Richmond, BC

Can one times the real estate market, and make money by following the monthly supply/demand for homes?

The answer is yes.

Real estate follows the basic economic principle that home prices are affected by market supply and demand. As can be seen from pricing trend and data here, home prices are inversly related to the changes in the supply/demand or list/sale ratios.

Following the pricing indicator

It is generally accepted that a ratio of 6 is neutral, or the market is considered to be in balance. There is no pricing pressure for home prices to move up or down. When supply exceeds demand, the supply/demand ratio rises above 6, resulting in home prices falling. The reverse happens when the ratio falls below 6, signifying stronger demand than supply, resulting in home prices going up.

Supply/demand ratio for Richmond

Home sales activities in Richmond contribute to the overall Greater Vancouver pricing trend as shown above. The list/sale ratio below showed a clear trend as whether home prices will move up or down.

You can see from the data that the supply/demand ratio tipped over in June and July of 2008. That's when home prices falled, and reached the bottom around Jan/2009 when the list/sale ratio was at it's highest at 17.33 months of inventory. The ratio falled quickly the subsequent months, and crossed the 6 month supply ratio by April, 2009. At this point, home prices turned and gained in values due to stronger demand.

The ratio tightened further to below 3 from June, 2009 and remained around the 2,5 months ratio until today. The 15% or so drop in home prices since May, 2008 to the bottom around February 2009, recovered just as quickly by November 2009.

Future market activities and pricing trend

The above is a simple housing price indicator to follow. There are many factors influecing the supply and demand for homes. There are many economists who are sounding the alarms that home prices in Greater Vacnouver are over-valued. If you are wondering whther it is time to buy or sell, you may want to follow the supply/demand ratio to guide you with your investment decision. You can be a month or 2 ahead of the crowd by taking action before the ratio turns above or below 6.

Click the link to view Vancouver and Richmond homes currently listed for sale.

Outlook for Greater Vancouver's real estate market for 2010 and beyond

Below is a quote by James Schouw, James Schouw & Associates, Published on January 02, 2010 in The Vancouver Sun:

"Greater Vancouver's real estate market will continue to be driven by the growing number of people that simply need homes. Speculation, the catalyst of a 'bubble', is largely absent from the market due to lingering fear from the lessons of 2008. A bubble will only materialize if overconfident developers and speculators manage to oversupply demand".

Read the full article here>.

A review on current home prices and the market fundamentals are telling us that home prices at current levels are economically unsustainable.

Housing market dynamics

The supply and demand for resale and new homes are driven by market confidence. Home prices rebound due to ultra-low interest rates, and limited supply of homes. A case in point for Richmond, B.C, showed that in November 2008, there were 2,495 homes listed as compared to just 1,275 homes listed for sale in November 2009. The supply of homes was down by half!

The market dynamics may change again when market confidence is affected by external events beyond the control of the market players. A repeat of the housing correction that happened in late 2007 may happen again when there is a loss in market confidence. When signs of a market turning south are apparent, more sellers will want to sell, accelerating the price decline.

Cheaper to rent than to own

Buyers can opt to rent than to buy when they find home ownership is not affordable. A jump in mortgage interest rates will swing buyers decision, and will result in many of them staying on the sideline. Home prices are too high at current levels, as renting make more sense to many prospective home buyers.

You can view Vancouver and Richmond homes currently listed for sale.

Market confidence is the key

Market confidence is the driving force behind the high housing prices in Richmond and Greater Vancouver. The credit crunch of 2008 scared home buyers away from buying, resulting in home prices declining 15%. Rapid and successive cuts interest rates by the central Bank of Canada Canadian from early 2008 drove base-lending rate down from 4.25% to 0.25% by April 2009. Current rate stays at 0.25%. Low interest rates helped to boost demand for homes, and within a year home prices almost regained all the losses.

