“Most years since 2005 have seen September inventory at least as high as Octobers but not by much. This year looks to be on balance a hybrid 2008-2010 scenario: inventory is off its highs but still elevated, sales are lackluster, and prices are starting to drop, but nothing as of yet that as yet looks as acute as 2008. So what can be expected for the rest of this year and next for sales and inventory?
We can first compare to 2008. 2008 saw Vancouver get hit by a freight train, most likely in part because lending was becoming difficult, with higher mortgage rates than today’s, but early 2009 saw such a dramatic decrease in price-payment ratios there was an immediate response to housing activity, in part buoyed by robust population growth. Both these shots in the arm are for the most part no longer present.
Nonetheless we are still in a mode where low interest rates are allowing some households to reduce their payments as their pre-2009 financing terms expire, and this tailwind will be mostly spent in a year or so (and as of now it’s mostly spent already). Rents are increasing and have been on the tight side in the past 2 years or so.
A slowdown in China’s investment spending has likely led to less capital flows being invested in Canadian real estate this year compared to 2009-2011. And this is not only because of so-called “HAM” but also indirectly through a recent boom in hard commodity prices that has subsided somewhat this year — look at how BC-headquartered resource company equities have been doing since 2009.
The Chinese central government has already approved a significant stimulus spend to come into place in Q4 of this year. That will lead to additional economic activity but this is unlikely to have the same impact as previous stimulus efforts as much of the spend will go into servicing existing outstanding nonperforming loans. I would expect some uptick in capital flows into Canada in 2013 but nothing like was seen in the past couple of years and will likely be short-lived.
Mortgage rate spreads have increased for a variety of reasons since 2011, which has partially offset falling interest rates seen earlier this year. Going forward we can expect further crimps on lending through increased spreads and increased loan rejections for Vancouver-area mortgages.
Population growth has continued to slow, in part due to unemployment still being elevated. This looks to be a cyclical trend that is highly dependent upon residential construction activity. It is the nature of BC’s economy that construction boom leads to population growth but as completions mount, population growth subsides, as it is doing now. This cycle looks to be on roughly a 10 year period and it looks 2012 and 2013 lie in a downdraft.
Units under construction are elevated relative to population growth and still appear to be increasing. As completions mount later on this year and into 2013 this will provide an additional headwind for the housing market.
Are there factors that could produce a renewed bout of strength? Well some navel gazing is in order — I for one did not anticipate the veracity of the stimulus from governments and how strongly they affected house prices. I am, now, trying to keep an open mind as to what could come to the rescue this time round, though any insight into what this might plausibly be would be greatly appreciated. A markedly improved US economy in 2013 would be a positive for Canada as a whole.
Aside any additional strength from factors not considered above, I see continued elevated inventory and lower sales continuing through the rest of 2012 and likely through 2013: we need only look at the early part of this century to see the effects of lower population growth. I think the months of inventory levels will be enough to put a downwards pressure on prices as measured on a year-over-year basis. This will not mean that prices are monotonically going to fall — seasonality sees prices buoyed in the spring for a variety of reasons — but any bouts of strength are likely to be muted before renewing their descent in the second half of the year. How much? I’ll say -5% by the end of 2012 and a further -10% by the end of 2013. And that is only a guess based on what I can see based on the factors above. If factors I considered above combine in some way to exacerbate effects, or if some real sh!t starts going down in, say, Asia, things could get worse.”
– jesse (YVRHousingAnalyst) at VCI 17 Aug 2012
jesse’s price drop estimates are conservative but we reckon they’re sensible: they’re the high probability outcomes for the next two years.
We’d add that at any point buying could slow more rapidly, via the effect of sentiment change. If it suddenly becomes ‘common knowledge’ that prices are dropping (this is not yet the case), buyers would lose the desire to overstretch to buy, and the market could freeze up.