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The Price is Not Right… (But Not by Much) December 22, 2008

Posted by DustinRJay in supply and demand.
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In 2005 and 2006 supply was much less than demand and house prices rose.  A ratio of 50% sales to new listings ratio has historically kept prices in balance.  House prices overshot the supply/demand balance and started to fall.  The crossover of the supply/demand balance indicates a level of price support at ~$375,000.  Demand is likely to rebound slowly as prices drop.  Supply is likely to retrace the supply/price relationship.  As illustrated below, some overshoot to the downside is likely to burn through the current inventory.

Of particular interest is that supply had a high degree of elasticity in respect to price whereas sales did not.  As a corollorary, I think that to some extent:

  • Supply = f(marginal cost of supply), linear relationship
  • Demand = f(consumer confidence), nonlinear relationship

The Price is Not Right... (But Not By Much)

Click above image to enlarge.

Data:  Bob Truman, First Place Realty – Old Criteria

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Comments»

1. Rich Mundle - December 23, 2008

Supply and demand is a fundamental that seems to have been lost on people in the last few years, especially in Alberta. If jobs dry up then the demand will lower, this will be the only thing to even out the current in my opinion.

Rich Mundle – Sherwood Park Realtor

2. BradBender - December 24, 2008

The only reason prices went up is because CMHC started insuring 30, then 35, and 40 year mortgages; all in a short period starting in 2006. Demand did NOT spike, credit and leverage did.

David Dodge himself was quite upset with CMHC, arguing that increasing amortization periods did nothing to improve affordability, but instead drove up the price of housing. Canada may not have “Sub-prime” mortgages (per se), but there are certainly problems with our housing market. CMHC will probably NOT revoke it’s policy to insure 35 year mortgages; so housing will probably NOT drop back to 2006 levels. What CMHC has done is short-sell everyone’s future who bought after 2006. Existing home-owners are NO richer (in real terms), and first-time buyers are much POORER, since they must leverage themselves immensely just to get in.

Read the last paragraph here: http://www.theglobeandmail.com/servlet/story/RTGAM.20081218.wrmortgage18/BNStory/robLawPage/

Another informative link:
* http://www.theglobeandmail.com/servlet/story/RTGAM.20081212.wmortgage13/BNStory/Front/

Slowly the truth is emerging on Canada’s own housing problems. Short-sighted government policy, generous lenders, and greedy foolish home-buyers; all drunk on the euphoria of ever-increasing housing prices. I don’t know how this plays out, but the music has stopped.

3. BradBender - December 24, 2008

Radley,

Just to followup on my previous post, and comment more directly on your analysis:

I understand that you are plotting the numbers, and they seem to point to current prices, and why wouldn’t they? But you should question just WHY the numbers are what they are. Sure, demand appears to have gone WAY up, but WHY did it do that?

What really happened is CMHC increased amortization periods and thus increased the money-supply chasing housing. Voila – simulated demand spike.

I think the *real* demand level will reveal itself in 2009, and we’ll see just how much that $400,000 bungalow is really worth.

4. Running Against The Heard - December 28, 2008

Finally some common sense !!!

I couldn’t agree more with the above posts…
In addition to the comments already made…. Canada, don’t be fooled by the banks statements regarding the lending standards here being more stringent. Its a fallacy. Its true that the banks did not partake in the dodgy lending that occurred south of the border, but somebody did. They are called mortgage brokers. Mortgage brokers (not all) provided the same terms as the sub- prime lenders in the U.S. i.e no money down, no proof of income etc… All they asked for in return (if anything) was a slightly higher rate of interest and insurance. All the Canadian banks have done is keep this at arms length (pretty clever) by using third parties to do the dirty work (take the most risk). If I was a betting man I’d say median house prices could easily return to $250,000 CAD. As for condos and town houses… I don’t know… they weren’t build the way they were 25 years ago that’s for sure.

The rumblings in the commercial sector (even more fiscally skewed)
should be reason for serious concern also.

5. Sharon Hollas - December 29, 2008

Going to be an interesting 2009 that is for sure. I’m very curious to see how the supply/demand trend is going to go this year.

Sharon Hollas – Langley Real Estate

6. Greg Williamson - January 1, 2009

Post number four, I respectfully disagree with you, and unfortunately I don’t think you know enough of what you speak regarding mortgage brokers.

Yes, I happen to be one in Calgary so I do feel I can rebut your statements. Mortgage Brokers RARELY lend there own money or syndicate their own mortgages in Canada as you seem to be suggesting.

Mortgage Brokers in Canada simply introduce clients to the mortgage lenders and they alone make the credit decision to advance a loan.

It is true we had innovation in the Canadian Mortgage market similar to US sub-prime loans such as stated income products, but we had very different provisions to qualify for those loans, most specifically was a larger down payment (usually 20%) down whereas in the US they could get those loans for no money down.

