The months of inventory or MOI is one of the key measures of the balance between supply and demand in the market. It’s a simple measure but as usual it can get more complex depending on what subset of the data you use.
The months of inventory, as it sounds, is the number of months it would take to sell all the inventory at the current sales rate if no more houses were listed. So if there are 2000 properties for sale, and 500 of them sold last month, then it would take 4 months to sell every property. Months of Inventory equals 4.
You can look at months of inventory for the whole market or for a subset. For example, you could only look at months of residential inventory (no commercial properties), or you could look at months of inventory for only certain types of housing, or certain areas. I publish two numbers regularly:
- Total market MOI – This is simply all inventory divided by all sales. It is for all of Greater Victoria and includes commercial inventory and sales. This is what you will see in the weekly updates (as of March 20 the total MOI is 1.85). The weekly numbers provided by the Victoria Real Estate Board are not broken out by residential/commercial so this is the best we can do without a bunch of manual work.
- Residential MOI – This is residential inventory divided by residential sales in Greater Victoria. This is the number that will be more meaningful to people as I doubt many people care about commercial. As of February 2017 it is 1.66 (this is the number referred to in the Market Summary box at the top right).
The residential months of inventory is a good indicator of the balance of supply and demand in the market. Generally accepted values are that if MOI is under 4 it is a sellers market, if it is 5 to 7 it is a balanced market, and above that is a buyers market. Here is a look at the current values and that of the last several years with prices plotted on the left axis, and months of inventory on the right (colour coded to indicate how hot the market is).
Couple things are apparent from this:
- The market is still extremely hot with 1.66 months of residential inventory. Well below the cutoff for a hot market which is 4, and below this time last year when it was 2.66.
- MOI is seasonal. It drops in the spring until May, then rises in the summer with a small dip around October, and then peaks in December and January. If we look at this pattern over many years it becomes very clear.
The easiest way to correct for seasonality and discover the underlying trends is to take the running average of the last 12 months of readings which removes all seasonality (at the expense of making the measure a bit slower to react to changes in the market). For example, the latest reading is made up of the average MOI from March 2016 to February 2017.
This tells us whether the market is still heating up or cooling down overall. What I find useful about this graph is that there was ample warning of the change in the market. The months of inventory peaked in 2013 and slowly dropped for almost 3 years before the market really jumped.
One might argue that these overall market charts of MOI for all of Greater Victoria are too broad since they mash together condos in downtown with detached homes in the uplands, with townhomes in Langford. While true, I’ve found that though individual submarkets can diverge a bit, they aren’t that different. If detached in the core is going crazy, detached in the westshore will be rising too (a little less quickly perhaps). If condos aren’t selling then the rest of the market is weak as well. However let’s look at some subareas to see the differences in market segments.
For example, plotting months of inventory for detached houses in the core vs the westshore shows that the market in the westshore lagged the market in the core up until this spring. In 2015, the westshore was still a balanced market while the core was already a sellers market.
We could also segment by price. Single family homes under 1 million are definitely hotter than those over, but again the luxury market isn’t far behind recently.
What about condos vs detached homes? Here we see that while detached homes were more active than condos until last summer, the situation has now reversed itself with detached homes cooling off a bit, and condos in a tighter market.
You can of course get arbitrarily fine grained, but eventually you start to get into data quality issues as the number of sales decrease and the month to month variability increases. For example, comparing Oak Bay to Saanich East doesn’t tell us much at all.
One I have the data feeds up and running (mañana, mañana), the idea is you will be able to see this kind of region specific data much more easily. However as before, I don’t really see any surprises when you break it down by region. There’s been a small pullback in SFHs as prices roared upwards, and condos have taken up the slack. I suspect at this point both are about as hot as they’re going to get and the overall market will start to cool down slowly.
|The HHV Meetup is happening on April 7th at 6PM at the Penny Farthing. I have a reservation for 20 people which is about as many as are signed up. If you can no longer make it, please remove your name from the list or email me so I can adjust reservations closer to the date. Thanks!|