Saturday, January 17, 2009

B-b-b-b-baby, You Just Ain't Seen Nothin' Yet

The Vancouver real estate market, along with the rest of BC and Canada, has now entered the full blown correction stage. Nobody is denying the reality that prices are falling and that it is very difficult to sell a home right now. Vancouver real estate prices have retreated nearly 15% in the past 7 months and Canadian prices as a whole have retreated 5-6%, depending on the data you use.

Many prognosticators, extrapolators, eternal optimists, and kool-aid drinkers have concluded that the worst is behind us in terms of price drops and I will now tell you why that is far from being the case.

Quite simply, there is TOO MUCH DAMN SUPPLY for the level of demand we had last year nevermind the level of demand we see today in the midst of a full blown credit contraction and recession. Shockingly ;-) people don't really want to commit themselves to a 35 year payment schedule, with payments double their current rent, when their job prospects are weak or at risk.

For those of you who are now planning on waiting until 'the market recovers' to sell your home, you may be waiting many, many years. The real estate market is not like the stock market, where crashes and recoveries can happen over a period of weeks or months. The real estate market takes years to exhibit the same market movement so get honest with yourself and don't let your realtor give you some mumbo-jumbo about a spring market rebound because the facts just don't bear that point of view out.

So the question becomes - When will we see more demand and less supply - ie. a recovery?

The answer of when a recovery will come is not complicated and actually we can make an educated estimate of when supply and demand should come back into balance. When supply and demand come back into balance, the worst of the price drops should be over and we can reasonably expect a 'recovery' of sorts, or at least no more big price drops!  This doesn't necessarily mean a return to the rapid price appreciation of the bubble years nor does it mean that we will attain the lofts heights of 2007 pricing again soon, in fact, it is likely that we will not see spring 2008 peak pricing for at least a decade and if we adjust for inflation, my children may never see that day.

In the current supply / demand situation, with well over 15 months of inventory in every major BC real estate market, we will see price drops in the order of -2% or more per month. This has been true of the past year.

For argument's sake, let's just say that the demand in the current real estate market does not deteriorate further and again let's imagine the looming supply of new homes under construction that will complete in the next 18 months is reasonably around 20,000 units. With current existing home inventories in the Greater Vancouver area and the growth in listings that is typical for the first half of the year we should see approximately 25,000 units for sale by the time May or June rolls around. Sales will likely be in the 1200 to 1500 per month range giving us a months of inventory metric well over 15 months again.

This means that 2009 will not be a positive year for prices in the local real estate market. In fact, assuming the trend shown in the chart above holds true this year, we should see continued price declines of 2% or more per month. If there is a further influx of inventory via new home completions or existing homes coming onto the market, or a further deterioration of demand, things could be much, much worse.

In regards to prices, here are my best case, reasonable case, and worst case scenarios for 2009:

Best Case - average of 2% declines per month, inventory does not exceed 25,000 units, sales hold up at 2008 levels, benchmark price finishes the year above $525,000.

Reasonable Case - average of 3% declines per month, inventory does not exceed 30,000 units, sales fall modestly from 2008, benchmark prices finishes the year above $475,000.

Worst Case - average of 4% declines per month, inventory exceeds 30,000 units, sales fall dramatically from 2008, benchmark prices barely finish the year over $400,000.

If these predictions seem alarming, then you haven't had a good look at the facts yet. There will be no recovery until 2011 at the earliest. For those of you looking to sell a home this year, get real, and drop your price to be the lowest in your neighbourhood, otherwise it isn't going to sell. For those of you looking to purchase, wait, or drive a very hard bargain, and be prepared for further price drops. If you are a developer, cut prices hard, 30% or more, and finish up your projects fast. If you are a city that happens to have a huge development full of unsold units on your hands, get rid of them, FAST.

Real estate prices will be 20-40% lower than now only 12 months from now so move fast if you're selling and move slow if you're buying.

Good luck because You Ain't Seen Nothin' Yet.


macho slob said...


You hit a homerun with every statement, especially since your "worst case" scenario was much more convincing than the other 2.

So far, we've only been scratching the surface of the bust. Just wait til we get a couple of months with 5% price drops, that's when the real slaughter will start.

Van Housing Blogger said...

Again, well done Mo. In the Globe again today, Mason's column talks about refinancing to lower interest costs until the market comes back.

Almost all journalists, politicians, professional economists, and other talking heads are still stuck in the '2007 pricing is normal world.'

This city is going to be rocked over the next 12 months.

When I was predicting that the boom would end, I didn't envision the downturn being so quick. However, the confluence of events I think is leading to a very quick adjustment.

This is not being doomy and gloomy. This is looking at the numbers as Mo has done here.

The other thing to factor in is unemployment rate jumping .3-.5 points per month. THAT will be really important . . . not to mention when banks stop letting people buy with OPM. Man, this is going to hurt (some people).

jesse said...

I think at this point it's not worth beating around the bush. Thanks for putting it so plainly, mohican.

I hope your readers, city officials included, understand they may be biased and look more closely at your presented data and analysis. Denial of reality will only hurt more in the end.

jesse said...

