Saturday, May 16, 2009

Dude, Where’s My Inventory?

Or as they say in West Vancouver, “Whither Inventory?”

I remember a short 4 months ago local real estate blogs and forums were full of predictions of 25,000 to 30,000 active listings in GVREB by summer 2009. Well, it looks like that is going to be a bit of a whiff. The question is, where did all that inventory go?

To answer the question, the first thing to remember is that the population and dwelling count in Vancouver are pretty much fixed. There is of course a steady increase in dwellings as the population grows but, recently, we have seen a significant increase in housing stock above what population growth can fill. When we hear that inventory is down compared to this time last year, it does not mean the housing supply suddenly shrunk. Housing supply for those wanting to buy has shrunk. As mohican’s analysis has shown, reduced supply with higher demand is correlated to higher price changes and an increase in prices recently is not unexpected.

So, where did all this inventory go? Simple: it went back to generating rental income for the owners. There are 2 players in the housing business: landlords and renters; owner-occupiers happen to be both landlord and renter. The number of landlords and renters must balance. That means, effectively, for every landlord who decides not to sell, there must still be a renter available to fill the property (putting “dark” dwellings aside). And for every first-time buyer entering the market, there is an upcoming rental vacancy.

It can be easy to lose track of what really matters with real estate. When there is a long bout of housing oversupply, whether listed for sale or not, both rents and prices will eventually fall, with inherent oscillations of rents and prices along the way. Ultimately the utility provided by housing, in the form of the rents landlords are able to extract from its users, is all that backs prices.

What we are witnessing now is significant wage deflation and dwelling oversupply -- a one-two combination -- meaning overall rents are under pressure. The landlord (or owner-occupier) who has pulled his listing has in essence become a speculator again, but now faces an additional erosion of rents as average wages fall. The speculative game is doomed to fail eventually, though whether one opts for amputation (selling at a loss) or gangrene (low rental yields) is entirely the decision of the patient. I know which one the doctor recommends.

So is the low inventory an indication of a market bottom? No. Looking at the overall dwelling supply compared to the ever-shrinking pool of money available to generate income for these dwellings, we know the endgame.

16 comments:

david said...

I always thought that the partial reason for listings being lower than expected is because less people are using MLS to sell a home. Check craigslist and there are thousands of "for sale by owner" listings which won't be on MLS. I have also noticed a few realtors that dont list on MLS. (I am not sure about that but i see realtor signs that i cant find on mls) I think people figure they have already lost 10-15% of their value they dont want to spend another 5% on a realtor.

first_time_buyer said...

patience is a virtue here. These things happen in a typical bubble crash. The sales are still dismal, only thing different is lack of listings. There are lots of sheeple out there who believe (visit RETalks and you know what I am talking) that we are all set for another upswing. There is only end to this game and that has been said several time over. Lots of people are going to burn their hands real bad. Just a matter of time.

Mark S. said...

Ok, I'm actually a bear who still believes that prices will eventually fall at least another 15-20% by the end of next year...though I have to admit my patients is being severely tested.

But impatients and frustration shouldn't lead us away from keeping with the facts (its one reason I gave up posting/reading another popular local "bear" realestate blog).

The fact is, there is not "thousands" of listings on Craigslist. There are maybe a hundred or so listings of which the majority are agents who also list on MLS.

Also, sales for May are actually up about 10% over last year from the weekly updates posted on Chipman's blog. I know, I find it hard to believe too. Although May 2008 was the beginning of the crash in sales numbers in Vancouver, so 10% over last May may not be that big of a sales number relative to maybe 2007.

As far as listings falling and prices seeming to stabalize? I think a good chunk of the listings on the market in the last half of 2008 were "soft" listings; sellers who weren't truly committed to sell but thought they could cash in on a huge winfall. When they saw their house/condo sitting for a few months they gave up and delisted. They likely didn't have to sell, they just thought they could either make a big chunk of quick cash or sell and move up to a bigger and better place.

There is also the fact that many sellers were/are constrained in how far they can drop prices and stay in the market. Some need a big enough spread between the sales price and their remaining mortgage to meet the downpayment required on the new home they'd hoped to buy. Other sellers who were/are trying to sell their presales are constrained by a determination to at least get back what they owe.

As far as a flood of rentals going back on the market? You seem to be forgetting that most investment condos are listed and sold or delisted with the renters still in them. Its not a vacant unit coming back on the market increasing the inventory of rental properties. Its a unit that is likely already occupied.

The problem for us renters is that we have a highly inelastic price structure. We cannot put pressure on landlords through the market because we cannot easily substitute high priced rentals for something else. If sellers of cars or oil companies raise their prices too much people can and usually do bike more or car pool or start taking rapid transit. If landlords raise their rents renters can only move away, which means quitting our jobs and cutting off our means of subsistance or we can move to crappier living spaces or pack ourselves in like sardines with friends, which is the option most renters face in Vancouver (50 renters applying for a crappy $1200 basement suite off the Drive!!).

