writing ghost projects, especially autobiography and memoir.

Who better to pump BC’s newest ghost town.

patriotz
Member

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

People predicted the US crash using exactly the same methodology as we use.

What’s so special about Vancouver?

patriotz
Member

“Here is a link to a graduate level course outline at UBC on qualitative data analysis:”

It is obvious from the list of topics that it is aimed at sociological/anthropological fields and is completely irrelevant to an area such a finance where you have hard numbers on asset prices and earnings.

Groundhog
Guest
Groundhog

“You guys should know that economics has never been just about numbers. There have been efforts to make it so for a very long time, but a number of thinkers have argued that it is not possible.”

Ditto. Behavioral Finance was “invented” in the early 90’s, but historically before the early 1900’s economics was far more a social science. The last century many have attempted to turn it into a physical science all about about numbers and laws but it really hasn’t turned out too well I must say. The economics they teach in schools is a very small subset of what is actually out there.

There are now trends moving towards the more social science aspects of it (ie. behavioral finance).

Ludvig von Mises
Guest
Ludvig von Mises

Here is another article you might want to look at, about behavioral economics.

http://www.acacia-avenue.com/…/1304424872IJMR53(2)Gordon_fpp.pdf

Anonymous
Guest
Anonymous

“By the way, my comment #127 about the falling dominoes was entirely qualitative analysis. Right now, that comment has 8 up votes and no down votes.”

Great. Now you won’t have to cry yourself to sleep tonight.

Ludvig von Mises
Guest
Ludvig von Mises

You guys should know that economics has never been just about numbers. There have been efforts to make it so for a very long time, but a number of thinkers have argued that it is not possible.

See e.g. von Mises in 1933: https://mises.org/epofe/c2sec8.asp

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

shriller
Guest
shriller
@ Patriotz, I’m of the opinion that SFH could fall 50% nominal but I don’t think the same is true for condos or townhouses which I don’t think have appreciated as much since 2008. But even here I anticipate a 30% or greater fall. Of course the devil is in the timing and I don’t have a good timeline forecast going forward. It’s more of a steady-state analysis. I suspect that the withdrawl of CMHC stimulus via NHA-MBS securitization of bank mortgages and increases in the (effective) property tax to offset less income from development will disproportionately affect the SFH market. Either that or services from city hall will contract and make the amenity value of the SFH lower. And I am rather worried about the BC economy going forward. The HST debacle, falling revenues and rising costs are going… Read more »
jesse
Member

“Both have something valuable to contribute. And DATA itself can either be quantitative or qualitative”

“Qualitative” data only stands up when gathered using proper design of experiment. Social science, one would think, includes properly applying the scientific method. Not sure what your beef is.

Anonymous
Guest
Anonymous

By the way, my comment #127 about the falling dominoes was entirely qualitative analysis. Right now, that comment has 8 up votes and no down votes. So I guess there is hope for this blog yet.

