Tuesday, October 04, 2016

REBGV Sales Update Through September 2016

REBGV released their stats package through September 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.

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.

Friday, September 02, 2016

REBGV Sales Update Through August 2016

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

Sales are average but 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. A few more months of "average" would set up 2017's starting inventory "base" to be healthy. 2017 could then be whatever it wants itself to be. (That was not the case at the beginning of this year when inventory was very low.)

A slowdown had to happen sometime. That necessarily meant lower sales. My suggestion is not to over-think the most recent sales data — corrections take years to manifest and a significant and near-unprecedented 20% "correction" would only return prices to 2015, let alone to where some people are hoping they settle.

In summary, evidence of a constructive evolution in Vancouver housing market conditions continues to accumulate.

Wednesday, August 03, 2016

REBGV Sales Update Through July 2016

REBGV released data for July 2016. Inventory is starting to creep up from unprecedented lows

This is mostly due to a marked drop in sales, which are now trending about average compared to the last decade. A surprisingly not-well-discussed way of increasing supply is to reduce sales (i.e. demand).

Months of inventory is, due to the drop in sales, up sharply from the low in the spring. Still low, but a few more months of average sales will bring MOI back into historical territory. If historical territory for MOI is retaken, we can expect price changes to moderate. MOI would continue to move up with lower sales rates because more properties stay on the market for longer, and begin to accumulate.

New listings are trending as they have historically.

As I have mentioned in previous posts, a return to normal levels of MOI is necessary for the market to retract from two years of significant price gains. We may be experiencing the beginnings of this process. Blame what or who you like, but from my analysis, the only thing we can say for certain about causes for a real estate market correction (or, if you prefer, "soft landing") is their proximity to the observer. It would have to be something. Not that the market is soft-landing-ing. I never said that.

Wednesday, July 27, 2016

CMHC Assessment Points to Potential Impact of Home Price Growth in Vancouver and Toronto on Canadian Market

OTTAWA, July 27, 2016 – Evidence of problematic conditions in Canada’s housing market as a whole has increased from weak to moderate since the last report, according to the latest Housing Market Assessment (HMA) released today by the Canada Mortgage and Housing Corporation (CMHC). ). In Vancouver, we now have sufficient evidence to raise our overall assessment of problematic conditions in the Vancouver housing market to high.

The HMA serves as an early warning system, alerting Canadians to areas of concern developing in our housing markets so that they may take action in a way that promotes market stability.

Report Highlights

  • Overvaluation and overbuilding remain the most prevalent problematic conditions observed across the 15 centres covered by the HMA.
  • Overvaluation is detected in 9 centres while overbuilding is detected in 7.
  • Overall evidence of problematic conditions has increased since the previous assessment nationally as well as in Vancouver.
  • Strong evidence of problematic conditions is seen in Vancouver, Toronto, Calgary, Saskatoon and Regina. In Toronto and Vancouver, this is due to the combination of price acceleration and overvaluation. In Calgary, Saskatoon and Regina, this is due to the combination of overvaluation and overbuilding.
  • Moderate evidence of problematic conditions is seen nationally as well as in Edmonton, Winnipeg, Hamilton, Montreal, and Quebec.
  • Evidence of overvaluation has increased since the previous assessment nationally and in Hamilton.
  • Overall evidence of problematic conditions has decreased in Ottawa since the previous assessment.
CMHC defines evidence of problematic conditions as imbalances in the housing market. Imbalances occur when overbuilding, overvaluation, overheating and price acceleration, or combinations thereof depart significantly from historical averages. For examples, please consult the Overview section of the national report.
The complete HMA, including national, regional and CMA insight and analysis, is available on ourwebsite.
“For Canada overall, we now detect strong evidence of overvaluation. As a result, our overall assessment has moved from weak to moderate since the last report. Moreover, the greater range of evidence of problematic conditions in Vancouver has led us to conclude that there is now strong evidence of problematic conditions in our overall assessment of the Vancouver housing market.”
— Bob Dugan, Chief Economist, Canada Mortgage and Housing Corporation
Robyn Adamache
“Right now we're seeing moderate evidence of overheating and price acceleration in Vancouver because supply is not keeping pace with demand. We're also continuing to see strong evidence of overvaluation mainly because single detached home prices are higher than those supported by economic fundamentals.”
— Robyn Adamache, Principal Market Analyst (Vancouver), Canada Mortgage and Housing Corporation

Information on This Release:

Jonathan Rotondo
Media Relations

Saturday, July 16, 2016

Teranet and Months of Inventory Update Through June 2016

Long-time readers will remember the scatterplots this blog produced outlining the correlation between house price index changes and months of inventory. When mohican first investigated and quantified the correlation it was 2007 and even with only three years of data a decent relationship was shown. We now have about 11 years of data and the relationship has held up very well under a broad range of market conditions.

The methodology is to take two datasets, the ratio of for-sale month-end inventory and monthly sales (i.e. Months of Inventory or MOI) as published by the Real Estate Board of Greater Vancouver (REBGV), and the Teranet House Price Index, then cross-correlate them with a small amount of averaging.

I present two scatterplots here, the first being year-over-year change in prices plotted against months of inventory. Prices are lagged by six months to maximize correlation.
The second graph turns out to have highest correlation, relating six month price changes to months of inventory with a three month lag. It is amazing, even after the most recent strong sales activity in Vancouver that this relationship has held so well!

This correlation is what I have recently been calling the "mechanics" of the market.

The first question is surrounding causality: are MOI and price changes coincidental or does one cause another? The short answer: MOI level most likely causes price changes.

(Months of Inventory is close to a real-time dataset -- it is reported quickly a couple of days after month-end. The Teranet HPI reports based on closed sales that are delayed by some months after prices are negotiated. Not surprisingly MOI leads the delayed reporting of the HPI inputs. MOI as I report here has a 1.5 month group delay (3 month moving average), and based on conversations with several real estate agents a typical closing time is 2-3 months. Taking all this into account, MOI does indeed lead price changes, and this matches the intuition: less supply available means more competition between buyers and prices will be "bid up".)

An interesting ancillary observation here is that the dearth of inventory has been almost exclusively due to high sales volumes and not low listing levels. Homeowners have been, at least recently, slow to change behaviour in the face of significant price changes. In addition there is an inherent and unavoidable lag between construction starts and completions (about two years for multi-units, just over a year for single detached). The amount of supply has therefore been broadly fixed and has not kept pace with the sudden change in demand. The result is that MOI has fallen to unprecedented lows and prices have shot up.

Whatever the reasons for the heightened demand (theories and conspiracies abound!), high sales and low inventory has caused prices to go up. But where do we go from here?

Current MOI is around 2. Say for argument's sake we want to "soft land" the market and return price changes to around 5% per year (never mind correcting). Sales would need to stay below new listings such that MOI can climb back to an year-round average around 5. That is a significant move from the current situation and would necessarily mean significant new listing growth, falling sales, or both, just to get things to "soft land". In other words, even a soft landing will require a significant sales/listings transient to hit the market.

The danger with a bout of significant price growth is that it takes a ton of fuel just to level things out, and there is a greater risk of overshooting on the downside. Even absent an overshoot we can expect some stomach-churning along the way. Luckily we all know what overshooting looks like so it shouldn't be a surprise to anyone if that happens.