Thursday, February 23, 2017

Vancouver Teranet and Housing Inventory Correlation Update

The past few months have seen a marked cooling in price changes and sales volumes in Metro Vancouver and I just got around to updating some scatterplots that relate the change in the Teranet House Price Index to the ratio of for-sale inventory to monthly sales (months of inventory, or MOI). Here are the updated charts, showing price changes for 3 months (quarter), 6 months (half) and 12 months (year):








An interesting development late last year saw prices drop significantly when compared to the available inventory — the model predicted more price strength in the face of a dearth of available inventory than what actually occurred. Prices have moderated somewhat but are still up 16% year-on-year, an indication perhaps that last spring's buying frenzy was anomalous compared to other years. Perhaps the spike in the spring of 2016 was more of a transient event and was not truly representative of underlying demand.

On the subject of inventory, inventory is very low right now, around 8000 or so for REBGV and inventory growth is nothing short of anaemic. As the market enters the traditionally robust spring selling season the lack of inventory will tend to place upwards pressure on pricing, all else equal.  I see no significant evidence yet to suggest that prices (as measured by the Teranet HPI) are exceptionally weak compared to current MOI, in the context of the historical price-change-to-MOI correlation. That stated, with inventory this low, the market may be operating in a different state compared to most past years.

Thursday, February 02, 2017

REBGV Sales Update Through January 2017

REBGV released their stats package through January 2017. Here are the numbers:
January gives us an early read on market conditions preceding the busy spring selling season. It does not appear like conditions in 2017 are similar to 2016. Sales and new listings were both slightly on the weak side of average. As a result, inventory growth has not been high, but is average. Since inventory was extremely low through all of 2016, there is a long way to climb to bring inventory back to historical levels. The lack of inventory suggests that, even with low sales volumes, prices will likely remain robust through the spring. This is based on the historical high negative correlation between months of inventory and price changes.

2017 is an unprecedented year in that both sales and inventory are low. It is unclear to me how quickly, or if, the market can return to an average level of inventory and sales this year. Inventory can only climb by new listings significantly exceeding sales (and listing expiries not being high). Unless new listings pick up or sales slow further, there is no path for inventory to return to historical levels before the end of the spring selling season. (See 2006 for a potential template.)




Wednesday, January 04, 2017

REBGV Sales Update Through December 2016

REBGV released their stats package through December 2016. Here are the numbers:






As 2016 draws to a close it's worthy of a look back at the year and some lessons for what happened. 2016 saw a frenzy of sales in the first half of the year (strong sales were already present in 2015 and early 2016 was arguably a continuation of a crescendo of activity). New listings were above average as well, but have dropped off in the latter part of the year. Months of inventory is negatively correlated to price changes and indeed the first part of the year experienced robust price gains with few other years as equals. 

Conditions in the second half of the year were more subdued and were trending slightly below average for sales, though nothing as severe as 2008 and 2012, years in which year-on-year price drops occurred.

At the beginning of 2016 there were signs that it was going to be a strong year for sales. The strength in fall of 2015 coupled with low inventory was enough fuel to ensure price strength through the spring. Nonetheless the strength of sales in the spring of 2016 surprised me and likely most objective observers in the RE industry. I am not fully certain the reason for the strength but I expect it was a combination of factors including: offshore capital, low mortgage rates, increasing household formation, a spike in construction activity, and inter and intra-provincial population growth. I remain unconvinced that one factor was the overwhelming determinant to 2016's sales strength.

On the policy side, 2016 has seen the federal government take more aggressive action through macroprudential guidelines via OSFI, designed to limit the amount of lending both through underwriting guidelines as well as providing a significant shift in policy with respect to unverified income loans ostensibly popular with those using foreign capital to finance house purchases. These policy shifts are likely starting to kick in now. In addition there are indications that gaps in money laundering oversight are starting to close, though I have yet to read of anything substantive on this file yet. The BC government implemented a foreign buyer tax in a rather heavy-handed fashion and the City of Vancouver has implemented an empty home tax. Both of these taxes are likely to be challenged in the courts in the coming year. 