Anonymous
Guest
Anonymous
@Patriotz: Here is a link to a graduate level course outline at UBC on qualitative data analysis: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0CE8QFjAE&url=http%3A%2F%2Fedst.educ.ubc.ca%2Fsites%2Fedst.educ.ubc.ca%2Ffiles%2Fcourses%2F504%2520outline.2011.doc&ei=SdL1UOyPCs7xigLE7IDoCw&usg=AFQjCNGn2UI8gBUf_NrtT48_erZfwoWUJw&bvm=bv.41018144,d.cGE Just google the terms “qualitative data analysis ubc” –you will see all sorts of courses and discussion groups and software programs. If you are actually doubting that qualitative analysis even exists then you are truly embarrassing yourself and showing the limits of your knowledge. Any outsider reading this discussion and looking at how the comments are being voted on, absolutely would see that this group is plagued with group think. What I am saying is not all that radical. I’m just about as neutral as Switzerland in the quantitative vs qualitative debate. I’m saying both epistemological positions offer something important. You guys are the radical ones when you say that quantitative trumps qualitative and when you doubt that qualitative data analysis even… Read more »
Anonymous
Guest
Anonymous
@Yalie “If you don’t believe that, go watch a poker game between a statistician and a guy who bets entirely “on his gut”, and see who wins.” Going with your gut is not the same thing as relying on qualitative info. You are completely misunderstanding what the word qualitative means if you think it means relying on gut feelings or some sort of sixth sense. In a poker game, qualitative info would be things like how the guy across the table smirks everytime he gets a good hand, how the guy likes to make big bets when he is bluffing, ie. learning to read body language to see if someone is bluffing. My point is that quantitative and qualitative both have something important to offer. The very best poker player would combine both–counting cards and knowing the statistical odds of… Read more »
Anonymous
Guest
Anonymous
@Patriotz “What we have a problem with is people who think that subjective parameters, which is generally what people mean when they say “qualitative”, can trump the numbers. That is a classic argument of bubble deniers. Being able to golf and ski on the same day is not an input to a sustainable price/rent.” WRONG. NOT ALL QUALITATIVE THINKERS ARE BUBBLE DENIERS! I am a qualitative thinker and I am not denying there is a bubble. Really, the majority of people who earned university degrees in the past ten years in the social sciences are qualitative thinkers. Qualitative methods have been in vogue in academia for some time now. Not all of these people who have been educated in social sciences in the past 10 years and who have been trained to think qualitatively are going to be bubble deniers.… Read more »
Yalie
Guest
Yalie

And DATA itself can either be quantitative or qualitative.

Sure, and sometimes qualitative data is the best you can do because that’s all you’ve got.

But let’s call a spade a spade for a second: quantitative data trumps qualitative almost every time, if you have the choice. If you don’t believe that, go watch a poker game between a statistician and a guy who bets entirely “on his gut”, and see who wins.

patriotz
Member

“Universities offer entire courses on QUALITATIVE data analysis.”

How about giving us a link to one so we know what you’re talking about.

patriotz
Member

“To me, information includes both quantitative and qualitative.”

Sure it does, and nobody on this board has any problem with people reporting their own personal anecdotes about the rental or sales markets or what have you.

What we have a problem with is people who think that subjective parameters, which is generally what people mean when they say “qualitative”, can trump the numbers. That is a classic argument of bubble deniers. Being able to golf and ski on the same day is not an input to a sustainable price/rent.

Anonymous
Guest
Anonymous

@Jesse

“losing perspective by ignoring the data”.

It’s telling that you consider data, by definition, to be quantitative. That right there shows your quantitative world view. Universities offer entire courses on QUALITATIVE data analysis.

Anonymous
Guest
Anonymous

@Jesse

“If you mean it’s possible to lose perspective looking only at numbers, I suppose so, but the real danger is, in my view, losing perspective by ignoring the data.”

Of course, you think that way! You are a quantitative thinker. That is your epistemology/world view. That’s fine.

But not everyone sees the world primarily in terms of numbers. I need not repeat the epistemological debate between quantitative and qualitative that has gripped academia for at least the past 30+ years. Suffice to say that a great many people have been trained by our universities to analyze things from a qualitative perspective. There are quantitative thinkers and qualitative thinkers. Both have something valuable to contribute. And DATA itself can either be quantitative or qualitative.

Anonymous
Guest
Anonymous
@JR Regarding the BC Government commercial showing falling dominoes: Yes, I chuckle every time I see that commercial. The BC hubris of that commercial is appalling. The falling dominoes are supposed to represent economic problems. In that commercial, dominoes from around the world and then across North America are all falling into each other. The last domino left standing is BC and it doesn’t fall. It seems to be saying, economic problems are, by definition, external to BC. BC cannot have any home-made economic problems (like a real estate bubble, for example). All the risks to the BC economy are external to the province. As long as the government doesn’t let those external economic shocks affect BC then BC will be fine. It is simply impossible for the government of BC to be the author of BC’s economic woes. This… Read more »