Last week I started increasing my real estate market reporting to include weekly updates.
My secondary objective for this increased coverage is to learn what a recovery scenario might look like, and to be able to understand the shape it will take. Until that happens, I'll likely continue this practice.
My primary objective for this increased coverage is to monitor the important indicators that we can use in an attempt to determine whether nor not we will see major changes in the market in the short-term. This brings value to my clients, and helps them make a decision in their best interest, and ultimately, it's my fiduciary duty to do everything in my power to help them do that.
There is one question everyone wants the answer to:
are prices going to fall?
The easiest way to answer that question would be to look at price, right?
You tell me:
Real estate & the macroeconomy:
There are a few different metrics we'd use to answer that question. Some of them are in the macroeconomic outlook, and none of them look good - which we're all pretty aware of (or should be) by now:
- unemployment is rising
- credit creation is declining
- immigration is likely to decline
Real estate & the microeconomy:
The microenvironment is a little more nuanced, and requires close attention for people who aim to be active players within it. Microeconomics allow us to analyze a couple of different factors here, all of which have been used in the past to allude to growth. If you assume the correlation means the same thing in a deflationary environment, that would tell you whether or not we'll see a price decline. When you look at these metrics in order, they compound to create a scenario that tells a story about price:
- absorption (days on market) - how fast units are being purchased
- volume (sales to listings ratio) - how many units are being purchased
- price (sale to list price ratio) - how much buyers are paying for the units
April 17, 2020 York Region Real Estate Absorption:
When we analyze the absorption cycle of properties in York Region, it's clear that covid-19 has caused a slowdown. Properties are spending more and more time on market prior to selling. While this can be clearly attributed to social distancing challenging the very nature of transaction, it's also an indication that excess demand is no longer present.
Longer time on market means more inventory. More inventory means more choice. More choice means...
April 17, 2020 York Region Real Estate Volume:
We can look at volume objectively or relatively. When you look at it objectively, you can see that we're seeing fewer listings and fewer sales. It's pretty simple to understand the significance of that, but also easy to understand why it's happening - the economy is on pause:
When you look at things relatively, we learn that purchase volume is declining at a faster rate than sales volume. This means that despite supply scarcity disappearing, properties are selling at a lower rate than they're entering the market. If you loosely apply the logic that the only people who are selling in a pandemic are people who need to sell, then this creates a scary-looking scenario:
You read that right. Just 20% of weekly listing volume is transacting - down from a high of almost 90% in March. With 2,215 active listings, that leaves us with 63 weeks of inventory.
63 weeks of inventory.
This finally gets us to the place we want to be... price.
April 17, 2020 York Region Real Estate Prices:
The easiest way to forecast whether or not price is going to decline is to look at it like you'd look at a bid/ask spread table on the stock market... and in this case, you're seeing declining bids and declining asks. Real estate runs on a much longer sales cycle than the stock market, but you know how that story ends if it's not changed. Last week, I said if we could stay at 98% sale-to-list price ratio, we might see some price-safety in the short-term as opportunism from previously marginalized buyers propped up the price floor.
This week, we reached a new low sale-to-list-price ratio of 97%.
So, if you're concerned about prices, you ought to make an educated assumption about how you think this pandemic+recession scenario is going to play out (think macro) and start thinking about where the bottom is. This is where you get to be grateful for a long sales cycle. It gives the economy more time to correct while prices try to find a bottom.
So, let's return to the question at hand:
are prices going to fall?
Today, I'm able to tell you that in the short-term, prices are already falling. The first graph in these series demonstrates a declining trend in the median sale price for homes in York Region. You might look at this graph and see the anomalous increase in the average price, which media tend to enjoy using as a metric for growth. This is why you always see the January-April "growth" each year, because it's easy to ignore the selection bias that family homes (spring market) are bigger, and more expensive.
Even prior to Covid, I would typically say that the answer was a relative yes. In a best-case scenario, every ounce of stimulus policy works exactly as intended, and we see a no-growth environment. Toronto's housing market, and the Greater Toronto Area in general, has a lot of froth that would be immediately erased in a no-growth scenario. For this reason, I would say that properties bought pre-construction at speculative values above current market have already lost value today. That's not a meaningful decline unless those values are actually erased upon completion, so, I guess you can pray that time is on your side there.
Honestly, this is always a question that most brokers are reluctant to answer, and I can understand why. For the past five years, thousands of agents have happily spewed selective data points about how prices are going to rise. There's a lot less risk in telling someone that prices are going to rise, because eventually, someday, inflation will make you correct. In the past 20 years, if you said a property would increase in value by the end of your client's 5-year mortgage term, you'd have been right most of the time. If you said the same thing between 1985-2000, you'd have been wrong about just as much.
are prices going to fall?
Since hindsight is supposed to be 2020, to answer this question, I'll leave you with a question: Is this 1990, or 2010?