As well in the US the real crisis was caused by having teaser interest rate periods on these low down payment, no income verification mortgages. In Canada we had no such thing.

Finally, at the height of the bubble in the US 35% of loans were sub-prime and toxic, in Canada we never got over 5%. 7% of mortgages in the US right now are in delinquency, whereas it is around .30% in Canada. Yes we had tighter lending criteria, and in fact the lending criteria in the last six months has become extremely tight.

Brad Bender, Radley, is correct the housing market in Calgary is approaching a balance as long as supply stays down in the coming 90 days we will balance by spring early summer.

I agree that the 40 year amortizations and some of the other innovations introduced to the market fueled some demand in 2006 and 2007, but we also had very low unemployment (particularly in Alberta, and we had record amount of net in migration which contributed to demand.

The laws of supply demand are just that, laws. If demand drops as much as you say it will, then supply will also drop it ALWAYS does. people will not try and sell a home when they feel it will not sell for the price they want. This adjustment happened in Calgary in the past six months supply has dropped 22% and new listings added (a very important stat) has dropped 40% since the peak in June 08.

As long as supply continues to drop we will balance, and it will.

7. average joe - January 1, 2009

Many people are just frustrated as they feel they are being priced out of the market, myself included. I agree with above post that prices will not plummet anywhere near as far as I want them to. It is supply and demand of course but to me current prices are too high for the average household income to afford, or at least afford comfortably. I am a single person and make in the 70-80k range. With no other debt that gets me what 270-290k approval with a 5% downpayment. Im sorry but you can’t get much of a house for that, so my only options are continue saving for a gargantuan downpayment or get a condo… neither of which are very appealing. Im sure there are literally thousands of people in Edmonton and Calgary in my exact position.

8. Anonymous - January 2, 2009

Rental Yields still suck people (Rental income vs Housing costs have a lower return than mortgage rates). You are dreaming if you think the market will “Stablize” in the next 6 months. Expect atleast another 10% hit in housing prices.

Also, some food for thought. There is an enormous surge in young Canadians simply avoiding the Real Estate Market all together, they have realized that buying a house is a bad financial decision. It is far cheaper in Alberta for example to rent a house worth 400K than to own it. Take he split invest it in 5 year bills and you are ahead. Generation I and Y are quickly realizing that it is better to live life, travel, party, and have money to burn than to be house poor just so you can say you have a house. They also are begining to realize that the workforce is increasingly mobile and as such it is a bad idea to own a house and buy and sell every 5 years as you move.

9. section 31 - January 2, 2009

Average Calgary House hold makes 100-120K and yet the average house is like 450K. Thats an almost 4 to 1 ratio! 2 to 2.5 is more realistic affordability. Anyone who pays more is throwing away there disposable income in favour of a $450,000 McMansion filled with IKEA furniture and lawn chairs.

You keep your house.
I’ll keep my life!

10. Richard (permabear) - January 18, 2009

a 10% decline is extremely conservative. look around you. carnage everywhere and Calgary is not immune. just saw competing condos in Victoria listed at $250,000 and one just accepted an offer of $200,000. and real estate will only decline 10% this year? this shows some people are rushing to the exits expecting a much larger drop and if people have that expectation it will happen. I’ve sold and im renting. it will take years to correct and this is only the first leg. the first leg is usually the strongest . expect 20-40% off from the peak by the end of 2009.

11. Joan - February 27, 2009

Hello, I’ve been reading this message board with great interest. My husband is being transferred to Calgary in May’09. We sold our house in 4 weeks in Montreal and got 2K less than our asking price.

My question to you all is, should we rent or buy? We are a young family of 4 with a family income that should be approx 100K. Incidentally, our mortgage broker thinks the market in Calgary is levelling off now.

Thanks for the advice!

12. radley77 - February 27, 2009

If this is your first time living in Calgary I would definitely rent a house for the year. During that time, you have time to evaluate what communities you would prefer to live in and if things go well with your careers and your kids schools then I’d think about buying. Also, by May 2010, it’s likely that the housing market will be on much better footing.

Good luck and hope things go well for your family in Calgary!

13. Joan - March 2, 2009

Thanks!

14. Steve - June 6, 2009

to post #11, you should definately buy. I own a couple of homes in Calgary and rent them out for about $2200 per month becauses people like you are nervous about entering the market. Obviously this is self defeating because I like people renting my houses, but my point is that Calgary is an extremely wealthy city that isn’t going to slow down in growth. By and large, your property will appreciate over time and you’ll gain equity in your home.

Also, I run a website that helps people find quality renovators in the Calgary area and it’s a busy site. My point is that a lot of people buy and renovate homes here, which is another example of the market’s vibrancy.

15. Calgary Mortgage Brokers - September 2, 2010

I agree with this post. The difference between those who are successful and those who are not is the fact that the successful ones do something, while those who are not successful simply think about doing something.
Even if the price is off by a few $1000 just keep pushing ahead.


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