Many prognosticators, extrapolators, eternal optimists, and kool-aid drinkers have concluded that the worst is behind us in terms of price drops and I will now tell you why that is far from being the case.
Quite simply, there is TOO MUCH DAMN SUPPLY for the level of demand we had last year nevermind the level of demand we see today in the midst of a full blown credit contraction and recession. Shockingly ;-) people don't really want to commit themselves to a 35 year payment schedule, with payments double their current rent, when their job prospects are weak or at risk.
For those of you who are now planning on waiting until 'the market recovers' to sell your home, you may be waiting many, many years. The real estate market is not like the stock market, where crashes and recoveries can happen over a period of weeks or months. The real estate market takes years to exhibit the same market movement so get honest with yourself and don't let your realtor give you some mumbo-jumbo about a spring market rebound because the facts just don't bear that point of view out.
So the question becomes - When will we see more demand and less supply - ie. a recovery?
The answer of when a recovery will come is not complicated and actually we can make an educated estimate of when supply and demand should come back into balance. When supply and demand come back into balance, the worst of the price drops should be over and we can reasonably expect a 'recovery' of sorts, or at least no more big price drops! This doesn't necessarily mean a return to the rapid price appreciation of the bubble years nor does it mean that we will attain the lofts heights of 2007 pricing again soon, in fact, it is likely that we will not see spring 2008 peak pricing for at least a decade and if we adjust for inflation, my children may never see that day.
In the current supply / demand situation, with well over 15 months of inventory in every major BC real estate market, we will see price drops in the order of -2% or more per month. This has been true of the past year.
For argument's sake, let's just say that the demand in the current real estate market does not deteriorate further and again let's imagine the looming supply of new homes under construction that will complete in the next 18 months is reasonably around 20,000 units. With current existing home inventories in the Greater Vancouver area and the growth in listings that is typical for the first half of the year we should see approximately 25,000 units for sale by the time May or June rolls around. Sales will likely be in the 1200 to 1500 per month range giving us a months of inventory metric well over 15 months again.
This means that 2009 will not be a positive year for prices in the local real estate market. In fact, assuming the trend shown in the chart above holds true this year, we should see continued price declines of 2% or more per month. If there is a further influx of inventory via new home completions or existing homes coming onto the market, or a further deterioration of demand, things could be much, much worse.
In regards to prices, here are my best case, reasonable case, and worst case scenarios for 2009:
Best Case - average of 2% declines per month, inventory does not exceed 25,000 units, sales hold up at 2008 levels, benchmark price finishes the year above $525,000.
Reasonable Case - average of 3% declines per month, inventory does not exceed 30,000 units, sales fall modestly from 2008, benchmark prices finishes the year above $475,000.
Worst Case - average of 4% declines per month, inventory exceeds 30,000 units, sales fall dramatically from 2008, benchmark prices barely finish the year over $400,000.
If these predictions seem alarming, then you haven't had a good look at the facts yet. There will be no recovery until 2011 at the earliest. For those of you looking to sell a home this year, get real, and drop your price to be the lowest in your neighbourhood, otherwise it isn't going to sell. For those of you looking to purchase, wait, or drive a very hard bargain, and be prepared for further price drops. If you are a developer, cut prices hard, 30% or more, and finish up your projects fast. If you are a city that happens to have a huge development full of unsold units on your hands, get rid of them, FAST.
Real estate prices will be 20-40% lower than now only 12 months from now so move fast if you're selling and move slow if you're buying.
Good luck because You Ain't Seen Nothin' Yet.
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