“The likely scenario is rents increasing slightly above or at inflation and prices correcting over several years. In the US, prices corrected over about 7 years.” …
“To revert price-rent to the middle of the longer-term historical bound in 7 years, with nominal rental inflation of 3%, prices would need to change by -35%, or -6% year-on-year.
To achieve -6% for each of 7 years would require average MOI to be about 9.
2005-2011 MOI averaged 5.4.” …
“A higher MOI is a combination of higher inventory and lower sales. Historically, higher MOI has been a combination of both.
If prices are to correct like they did recently in the US, prepare for a prolonged period of high inventory and low sales.”
Look through jesse’s entire presentation.
His short term and long term hypothesis and analysis is persuasive.
MOI is definitely a very good way of assessing price pressures in the short term, and we are grateful to jesse and others for highlighting it’s importance in recent years.
For what it is worth, I still have some unformed hunches about the relationship between MOI and price drops possibly changing under market conditions that we’ve not yet seen. Could you see data points off the correlation line under certain circumstances? Wouldn’t seller panic possibly take us off the correlation line? (Making larger price drops at lower MOIs possible?). The US chart suggests not. It’ll be interesting to see if our market’s descent produces any MOI/price relationships off that line.
Regardless, I agree regarding the long term primacy of the rent:price ratio; it’s the crux, the most important fundamental measure of a property’s value over the long term. Vancouver RE prices have to, somehow, reconcile with historic norms in this regard.
I strongly suspect this will happen almost entirely via price drops. jesse uses the example of 6% drops per annum over 7 years. We’re aware that isn’t the only scenario that he sees possible. We’d add it’s one of the only scenarios we definitely don’t expect. However the unwinding occurs, you can be sure it won’t be orderly and linear. As regular readers know, we’re particularly interested in the effects of sentiment, and anticipate that, on the way down, we’ll see at least two periods where seller panic sets in. One will likely occur at some point before we hit 2009 lows…. another when we drop below 2009 lows. During those periods price drops will accelerate. Before the trough we’ll definitely see some years with double digit drops, and may even see a year of flat or even slightly advancing prices; possibly after a bounce off the 2009 lows.