Market Timing

Some discussion here about market timing in real estate this week and whether it can be done.   Thought I’d add my 5 cents to that discussion.

Market timing in the real estate sense would be to either buy or sell based on expectations of where the market is going.  There are several kinds of market timing in real estate:

  1. For non-owners, choosing to delay buying based on an expectation that prices will decline.
  2. For owners, choosing to sell real estate on the expectation that prices will decline and perhaps that it can be bought back at a cheaper price later.
  3. Buying or acquiring additional real estate much earlier than originally planned based on an expectation that prices will increase quickly.

Mostly we hear about the first on that list, and then occasionally we see people attempting the second.

In the stock market, there is pretty good evidence that market timing doesn’t work, but what about in real estate?   Having read many thousands of very intelligent and convincing arguments about why the market was either under or overvalued in the last 10 years, I’m inclined to think that although the local fundamentals like incomes and market conditions can be used to make reasonable predictions, the macro-level factors (credit availibility, housing policy, market sentiment, immigration, etc) are so influential that you can’t have much confidence in those predictions. Continue reading

CMHC: Victoria Overvalued

Last year the CMHC started releasing their quarterly housing assessments and I had some fun ridiculing their conclusions.   Once again they’ve swapped out the analyst in charge of Victoria, which makes it the 4th analyst in just over year, and none of them are from here.

The new report for Spring 2017 is out, and by new report for Spring 2017 I mean released spring 2017 and actually only covering data up to Dec 2016.  Again, how a measure is supposed to give an “early indication of potentially problematic housing market conditions” when the measure is at minimum 4 months out of date I have no idea.

They analyze the housing market based on evidence of Overheating, Price Acceleration, Overvaluation, and Overbuilding.  Let’s go through their analysis in detail.


Their definition of overheating is a sales to new listings ratio of 80% or higher for the quarter.   This is relatively sensible, although the threshold is quite high.   Looking back at recent history, the hot market recently and the mid 2000s would have been identified as overheating.  Note that the overheating evidence does not go higher than “moderate evidence” because it is only based on one metric (sales/list ratio > 80%).

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How to mislead with charts

What would you conclude if I showed you this chart?

With 4 months of declining medians it seems like prices are declining in the core, right?   Are people maxed out on price?   Are the Vancouver buyers not coming?  Are people scared of the green party winning a landslide?   Is it those Chinese capital controls beginning to bite?

Let’s zoom out a bit.

Hmm..  Looks a bit different but perhaps a market top?    Doesn’t this stupid website say the market is “ludicrously hot” on the right side??   Hardly seems like strong appreciation in the last year with prices in April 2017 and May 2016 close to $800,000.

Let’s zoom out a bit more.

Now the graph gives a totally different impression.  The big decline from the first graph is lost in the noise and the actual trend of about +$100,000/year reveals itself.  Monthly medians are notoriously variable.   Sometimes that variability manifests itself in large changes (like the increase of $140,000 from December to January) and sometimes it results in a stretch of steadily declining prices.

Could it be some sort of top?  Sure.  If we get another 4 months of price declines then there is something going on, but so far it’s just that much noise.  It’s human nature to spot patterns in noise, and so we glom onto these things when we see them.   This is why I think that while data is interesting, it doesn’t really help people form an accurate opinion of the market without interpretation.   For example Zolo has a great page of stats for Vancouver but what they are actually highlighting in many cases is the noise, and in other cases they have the signal but it’s not obvious to someone not familiar with the details of real estate markets.

Regarding our market, I still believe that before we see prices slow down we would need to see a matching pullback in market conditions.  This would be something to watch out for and I’ll look into what a market top actually has looked like in Victoria in the past.   When the current runup is over, will we get any warning, and if so, what should we be looking for as an early warning of the market rolling over?

Foreign buyer tax still working as expected

The foreign buyer tax has been in effect for 8 months now, and despite a lot of hand wringing from the real estate and construction industry, as well as fear from Victorians that it might push international buying activity to our market, it seems to be working as intended.

The government has stepped up the timeliness of the data and they are now no longer 2 months behind publishing stats their property transfer tax transactions.   So here is the latest data for Victoria and Vancouver.   In percentage terms, we can see that outside of the spike in October, foreign buyers have settled in around 4.5% of the market.   Not insignificant, but also not a huge number (there were only 25 foreign involved transactions in February).

Looking at the sales volume, the picture is much the same, considering that the sales volume should be decreasing into the winter so the decline is likely more seasonal than indicative of a slowing of interest. Continue reading

Months of Inventory: all you ever wanted to know but were afraid to ask

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:

  1. 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.
  2. 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). Continue reading

Hot Vancouver Money

Lots of discussion lately about whether we are being overrun by the Vancouver hordes, and if so, whether that will continue.   After much discussion on this topic last year, there is certainly no shortage of hyperventilating in the news about those wealthy Vancouver buyers snapping up properties.   Vague stories of Vancouver interest mashed together with anecdotes of bidding wars combine to paint a scary picture for locals hoping to get into the market.  Buy now or be priced out forever!   As usual the stories are light on logic and won’t help anyone figure out whether Vancouver buyers are actually a big factor here.   So let’s take a look.