"The other thing to factor in is unemployment rate jumping .3-.5 points per month."

Also note unemployment is a lagging indicator. What I mean is that after layoffs there is a delay between when workers start looking for work again and this is smoothed over the subsequent 6-12 months. Further increases in the unemployment rate are definite as the layoffs at the end of 2008 will only be starting to show up now.

johnnyrent said...

Good analysis Mohican.

I find it interesting when people use the word "recovery" in the contex of a real estate correction.

A recovery in the stock market normally means when stock prices have risen to their previous highs. Hopefully for my sake this could take place by the end of 2010.

Apply this same criteria to real estate, however, and "recovery" could take a decade or more. History shows that real estate markets tend to stay relatively flat after a market bottom.

It amazes me that despite the ready availability of historical data, the talking heads rely more on popular folklore and wishful thinking than on documented evidence.

jesse said...

johnnyrent, good point about "recovery". From that perspective it looks like it will be many years before prices "recover" to 2007 values in real OR nominal terms. From my perspective the "recovery" will be the opposite: when prices are once again supported by fundamentals. I do think we will see some buoying of prices in the spring but, overall, -20% YOY is a high probability.

John Collison said...

Another great post.

One factor you have not touched on, but hopefully will consider is this: rising tax rates throughout the Lower Mainland.

Taxes will have to soar to mitigate damage from municipal excesses like the Olympic catastrophe (and we are only seeing the tip of that ice berg).

Vancouver property taxes have historically been very reasonable, when compared to places like Toronto or Winnipeg. Vancouver civic government has become addicted to the high tax revenues that came with the boom, itself partially built on rational tax policy.

With revenues dropping, liabilities increasing, tax rate will be ratcheted up. This will depress home values as it has done in places like Toronto and Winnipeg.

The Vancouver housing "recovery" will be sandbagged even if it does arrive as early as 2011.

Per demographer Foot, don't look for a recovery until well after the last of the Boomers is already getting fitted for caskets, circa 2020.

And even then, one suspects a mini boom in currently empty condos may have occurred as seniors downsize from rambling West and North Van manses and head to the city for their sunset years prior to assisted living ensconcement...

investah said...

OK jesse, that's gotta be the 2nd or 3rd time you've confounded some of us with your vision of that mysterious buying spurt in the spring without the slightest hint of why that might possibly be....mind telling us where you get these revelations?

With the exception that the recession has now scared off the few remaining buyers, nothing has changed since last spring when the market finally ran out of steam.

I supose anything is possible, but I'm betting that we're on the brink of the biggest plunge ever.

mohican said...

I suppose if we define 'recovery' as the point at which we have realized spring 2008 peak values again, then we likely won't see that for well over a decade in nominal terms and maybe never in inflation adjusted terms.

investah - we aren't 'on the brink' we are 'in the midst' of the biggest plunge ever. The biggest plunge ever started in September / October. If jesse's and my optimistic scenarios don't unfold in the next three months then it will be very grim indeed.

jesse said...

Sales will likely increase in the spring relative to current levels. This is a seasonal impact that is seen every year and will likely mean MOI will be lower which, according to mohican's graph, will mean a moderation in price declines but not necessarily price increases. There is little bullish in this, only that prices are unlikely to descend in a straight line. Maybe this spring will be different.

patriotz said...

Vancouver civic government has become addicted to the high tax revenues that came with the boom

Property tax revenues are a function of city spending, not the other way around. The city sets the mill rate each year to levy the desired tax revenue from the current assessment base. Property tax revenues do not rise automatically with rising property values, nor do they fall automatically.

This is vastly misunderstood, despite the best efforts of municipal governments which painfully explain it with their tax notices. Part of the problem is media reports from the US, where in many states there is a fixed mill rate and revenues really do rise and fall with property prices.

patriotz said...

Nobody is denying the reality that prices are falling and that it is very difficult to sell a home right now.

Well of course it's not difficult at all. Sellers are unwilling to price to sell, which is a different issue.

SurreyJoe said...

Nice analysis as always Mohican.

Was drving by two towers going up at Lougheed Mall - Silhouette is the name of the development. Down payment 5%. With what has happened to the market I'm willing to bet that everyone buying there with 5% down is now negative equity. Anybody depending on bank financing to compelete is going to be out of luck. I think Onni's condo dump is going to be the first of many such events.

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mohican said...

Unfortunately the pain felt in the next year by a lot of recent real estate purchasers is going to be nearly intolerable.

Anyone who has bought with standard mortgage terms with a low down payment is in for a world of hurt as they realize that the biggest purchase they have made in their lives was an overinflated value on a box made of pressboard and vinyl.

Paul said...

I agree 100%. Nice summary.

lacouvee said...

re: the market won't recover until the last of the Baby Boomers are being fitted for caskets circa 2020.

Given that the Baby Boom generation was born from 1946 to 1964 that will make the youngest babyboomers only 56 - a bit young to be fitted for a casket perhaps!

van_coffee said...

Actually 45, based on your dates, but who am I to question your math.

patriotz said...

He meant 56 in 2020, not now.

I agree BTW - no recovery in RE until all of the boomer inventory is cleared.

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