It's Starting

Real estate inventory is now ballooning in all major Canadian housing markets. Most notably inventory is skyrocketing in Greater Vancouver, where many so called experts have said that the market won't have a price correction. The not so far away Fraser Valley market is already saturated with over 7 months of inventory and the inventory keeps hemmoraging through the normally strong spring selling season.

The few lonely voices that have been predicting this exact scenario are being vindicated in their own eyes but villified as doomsayers by others. Many real estate industry pundits are touting this new market as a 'balanced' one but this one doomsayer says 'balanced' is just another word for on the way to the real estate apocalypse.

Mohican thinks that it is becoming pretty conclusive that 2008 is the year the real estate market will enter a prolonged buyers market and prices will moderate from this point on for several years. I fully expect that urban condos, where the price to earnings ratio has hit astronomical levels above 30, prices will correct to bring P/E levels to the 10 to 15 range. This means that prices in urban condos will correct by 30%+.

Suburban markets where the price to earnings ratio has not reached such lofty heights will likely see less of a correction but a hefty price reduction nonetheless. Price decreases ranging from 15-25% will be common in markets from Pitt Meadows to Langley to Chilliwack. Wherever rents cannot sustain the purchase price, we will see prices correct to the level that rents can sustain them.

Mohican's advice at this point in time is do the math. Figure out what a property is worth and don't pay any more than that. If you must shop for real estate, make lowball offers that make sense using this formula.

{Fair Price} = [1/{Five Year Fixed Mortgage Rate}] * [{Annual Rent} - {Property Taxes + Maintenance}]

For example:

A townhouse rents for $1500 per month has maintenance of $150 per month and property taxes of $150 per month. The five year fixed mortgage rate is approximately 5.9% right now.

{Fair Price} = [1/0.059] * [{1500 * 12} - {150 * 12 + 150 * 12}]
{Fair Price} = [17] * [18000 - 3600]
{Fair Price} = $244,800

Have fun and don't get robbed.