Dude, Where’s My Inventory?

Or as they say in West Vancouver, “Whither Inventory?”

I remember a short 4 months ago local real estate blogs and forums were full of predictions of 25,000 to 30,000 active listings in GVREB by summer 2009. Well, it looks like that is going to be a bit of a whiff. The question is, where did all that inventory go?

To answer the question, the first thing to remember is that the population and dwelling count in Vancouver are pretty much fixed. There is of course a steady increase in dwellings as the population grows but, recently, we have seen a significant increase in housing stock above what population growth can fill. When we hear that inventory is down compared to this time last year, it does not mean the housing supply suddenly shrunk. Housing supply for those wanting to buy has shrunk. As mohican’s analysis has shown, reduced supply with higher demand is correlated to higher price changes and an increase in prices recently is not unexpected.

So, where did all this inventory go? Simple: it went back to generating rental income for the owners. There are 2 players in the housing business: landlords and renters; owner-occupiers happen to be both landlord and renter. The number of landlords and renters must balance. That means, effectively, for every landlord who decides not to sell, there must still be a renter available to fill the property (putting “dark” dwellings aside). And for every first-time buyer entering the market, there is an upcoming rental vacancy.

It can be easy to lose track of what really matters with real estate. When there is a long bout of housing oversupply, whether listed for sale or not, both rents and prices will eventually fall, with inherent oscillations of rents and prices along the way. Ultimately the utility provided by housing, in the form of the rents landlords are able to extract from its users, is all that backs prices.

What we are witnessing now is significant wage deflation and dwelling oversupply -- a one-two combination -- meaning overall rents are under pressure. The landlord (or owner-occupier) who has pulled his listing has in essence become a speculator again, but now faces an additional erosion of rents as average wages fall. The speculative game is doomed to fail eventually, though whether one opts for amputation (selling at a loss) or gangrene (low rental yields) is entirely the decision of the patient. I know which one the doctor recommends.

So is the low inventory an indication of a market bottom? No. Looking at the overall dwelling supply compared to the ever-shrinking pool of money available to generate income for these dwellings, we know the endgame.