Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to September 2011.
Commentary: September 2011, continuing from previous summer months, has produced more tepid sales numbers than years past. A continued trend of higher months of inventory (MOI, the number of months it would take to clear month-end inventory at current monthly sales levels), a key indicator of market liquidity and impending price strength, is typical in the second half. Lest we forget that prices are still high by most validated measures and it will take a prolonged period of MOI well above 6 to bring them down to more historic levels. We are currently at about 7. Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation:
What this shows is the change in prices in a month from 6 months ago based on actual data and “predicting” the price based on months of inventory from that month based on linear regression of half-over-half price change to months of inventory (with 3 month moving average).
What is interesting is that the model predicts much smaller movements in price than what we have seen since early 2009. If we assume that the post-2009 market is now more volatile (smaller MOI changes mean bigger price changes than before), we should be seeing more significant price drops into the fall.
I’m not exactly sure why the volatility has increased — my best guess is because of low interest rates (convexity change) — but if MOI starts piling on into the new year, there’s a good chance we could see a larger-than-expected downdraft in detached prices by the end of 2012.
I (and others on bearish real estate blogs) have stated repeatedly that low interest rates are no free lunch based on a simple discounted cash flows (DCF) analysis. There are some early indications that increased volatility in price movements will be the mode that leads to a correction in a low-interest-rate environment.
It seems that we can look forward to very weak prices this fall / winter.
I think a more correct description is "tepid" prices.
If I get a chance I might review CMHC starts/completions data to see how weak things could get in 2012.
I hope regular readers understand that, based on all the indicators I'm tracking, the risks are to the downside, even ex international financial market turmoil.
I think the HST change is having a substantial effect on real estate demand. The zero sales of new homes on the west side in September has to be linked to the impending arrival of substantially lower sales taxes on new homes.
This anti stimulus may have the effect of increasing the fall in prices over what the HOH model suggests.
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