Seller’s aren’t competing with buyers, they’re competing with other sellers.
Vancouver sales dropped 27.6 per cent in November compared with November 2011, after tighter lending rules came into force this summer. The average price is down 6.3 per cent for the same period to $682,215, while the MLS home price index is down 1.7 per cent from a year ago. The average price reflects the mix of sales, while the HPI reflects price changes for typical homes. …
BMO deputy chief economist Doug Porter called Vancouver a “rather obvious exception” to the soft landing that most Canadian cities would see for their real estate markets. “I don’t know that I’d call it a hard landing in Vancouver, but it’s definitely a bumpier landing than most cities in Canada are going through right now,” Porter said. Meanwhile, it appears people thinking of selling their homes are holding off, especially in Metro Vancouver, which saw the largest drop in the country for new listings. New supply reached its lowest level in more than two years, CREA said.
“That may help avert a harder landing for prices because sellers do have the leeway to back off,” Porter said. “Fundamentally, I think that’s one of the reasons why the Canadian housing market is likely not going to have a hard landing because you’re not going to have a lot of motivated sellers – people aren’t going to be forced into it by rising interest rates or declining employment so they can take their time and wait for the market to stabilize.”
– from ‘Bumpier’ landing seen for Vancouver real estate’, Vancouver Sun, 18 Dec 2012 [hat-tip Edmund Garland]
There have been many stories that served to stimulate Vancouver’s RE mania. The most prevalent latter day myth appears to be that of the discretionary seller. We are all invited by many commentators (bankers, realtors, commenters on the blogs), to imagine the cool-headed seller deciding that, no, this is not the right time to sell, and backing off, biding their time, waiting serenely for the next leg-up in the market; in calm and comfort, perhaps next to a fire with a good book; no hurry, no urgency whatsoever.
I believe that this construct is complete hogwash.
I’d submit that, in the vast majority of cases, once an owner has made the decision to sell, they start the mental preparation for unloading that property. They move into a position where they disinvest themselves of the idea of ownership, and a clock starts ticking.. they have a building desire to convert that asset into cash, to ‘get out’ of the market. In a market where prices have barely budged, but sales are weak, they may be able to convince themselves that a more robust time for sales is just around the corner, so they may take their property off the market. But make no mistake, they remain very much in the ‘sell’ mode, they have their finger on the trigger, and they are waiting to unload. There is no intense urgency at that point; more a mode of expectation, of anticipation of coming action. Imagine now how that group of wannabe sellers responds when prices take their first substantial step down. Suddenly comparables are selling for 10% or 15% lower, and for lower prices than offers they themselves rejected 6 months before. Do these sellers remain cool? Well, a few may, but, here’s the point, a majority will not. They will experience new-found urgency, and many will rush to market. And only a few of them have to do anxious deals for prices to suddenly find themselves 20% to 25%-off the peak. And then more owners holding shadow inventory will respond, and so on. This is how speculative manias unwind.
The other side of all of this is, naturally, the buyers. There will always be some buyers, of course, at each step of the descent, but not enough to rescue the market; not enough to plateau it or take it to new highs. We won’t see a rerun of 2009 (although some of the early buyers will be “buying the dip”, in anticipation of a 2009-type rebound). Buyers will dry up because prices are falling. Yes, but won’t falling prices increase demand? asks the economist. Yes, falling prices increase demand, when those prices are falling from reasonable levels to cheaper levels such that the asset for sale looks like a good deal based on its fundamental value. But, when assets are at stratospheric prices, when people have been overextending themselves to buy at prices that are 2 to 3 times those supported by fundamentals, when people have been buying only because they anticipate future price strength, the dynamics are very different. People stop buying because their premise for buying (“prices will rise”) goes away.
Thus a powerful self-reinforcing system of price increase turns into reverse, and prices collapse. Falling prices beget falling prices. If that seems circular, that’s because it is. A ‘virtuous’ cycle turns ‘vicious’, and by this mechanism price drops that few have anticipated come to pass. Perhaps 2013 will be the first sharp leg down.