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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 2, 2016 | Greed & Fear, II

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

When houses go up, why don’t more people sell? More confusing, when prices drop, why do they stop buying?

Well, it turns out human nature – not rich Chinese dudes, sleazy realtors or economic factors – is most consequential to what real estate costs. It helps explain why the natives are willing to spend $1.5 million for a moldy beater house in East Van, and yet abandon discounted McMansions a province away.

I mean, look at poor Calgary – the hottest housing market in Canada thirty months ago. Bad boy ex-realtor and housing gadfly Ross Kay mashed some interesting stats on what happened in Cowtown over the last thirty days. Shocking, really.

In February 7,928 homeowners tried to sell their properties, of which 12% were builders and 88% were regular schmucks. Of those almost-eight thousand sales attempts, 6,803 were unsuccessful, for a sale-to-fail ratio of 16.5%. Only 1,125 trades were made and Kay estimates that over the past six months home values relative to municipal assessments have declined 8.2%.

This week, by the way, the number of new listings (relative to the same time last year), has tripled. Days-on-market last month jumped 20% on an annual basis. The market is dying. So what’s going on?

The same thing as in other tough gigs, like The Peg. There are more houses currently for sale in Winnipeg than during any of the past five winters. Listings are running an amazing 60% over levels of 2011 – when people in the parka-and-mosquito capital of Canada were convinced everybody wanted to move there, or at least buy an investment property. As in Calgary (or Saskatoon, or Halifax etc.) the slower sales get, the more owners who want to sell. And the more sellers there are, the fewer buyers who show up. It’s a vicious circle.

Of course, in hot markets, just the opposite. Like nutso Vancouver. House lust is so elevated that listings have plunged. Accepting the meme of buy-now-or-buy-never, owners are terrified if they list and sell, pocketing a huge and taxless capital gain, they won’t be able to re-enter the market. So the sales-to-listings ratio takes off, just as the sale-to-fail metric in Calgary tanks. In YVR these days almost 40% of active listings find a buyer every month. A year ago it was 17.7%, and two years ago just 14%.

Those numbers mean people looking for houses to purchase have, statistically, twice as hard a time now as in 2014. It also means demand is overwhelming supply, thus a detached house currently costs more than $1.8 million, with all the price graphs having hockey-sticked. So owners fear selling now for big bucks, then having to pay even more in 90 days when (or if) they find new digs. And that fear is laced with greed, since Vancouver real estate always, forever, without fail, rises exponentially and anyone can become a multi-millionaire if they wait long enough. So they do. Finally, we have a rental thing happening in Vancouver and the LM as well, since new leasable units are precious and so many mortgaged-strapped locals have discovered Airbnb.

So last month in Van, just to sharpen the point with Calgary, sales increased 36% year/year for the best February since Jesus. Said head realtor Darcy McLeod: “We’re in a competitive, fast-moving market cycle that favours home sellers. Sustained home buyer competition is keeping pressure on home prices across the region.”

Now, consider Montreal, the second-biggest market in the country, where an astonishing 32,644 properties are currently listed, and sales suck – a sales-to-listing ratio of about 7%, forecasting downward pressure on prices in a market where there’s a 15-month supply of homes. In contrast, in the GTA – with more than twice the population – fewer than 10,000 listings are available, a 14% drop from last year and a big reason why average prices have increased.

So what do we make of this?

First, if you really want a house as an investment, then buy one where listings are rising and prices falling. That’s because valuations tumble a lot faster than rents, and you’ll stand a far better chance of achieving a decent cap rate. (Besides, we all know commodity prices will restore.)

Second, no market rises endlessly. Even demand areas get ahead of themselves and correct. To believe otherwise is to err as an investor. So smart owners in Vancouver, for example, who have seen properties they bought years ago ride  artificial wave higher, should bail. They can either move inland and buy all of Kamloops, invest the proceeds and get enough income to rent a mansion, or just wait a year and buy back at a discount. Because it’s coming.

Third, bears and bulls make money. Pigs get slaughtered.

Human nature is not your friend, so it’s usually a good bet to look at what others are doing around you, then do the opposite. If you hoovered up equities in 2009, for example, you scored. If you sold when fear was everywhere, you got creamed. Same with houses. Prices in Vancouver and much of Toronto now are purely speculative, based on cheap lending rates and dwindling supply. This can change fast. Ask a cowboy.

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March 2nd, 2016

Posted In: The Greater Fool

One Comment

  • Avatar SirTalksAlot says:

    Someone tell Captain Oblivious that Oil was over $100 a barrel three years ago, might have something to do with Calgary’s woes. The only reason to live in Winnipeg is if you have people there (good people though). BC will never crash it may go sideways for a year or two but never will it crash. Last time to get in was 2009-2013 that is now over, thanks for the heads up then Garth. Oh wait there was no heads up then only “crash is coming next year”, at least there is always a crash over the horizon. The fact is there is nothing to buy. If your reading this and you’re not here, you can’t buy a house, because there are no houses for sale. Don’t believe what you want to believe try the truth for once.

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