From discussion at reddit.com (25 Jun 2012):
ionpulse: “Housing in Vancouver is overvalued (bubble!) so the value of homes will ‘diminish’, affordable housing or not.”
mike_sol: “That’s been said before, and it will be said again; but while the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.”
incognito_crocoduck: “We’re seeing it in a micro fashion right now. The factors that should be causing a sag in the market are all in play, but that sag is being delayed and perhaps even lessened because people are simply refusing to lower their prices below what they think they should get.
People are perfectly willing to sit on the market for up to a year rather than go below their preferred price range. Eventually most of them find a buyer and prices stay relatively high – the market just moves slow as molasses.
The economy isn’t in the state where many people are truly desperate to sell, and unless that changes dramatically prices can only go down so much.”
We disagree with the last two commenters.
For one thing, 600K houses may very well become 200K houses again when the bubble completely unwinds.
And for another, we don’t by any means need a weakening economy for the speculative mania in housing to collapse (even though we are indeed at risk of an economic ‘squeeze’ by virtue of local and international factors).
Mostly, however, we disagree with these posters regarding the psychology of sellers in a falling market.
Many people seem to believe that, in a stagnant or falling market, sellers will simply take their homes off the market, or simply ‘sit’; even prospective sellers themselves seem to believe that’s what they’ll do. But they are speaking from their current perspective, where they have been conditioned over years of Vancouver RE price increases that homes are ‘worth’ ‘x’, and are soon to be worth ‘x + y’, and thus they can’t possibly imagine ‘giving them away’ for less, or ‘selling for a loss’, or even the idea of houses selling for the same prices they fetched a few short years ago.
Further, the very brief 2008-2009 drop conditioned market participants to believe that dips would be short-lived; that the market is ‘bullet-proof’.
None of these beliefs takes into account the market psychology that will exist when price drops clearly declare themselves. All it takes is for a handful of necessary sales at lower prices to establish new, lower price levels that are modestly but definitely below the levels at peak. Once prices show that they are dropping, a percentage of potential sellers will stir. Those who own multiple properties with leverage, those who are holding ‘flips’, those who had planned to sell to fund imminent retirement, those who had been waiting to ‘pull the trigger at the top’, and other subgroups, will come to market.
Greed for higher prices will be replaced by fear of lower ones.
There will then exist a situation where sellers are competing with other sellers for a smaller pool of buyers.
Anybody who has been a participant in a market which is unwinding from speculative heights knows the psychology that prevails as prices fall. The prevailing sentiment is very, very different from that on the way up and at the top. Seller confidence and patience becomes doubt and impatience, and then urgency.
We never expect the Vancouver RE market to move as rapidly as markets for stocks or commodities, RE always moves slower, but the factors at play in the unwinding of different types of speculative mania are the same, and the price charts for manias in all markets look remarkably similar after the fact.