Momentum Changes in the Market

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Professional Economists and fair-ground fortune tellers are often largely correct about the same amount of the time when it comes to the future. Let’s be honest, if anyone really knew what was going to happen for certain, there would be no risk to investing and we know that is not true.

That said, economists do have some science to their predictions largely driven by consumer behaviour patterns. All first year business students (like I was) learn some of these basic (and often correct) economic theories:

  • Supply-and-Demand
  • Sticky Pricing
  • Seasonality
  • Greed vs. Fear

In greater Vancouver, 2016 has been a wild ride of price increases and fast transactions. However, that is not likely to continue forever as the market tries to find its balance.

2016 - Lack of Supply

Even with record numbers of houses coming on the market for sale, there was still more money available to buy houses than there were houses for sale. This resulted in rapid price increases as the market prices climbed tried to find a balance between available cash and houses for sale. Sellers were driven by a ‘greed’ mentality that they could get more, and buyers were driven by a ‘fear’ mentality that they would not be able to find a place to live. Overall, the market was setting records for being very hot.

One of the sources of cash in the market that was often cites was foreign investment. Cash from outside our local housing market, even if it was only 10-15% of sales, would have had an effect on housing pricing and activity. More cash meant higher priced sales, which is part of the affordability crisis both for buyers and for renters as investors needed to pay more for rental inventory.

This is where the BC Government has stepped in with a 15% foreign buyer tax. By taking some of the money out of the market (or pocketing a big bonus if it comes in anyway) the government is hoping there will be less pressure on house prices to increase. This has a compounding effect too. As sellers in Vancouver were taking money to the suburbs pushing prices up in the suburbs.

Don’t Listen to the Nay-Sayers - The Market Already Peaked

We have already heard a chorus of complaints about the 15% tax from those who profited most from the wild sellers market, but they are wrong. The 15% foreign purchase tax only went into effect August 2nd, it was only announced with a weeks notice, and there was a buying rush in the week leading up to it. However, actual July real estate market numbers were already down from the prior year INCLUDING the month end foreign investment rush. So when we start hearing from sellers and other profiteers complaining the 15% tax is hurting sellers, you can look them in the eye and tell them the market had already peaked before the tax.

The Great Pendulum

Everything in business is on a pendulum. In 2015/16, the pendulum swung high to the ‘sellers’ side of the market, and we have seen it start coming back. The question now is how far back does it go?

Sticky Pricing

Economic theory says prices go up easy but are ‘sticky’ on the way back down. This makes sense as sellers have an idea what they think their house is worth (after all, Ted across the street sold for $$$ last month) and a ‘greed’ mentality says they should be able to get the same. It won’t be until the house has been on the market for 30, 45, 60 days that sellers may start to realize they won’t get their price. So pricing will stay up for a while no matter where the pendulum goes.

Seasonality

Real estate is seasonal and the busiest time of year has always been in the spring and early summer. If the market peaked in June, we are in for a decline month-over-month, possibly in conjunction with year-over-year. This could lead to the ‘bottom dropping out’ faster than expected. In reality, we are at 30-year market highs, coming back down is just realistic.

Greed vs. Fear

The greed/fear relationship will change drastically if the market slows quickly:

  • Sellers - If your house is on the market for 45 or 60 days, you may worry it will never sell. This will put downward pressure on pricing.
  • Recent Buyers - If you paid market peak pricing for your house, your fear is a price decrease as you will go ‘under-water’ on your purchase. These owners tend to hold their investment waiting for the market to rebound rather than sell at a loss reducing house stock for sale. This takes supply of houses out of the market.
  • Current Buyers - Buyers may be able to get a better deal from sellers in the market. Watch for buyers to negotiate more into the deal (like home inspections) and post deal re-negotiating
  • Past Sellers - These guys are living it up as they cashed out of the market. Some may come back with investment money if prices drop.

Return of the Buyers Market?

After 4 years of consecutive real estate market growth and prices increasing to where many experts are saying it is unsustainable, 2016 will likely be the end of this record sellers market.

The question for the fortune tellers now is how far does the pendulum swing? Do we go to an extreme buyers market where prices rapidly fall or do prices largely hold and house volume calms down?

BC’s Lower Mainland remains an attractive place for people to live and has some built-in pressures which keep prices higher than elsewhere in Canada:

  • Limited land to build on:
    • North - Mountains
    • South - USA
    • West - Ocean
    • East - Agricultural Land Reserve
  • Population growth largely through immigration and large immigrant communities
  • Attractive weather for Canadian migration
  • A modern economy for the future with great international ties
  • Combination of sea, air, rail, and truck port facilities (inbound and outbound)

Consumer Protection

My interest as a Home Inspector is looking after buyers. In the peak of 2016, buyers were so fearful of losing the change to buy a home, they skipped home inspections and bought anything they could make a deal on. Unfortunately, this put the buyers in a lose/lose position as not only did they pay maximum pricing, they also bought houses with unknown expenses which will haunt them for years to come.

As I look forward from mid-2016, I’m anticipating a market slow-down, and perhaps a ‘major’ slow down back to 2012 type levels (which was still a good year all things considered). Of course, a slow down like this will put downward pressure on pricing which is not favourable to sellers so we may see less houses on the market.

Overall, I think for professionals who make our living on real estate, it is time for a bumpy ride.

 By James Bell - Author | Owner/Operator of Solid State Inspections Inc