There are two types of demand for RE, physical and speculative. The former represents people who literally need a roof over their head. Most people either rent or own, so other than new arrivals we are looking at first time buyers and trade up buyers. Speculative demand includes all those who are buying with the expectation of price increase. This includes not only investors, but home owners who are only buying to avoid being priced out. What has happened to the demand causing all these undigested RE inventories?
Speculative demand has taken a hit from the suffering global financial crisis which suggests that there will not be any price increases anytime soon (short jerks discounted). It may even be accurate to say that speculative demand will die off and would not get resurrected until prices trends have turned around accelerating upwards again. If you ask me for a timeline, cycles suggest that it may take 7-10 years from peak to peak with metropolitans like Vancouver taking shorter strides.
What about Physical demand? Let’s face it, average Joes do not and can not buy 2, 3 or 4 homes. They buy the one primary to stay in, and if the need arises and finances allow, they may upgrade (which means one sale, one purchase). This accentuates the fact that there has been excessive buying. The bases are full. Ownership rate is up because there has been borrowed demand from the future with people who would normally buy condos in their late 20's buying in their early 20's.
What can we do about all these RE inventories? They definitely are not conducive to a healthy real estate market. First we have to acknowledge that inventory is always a lagging indicator which means that it does not react immediately to the crunch of demand. By the time inventories start to become a problem, demand is almost completely dried up. Now, without a balance in demand and supply, there is simply no sensible way to stabilize the RE market let alone move towards recovery.
When talking about balancing demand and supply, the key lies in pricing. By pricing, I am referring to the value in which they can realistically sell for. Take British Columbia for example. 8% completed sales of the listed is hardly indicative of what is the price that balances demand and supply. As discussed above, demand is basically dead leaving the increasing supply undigested. If you think things are bad now, just ponder over the following
B.C. (or more specifically Vancouver) is heavily tilted to small companies and branch offices. Smaller companies also operate with tighter margins so when the going gets tough they cut jobs faster than big companies. Also, when big companies cut, it usually target their branches and secondary employees first. Certainly bad news for Vancouver, even if there aren't as many high profile layoffs as Ontario.
With increasing joblessness, there will be even less demand. Also, there will be an increase numbers of loan delinquencies both commercial and personal, which means that there will be an increase in foreclosures. No matter how the Canadian government chooses not to acknowledge this fact, this result becomes more inevitable with each day.
Somehow I find what's happening to Vancouver now a good thing. Money should go to R&D and other industries beside real estate. Vancouver for the past 3-4 years felt like Hong Kong before the 97 financial crisis: so much money, so many expensive cars on the road, city filled with a false notion of easy money and a severe lack of investments in infrastructure for the economy's future growth. This downturn is a bubble popped, for the collective good of the economy, the people and serious idea/innovation driven economy.
What can we do about all these RE inventories? They definitely are not conducive to a healthy real estate market. First we have to acknowledge that inventory is always a lagging indicator which means that it does not react immediately to the crunch of demand. By the time inventories start to become a problem, demand is almost completely dried up. Now, without a balance in demand and supply, there is simply no sensible way to stabilize the RE market let alone move towards recovery.
When talking about balancing demand and supply, the key lies in pricing. By pricing, I am referring to the value in which they can realistically sell for. Take British Columbia for example. 8% completed sales of the listed is hardly indicative of what is the price that balances demand and supply. As discussed above, demand is basically dead leaving the increasing supply undigested. If you think things are bad now, just ponder over the following
B.C. (or more specifically Vancouver) is heavily tilted to small companies and branch offices. Smaller companies also operate with tighter margins so when the going gets tough they cut jobs faster than big companies. Also, when big companies cut, it usually target their branches and secondary employees first. Certainly bad news for Vancouver, even if there aren't as many high profile layoffs as Ontario.
With increasing joblessness, there will be even less demand. Also, there will be an increase numbers of loan delinquencies both commercial and personal, which means that there will be an increase in foreclosures. No matter how the Canadian government chooses not to acknowledge this fact, this result becomes more inevitable with each day.
Somehow I find what's happening to Vancouver now a good thing. Money should go to R&D and other industries beside real estate. Vancouver for the past 3-4 years felt like Hong Kong before the 97 financial crisis: so much money, so many expensive cars on the road, city filled with a false notion of easy money and a severe lack of investments in infrastructure for the economy's future growth. This downturn is a bubble popped, for the collective good of the economy, the people and serious idea/innovation driven economy.
We still have a problem to solve. In midst of the looming supply boom and pricing collapse, what can we do? We have to find some way of stimulating demand. Lucky for us, Vancouver is still one of the best and most disirable places to live in the world. We always have the option of loosening our limitations on immigration (which would mean reducing health care and social services as well) so as to generate new home owner’s demand. New immigrants will also improve the business conditions in BC thus creating the much needed jobs.
So at the end of the day, what can we take away from this experience? I know I have learned to be thankful that I am residing in Canada. I have also gained a new found respect for the conservative approach my dad has always preached.
So at the end of the day, what can we take away from this experience? I know I have learned to be thankful that I am residing in Canada. I have also gained a new found respect for the conservative approach my dad has always preached.
1 comment:
New immigrants may push up demand for real estate properties, but an increase in jobs and business condition is not necessarily a given. It really depends on the type of immigrants that you are suggesting to loosen the limits on...don't you think?
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