Thursday, September 02, 2010

Single Family Home Price to Fall to $435,000 by February 2012

The Victoria Real Estate Board stats are in for August and it is BAD! 425 total sales is about 50-60% of the 'norm' of the last six years for August.  This comes in the wake of the Canadian Centre for Policy Alternatives paper on the housing bubble in Canada.

Total Sales for August
  • 2010 - 425 - 7th highest out of 8 so far
  • 2009 - 764 - 5th highest (Sept 12 sales higher)
  • 2008 - 517 - 7th highest
  • 2007 - 846 - 8th highest (Spet marginally higher)
  • 2006 - 694 - 5th highest
  • 2005 - abt 750 - 6th highest 
  • 2004 - abt 685 - 6th highest

Total Single Family Home Sales for August (I do not have detailed monthly data from before January 2006)
  • 2010 - 197
  • 2009 - 366 - 8.9% of year's sales
  • 2008 - 244 - 7.3%
  • 2007 - 399 - 8.9%
  • 2006 - 328 - 8.2%
Based on these numbers, total sales for 2010 for single family homes will be low, I am estimating 2800 to 3000 total single family home sales for the year.  This would be the lowest number of sales since the early 1980s.

So what has been happening with the price?  Average single family home sale price has dropped from $615,004 to $586,676, that is a 4.6% drop in one month. This means a house selling now will have seen more or less no increase in value in the last three years. The June to July drop was 5.3%.   That is close to 10% in two months.   

2008 as a very bad year for local real estate, in terms of single family house sales it was the worst one since two years in the late '90s.   Peak to trough in 2008 saw a 16.5% drop in prices.   

How far could prices fall?  2008 saw a rapid increase in the number of properties on the market in the first eight months of the year, 2010 saw an even faster increase.    This fall and winter looks to be the worst market for sales in close to a generation, at the same time the number of units on the market is not far off record levels.   September 2010 will 4000+ units seeking out 150 buyers, 25 units for each actual buyer in the month.   In comparison, at the peak of the market in 2006, there were 2-3 units for each buyer.  This is a ten fold increase in available properties.   The ration in September of 2009 was about 9 to 1.

Seeing that the prices have dropped so quickly in two months and the selection available is at a record level, the buyers in the market will be picky, very picky.   So where could it go?   If we take the 1990s as a benchmark and apply the rate of inflation to single family homes, a realistic average price is about $325,000.   Is there a chance we could reach this price?   Within a year or two this could very well be the case.   This sort of scale is the drop they saw in Toronto in the early to mid 1990s.   The early 80s in Vancouver were even worse, if that is where we are at, we could see a drop to $250,000

As of right now, anyone that bought a house after February 2007 is looking at no increase in value or a loss in value.   Factoring 2% inflation and a 5% cost to sell a house, anyone that bought a house after February 2006 is looking at no net gain in real terms.   The only people that are actually ahead of the game are those that bought more than five years ago.

One impact of this is that there a lot of people that are going to be falling into negative equity and this will lead to a rise in repossession.   Reposed houses take the market down because they are priced lower and they tend to empty.   A bigger impact will come from people not being able to sell and move up the property ladder.   

There were people that bought houses and saw $100k increases in value in a couple of years.   This allowed them more equity for their next house and allowed people to move to better neighbourhoods and bigger houses.  If this stops, Gordon Head is in a lot of trouble.

Finally, there are a lot of people out there that are no longer going to be convinced that buying a house is a good idea at all and that they are better off renting and saving money.   Certainly I was strongly influenced by my experience as youth in the 1979 - 1982 boom and bust in the Lower Mainland.   This dissuaded me from buying a house close to Gonzales Bay for under $50k in 1985.

So my final projection is that we will see total market drop in average prince for single family homes of about 33% by the spring of 2012 of $435,000.
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