I really hope prices fall. I hope they fall a lot. I'm still holding out hope that sales fall off the cliff during the summer. But while I'm waiting I'm going to keep my eyes on the facts, not wishful thinking.

patriotz said...

Some need a big enough spread between the sales price and their remaining mortgage to meet the downpayment required on the new home they'd hoped to buy....


If a potential move-up buyer doesn't sell, that represents a decrease in net demand.

Markets are driven by those who have to sell, or decide to sell for reasons of opportunity cost.

Prices in Vancouver are headed back to historical multiples just like everywhere else. What we are seeing right now is a combination of low interest rates, and a local perception of immunity from the economic bust that brought them on, resulting in what appears to be a buying opportunity for some. It won't last.

jesse said...

"You seem to be forgetting that most investment condos are listed and sold or delisted with the renters still in them.".

No I am not forgetting that at all. Re-read the post. The entire point is that the overall supply of dwellings doesn't change very fast and they all need to be filled or they lose significant money for their owners. Looking from 10,000 feet it's worthy asking where the money is going to come from to maintain 100% occupancy.

"The problem for us renters is that we have a highly inelastic price structure.".

Actually I think this is not as true as people think. An inelastic price structure would lead to larger swings in prices and rents have been relatively stable (and no it is NOT because of rent control; rents have been appreciating less than rent control on average).

When rents increase people use housing more efficiently by finding roommates or subletting rooms or suites. With wage deflation the pricing power of landlords is severely eroded. Think of it as a demand shock as renters lose purchasing power and a supply shock as new units come online in a big way in the next few quarters.

JimTan said...

"But while I'm waiting I'm going to keep my eyes on the facts, not wishful thinking."

Applause!

Tony Danza said...
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Tony Danza said...

(50 renters applying for a crappy $1200 basement suite off the Drive!!)When was this?

But while I'm waiting I'm going to keep my eyes on the facts, not wishful thinking.You'd be stupid not to, BTW what are the facts and what is the wishful thinking?

david said...

Hey Mark S

There really are thousands of listings on craigslist by owners. Since craigslist is largely unregulated it can't be said that they are all unique listings. I would be willing to bet most people probably listed on there 4 or 5 times in a month. The point i was trying to make is that the stats may not paint the full picture.

And the realtors post under "for sale by broker" on craigslist, so there is a difference.

Davieharely said...

When there is a long bout of housing oversupply, whether listed for sale or not, both rents and prices will eventually fall, with inherent oscillations of rents and prices along the way. Ultimately the utility provided by housing, in the form of the rents landlords are able to extract from its users, is all that backs prices..replica watch

JimTan said...

Checked out Vancouver CraigList. The sale 'By broker' outnumber the sale 'By owner' by at least 5x. Deduct the advertisements masquerading as 'By owner'. Deduct the out of town listings. That doesn't leave that many serious non-MLS properties. So, can we say that this is a dead end for the bears?

Think about it. Serious sellers would be using One Percent Realty etc if they refuse to pay full commission.

david said...

Jim, the fact that so many realtors post on CL shows what a powerful tool it is for anyone to get the word out about their house. Its probably possible that some owners posted under "by broker" by mistake or to get more interest. The discussion of how many houses there are for sale by owner is pointless. There is simply no way of telling because there are so many ways people sell homes by themselves. Another thing the stats dont tell is how many people are out there trying desperately to flip a pre sale contract. Massive amounts of condos are up for completion in the next year. Again i have no stats for this, but i am willing to bet 25% will either be sold, defaulted on, or rented before the original pre sale buyer moves in. I am not claiming any of these things are even close to the numbers on MLS. The biggest numbers will come from MLS no question, i was just trying to state that the MLS numbers are not the end all be all of stats.

And common sense shows that if about 20K units will be finished within a year, then the GVRD will need to gain about 40K people (assuming an average of 2 people per unit) in order to keep demand at current levels. Sure renters will buy, but then there is a rental suit on the market and someone has to fill that.

JimTan said...
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JimTan said...

“And common sense shows that if about 20K units will be finished within a year, then the GVRD will need to gain about 40K people (assuming an average of 2 people per unit) in order to keep demand at current levels. “

Oh Yeah! Lot's of people list themselves as 'By Broker'.

Anyway, we don't know who's buying these 20k units. Some will be buying pied-a-terre or vacation homes. Some will be moving from their parents' house. Some will be moving from Burnaby etc. At this time, we just don't know.

jesse said...

I doubt Craigslist contributes much to unaccounted for inventory. Most buyers don't even know Craigslist exists.

As for who is buying and selling, I would look at the usual suspects: mostly local investors, (obviously) local owner-occupiers, a smattering of first-time-buyers, and the move-up market as well.

One other thing to keep in mind is that while some may be moving out of their parents' basements into a condo, there will be more than a few doing the opposite or, given the state of wage deflation, will opt for roommates more readily now than before. I would look for the population density per dwelling to increase in the next few years.

buff_butler said...

Sadly I think this is the start of the 'olimpic effect.' Theres expectation to generate ~10 months of rent in one month so people are holding out for that curbing the rise in inventory.