Starting with the traffic on this blog, there was certainly an uptick last spring from Vancouver visitors, reaching almost 20% of traffic in March and April.  A proxy for the Vancouver buyer?  Well when a property is sold, the agent fills in a field called “Buyer city” on the listing, which indicates where the buyer is from.   Yes the data isn’t perfect since some agents don’t fill it in, citing the protection of privacy (about 5%).   But despite much gnashing of teeth about how buyers might rent here first and be counted as locals, it is a consistent measure of where buyers are coming from.   Think of it as a lower bound for measuring how many buyers might be coming from out of town.

Personally I find this graph truly astonishing.   While I knew Vancouver buyers were a factor last year, the magnitude of the difference to previous years really wasn’t apparent to me.  It’s quite clear that Vancouver buyers started increasing in 2014, grew more in 2015, and absolutely exploded in 2016.

At the same time, it is interesting that this year to date, Vancouver buyers are way down again.   Was this some kind of freak lemming migration that only happens every few decades?   Or will the Vancouver buyers pour in again this year?   I’ll keep monitoring this.

Equal affordability, but some affordability is more equal than others

I’ve yammered on enough about affordability and how despite being at record high prices, mortgage payments as a percentage of incomes are only middle of the road compared to historical norms.   Looking at the latest numbers for January, that is still true, although it is getting more and more stretched.

So despite the fact that today’s average house price of $800,000 has more than tripled since 1993, it is taking about the same percentage of the average income to service the mortgage.  Of course this doesn’t take account the down payment.  In order to avoid CMHC, someone purchasing today’s average $800,000 house would need $160,000 while in 1993 they only needed $50,000. Continue reading

The Dregs and an HHV Update

A few weeks ago reader Barrister commented that not only is inventory low, but much of what is listed are actually just the dregs.   Those houses that are overpriced for the market and merely represent wishful thinking or fishing expeditions by the sellers with no real motivation to sell.   Of course those properties exist in both slow and active markets, but assuming that the number of sellers that are either deluded or out fishing remains more or less constant, one might conclude that with such low inventory the dregs represent a greater percentage of the active listings than usual.   Let’s take a look.

What constitutes a stale listing?   I’d say in this market anything that’s been on the market for over 3 weeks.  Any commodity house that’s priced right should sell more quickly than that so those that linger are overpriced and at best will have to drop their prices or wait for the market to catch up.

Out of over 1000 properties on the market, the majority are actually just the dregs sitting on the market for sometimes years in the vain hope they will be sold at unrealistic prices.   Of course luxury properties would be expected to sit longer so not all of the dregs are necessarily overpriced.  On the other hand you have to keep in mind that a good chunk of the 364 properties that have been on the market for less than 3 weeks are overpriced and just haven’t sat long enough to qualify as dregs.   The common trick of relisting stale properties means there are probably fewer than 300 serious sellers of residential property right now.    Continue reading

Low inventory and high prices starting to bite in core neighbourhoods

For a year it’s come up regularly that at some point we must be hitting minimum inventory levels and sales just can’t be sustained because there isn’t anything to sell.  Well the market continued to prove everyone wrong, with December matching the year before despite there being 1000 less properties for sale.  At the same time prices in the core have appreciated more than the outer areas.

We’ve managed to eek out year over year increases every month in 2016 but if you look closer, some of the most popular neighbourhoods seem to have hit a wall in 2016 and sales have fallen year over year.   Oak Bay is the most prominent one, with large sales declines compared to last year.

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Affordability Recap

A few posts ago I dissected the CMHC housing report which still stubbornly refuses to acknowledge that the Victoria market is anything to be concerned about.  I concluded that the only explanation for their report might be that affordability of single family houses is not out of line with historical norms due to our very low interest rates.

Overall this fell in line with previous measures of affordability that I’ve done using different data sets of income.   But what about condos and townhouses?   It is logical to assume that as the city grows it will become increasingly dense, and a greater proportion of residents will be living in higher density housing, whether by choice or necessity.   Sales are currently split about 60/40 between detached and strata properties, and that doesn’t count all the pre-sales that don’t hit MLS and thus never appear in the stats.  It’s safe to say that half of all purchases are for something other than a detached home.

First of all, the price to income of all property types has risen throughout the years.  This is to be expected in an environment of falling interest rates.  Like I’ve said again and again, people look at the monthly payment not the total price.   That’s why we have a crisis in auto loans and that’s why we have a massive mountain of mortgage debt in this country.


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