"Balanced market" nonsense
AUGUST 15, 2012
I had to chuckle at the following quotes:
"The vast majority of markets had sales-to-new listings ratios consistent with balance between supply and demand, including Toronto and Vancouver" -RBC
"Based on a sales-to-new listings ratio of between 40 to 60 per cent, two thirds of all local housing markets were in balanced market territory in July" -CREA
The precise definition of a "balanced market" is certainly up for debate, but I'll suggest it's not when the sales-to-new listings ratio is near or at decade lows in 4 of the largest Canadian cities, whose metro areas account for just under 40% of the total Canadian population.
Just sayin'.
Readers may also be interested in this chart showing year over year change in the average house price in Canada:
Admittedly the bulk of the weakness is in BC where prices are off a mere 12% year/year, but should weakness persist in the sales-to-new listings ratio going forward, it's hard to see prices holding up in other key markets.
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19 Comments
I live in Regina and we are exempt to this. Prices here can only increase forever. Thanks to Potash, Oil and Wheat.
I would type more, but I am busy buying 4 new condo's that I can flip for triple the amount I payed in 2014.
Where can I get housing to flip... more money for doing nothing!
Good luck with that Mithan, while I'm busy saving so that I can buy at 30%-40% off in 2014 :D
Thanks for the new posts Ben, please keep them coming if your time/company policy permits!
I don't think these charts are particularly meaningful. Why don't you do a scatter plot of the sales to new listings ratio against year-over-year % change in price. You'll likely see that for most cities, a sales to new listings ratio of between 40% and 60% is consistent with only small changes in price (up or down). That is what is meant by a balanced market - Demand and Supply are in balance and so prices are relatively stable.
@withheld
Alternatively, we can express this stats in Months of Inventory. (Total inventory vs Sales ratio)
This is what the chart would look like: http://postimage.org/image/7xgv6ba11/ (courtesy of http://housing-analysis.blogspot.ca )
MOI of > 6 is so-called "buyer's market"
Okay, but that doesn't address my post. It is more useful to show how inventory relates to prices and why balanced markets are define that way, whether in MOI or its inverse.
U.S.: MOI vs Case-Shiller price index
http://static3.businessinsider.com/image/4d1b68ff4bd7c8ef4b030000-590/an...
(note the home price index Y-axis is inverse values)
I see your point however this type of approach looks squarely in the rearview mirror. Add changing policy, household debt, incoming inventory and where we are in the interest rate cycle (BoC's ability to resuscitate) to your equation.
However you define 'balanced', it implies that prices should not move. The evidence does support that assertion.
On the contrary. A scatter plot would show what happens in a average balanced market and would allow us to highlight whether current observations lie outside of normal dynamics.
your average observations are backwards looking and relying on such analysis is exactly how countless quant strategies go broke... tail events occur more often than most models allow. A little forward looking common sense goes a long way.
>> The precise definition of a "balanced market" is certainly up for debate, but I'll suggest it's not when the sales-to-new listings ratio is near or at decade lows
I don't agree. You're only looking at 8 years here, most of which were bull markets for real estate. So from the fact that sales/new listings are now significantly lower we can only conclude that the bull market is over. We don't know whether it is balanced or not. Prices will tell us that shortly.
For example, Victoria BC has had a sales/list of close to 40% for a few years now and prices have declined gently. So 40% seems about right for the lower end of the balanced market territory.
Here, draw your own conclusions on Toronto. This debate is useless at this point.
Toronto 416 Condo Sales To Listing By Area
Toronto 416 Detached Sales To Listing By Area
You can talk S/L ratios, sales, prices and whatever else, when all that matters is credit liquidity, that just declined by $4,058,917,717 dollars over the last two months as investor's risk appetite now fades for Canadian Mortgage Backed Securities, leaving lenders with limited outlets to offload risk. And so they lend less, driving sales and prices down further.
It's the same reason why every other housing bubble blew up or is blowing up. Nothing is different here.
Maybe I am misunderstanding the metric, but wouldn't a balanced market be one where inventories are stable at a moderate level or growing at the rate of population growth?
That would imply a sales/new listings of about 1, no? (for each house sold, a new one is listed)
I would rather consider balanced market a market which maintains its price increase at the same pace as the inflation, no matter how. There can be temporal boost in selling or in listing of properties, but it will not directly influence the pricing. This is, of course, an utopia.
Say about Vancouver or Toronto that it has stable sale/listing ratio is a lie:
Residential Activity in the Second Quarter of 2012
Number of Sales – 8,132
Year/Year (%) – -18.8 (from 10,018 )
Number of New Listings – 19,085
Average Price ($) – 724,319
Year/Year (%) – -11.5 (from 818,721 )
(Vancouver: Developments in 2012)
Infographic: Vancouver Detached Home Price vs Government Intervention.
Lots of squealing pigs in denial here. Keep up the good work, Ben.
Thanks for the article, Ben.
"Balanced Market" is right up there with "Buyer's Market" as the great misnomers of this stage of the cycle.
Great charts. If you get a chance, please post some more like: income vs. cost of ownership, debt to income ratio, rent vs. own ratio, percentage ownership (at all time highs). All of the math says real estate is over extended. Migration back to the historic mean average may not be a gentle one.
It looked like that GVA is till doing better than 2008. There was a price correction in 2009. This time - can we say that the effect will be similar?
Not trying to foretell though...