The provincial government has announced a program where first-time homebuyers can get a loan up to just over $35,000 towards purchase of a home, though it's notable that there have been similar schemes in years past that aren't that different. (There was a recent scheme for first-time homebuyers purchasing new homes not too long ago, then there was the brief 40 year amortization and 0% down schemes from the mid-2000s, so it's not like this recent provincial scheme is anything out of line with what we've seen before.) 

There appears to be more coordination between municipal, provincial, and federal housing policy than I've seen in a while. This bodes well for ensuring some unfortunate gaps in data collection and sharing are closed.

2016 also highlighted to me how limited governments can be in terms of effecting change in housing policy. There are significant entrenched interests, overwhelmingly dominated by incumbent homeowners. Producing affordable housing policy that almost certainly means affecting the living conditions of incumbent homeowners is a tough slog. I am far from convinced that there is a significant intersection between effective affordable housing policies and popular housing policies.

What will 2017 bring? Predictions are at best statistical but here are my "most likely" predictions for 2017:
  • Sales will most likely trend at the long-run average. A combination of tighter lending conditions and higher prices will likely weigh on sales this year, however there is a large 25-35 year-old demographic that is starting to form households and that should buttress numbers for the next few years.
  • New listings will most likely trend higher than the 10-year average due to a slight propensity to "cash out" by those thinking of downsizing, as well as housing completions likely rising.
  • Inventory will most likely climb to about 12,000 by September (we are very low now and have a long way to run).
  • Prices of attached and detached should increase through the spring since there is still some scarcity. I do expect detached to increase less than attached since detached inventory is higher and prices increased more than attached the past year, so are due to retrench. Price increases will most likely be skewed to higher-quality houses that will sell in most markets.
In the long run I expect detached housing in the core to outpace denser housing forms and suburban housing in terms of land value appreciation. Pressure to increase density will continue to grow, but we're talking a many decades trend that I fully expect to continue. Does that make detached a better investment? No.

Anyways, merry new year to all!

Friday, December 02, 2016

REBGV Sales Update Through November 2016

REBGV released their stats package through November 2016. Here are d numbers:






[Note: minor edits from October below - ed]

Sales are average -- and on the low side of average -- and markedly slower than the spring. Inventory is creeping higher but slowly starting to decrease, which is what usually occurs in the last months of the year. It is still very low because new listings are not significantly higher than average. Months of inventory has continued to creep up through a combination of rising inventory and lower sales. It appears that conditions are not worsening in a significant way.

The market is slower now. As I have mentioned before, a slowdown was all but inevitable to cause prices to stop rising at the rates they have recently. Current conditions could be, but are not necessarily, a very early indication of a more significant price correction in 2017, but there is no indication that such a slowdown is any more likely than other scenarios

Since sales are highest in the spring and inventory tends to climb through the first half of the year, prices in the spring tend to be more robust than the second half of the year. If you are looking for significant downwards price changes, they will most likely manifest in the house price index data no earlier than the fall of 2017, and that will necessarily be predicated by sluggish sales and rising inventory in the first half of the year. We are not to the point where a price drop is a surety, but there are sufficient conditions in place for it to occur.

Wednesday, November 02, 2016

REBGV Sales Update Through October 2016

REBGV released their stats package through October 2016. Here are z numbers:











Sales are average -- and on the low side of average -- and markedly slower than the spring. Inventory is creeping higher but slowly. It is still very low because new listings are not significantly higher than average. Months of inventory has continued to creep up through a combination of rising inventory and lower sales. It appears that conditions are not worsening in a significant way.

The market is slower now. As I have mentioned before, a slowdown was all but inevitable to cause prices to stop rising at the rates they have recently. Current conditions could be, but are not necessarily, a very early indication of a more significant price correction in 2017. 

Since sales are highest in the spring and inventory tends to climb through the first half of the year, prices in the spring tend to be more robust than the second half of the year. If you are looking for significant downwards price changes, they will most likely manifest in the house price index data no earlier than the fall of 2017, and that will necessarily be predicated by sluggish sales and rising inventory in the first half of the year. We are not to the point where a price drop is a surety, but there are sufficient conditions in place for it to occur.