Facing the inevitable - higher interest rates

How long the current low interest rates environment can be maintained is anyone's guess? By 2006, home prices in Richmond already reached an over-heated level. Buyers who purchased their homes the past 3 years will not have a large cushion to buffer them from a large drop in home prices.

Outlook for the next few years

The current over-priced market will correct sooner or later. When market sentiment turns negative, demand from home buyers will collapse. When home prices are losing values, more sellers will want to sell their homes, increaasing the supply causing a rapid decline in home prices. As shown in my earlier post, there is a large price gap between current home prices, and the break-even price point for real estate as an investment.

Real estate as an investment

At current price level, the risk of capital loss due to declining home prices is extremely high. The return on investment for a rental property in Richmond and other Greater Vancouver cities is negative. Home prices will have to decline significantly before a reasonable return on investment can be expected.

Click the link to view Vancouver and Richmond homes currently listed for sale.

Why Richmond and Greater Vancouver home prices are so high?

The main driver for home prices reaching current level is ease of financing, The average family income in Greater Vancouver assuming to be around $65,000 can only afford a $325,000 mortgage (using 5% interest rate and 35-year amortization). It will appear that the average home owners can only afford to buy townhouses or condos as detached homes are out of reach.

Longer amortization and low interest rates

The availability of 35-year amortization and ultra-low interest rates allow an average home buyer to buy a home 40% higher in value, as compared to the market conditions some 10 years ago. Easy credit, financial innovation and low interest rates have now resulted in home prices reaching an un-sustainable level. See chart here>.

While longer amortization and low interest rates may account for some 40% higher in home value, the average Greater Vancouver home price around $910,000 is around 69% higher than the base trend-line price around $540,000. Theoretically, the above 2 factors help to boost average home value from $540,000 to $756,000.

Market confidence

The price difference between $910,000 and $756,000 may be attributed to buyer confidence. If this is the case, market confidence helps to lift the average home price by 20%. When home buyers, investors and speculators see that year after year, their homes increase in value, their confidence help to support the market. Those home owners who entered the market prior to 2004, are well cushioned and can weather a price decline of 30% or more.

What happens if interest rate rises, and market confidence collapses?

When the market sentiment turns and confidence disappears, home sellers will swarm the market. Home buying will slow resulting in home prices declining. The important ratio to watch is the supply/demand ratio or "month of inventory". A reversal in the current ratio around 2.5 months to double home inventory to 5 months supply or more, will be a clear signal for a decline in home prices.

Duration of price decline

Over the next few years, mortgage payment will go up due to higher interest rates, and rental rates may decline due to the increase in rental stock. Declining home prices and higher mortgage cost will result in more investors wanting to sell their rental properties. A correction in home prices may take many years to reach bottom. The extend of the price decline could be as much as 35% or more.

Click the link to view Vancouver and Richmond homes currently listed for sale.

Below is an analysis on Richmond housing market and an attempt to establish the value of a home in relation to it's economic return as an investment.

What's the real value of a Richmond home?

The real value of a home is when the rental income can cover the cost of mortgage payment, property tax, maintenance, etc. When a market analysis (using 5% interest rate and 35-year amortization) is done comparing home values and their returns on investment, home prices in Richmond are found to be unrealistically high as shown below:

*computed at 5% p.a interest rate and 35-yr amortization, plus property tax, maintenance, etc.

Cheaper to rent than to own

The above analysis shows that it is cheaper to rent than to own except at the lower price range around $250,000 and when the interest rate is at 2.25%. As shown above, at historical interest rates around 5%, it is cheaper to rent than to own.

Generally, renters may quit renting and decide to own their homes when the cost of ownership is not more than 30% above their rental payments. As shown above, renters may opt to continue renting, until home prices decline significantly.

Break-even return on investment

Home prices in Richmond (and metro Vancouver) are much too high and cannot be justified as shown on the break-even analysis above. The lofty home values can be attributed to buyers who are willing to accept low or negative returns, while making gains on capital appreciation. Home prices at current level in Greater Vancouver is not sustainable. As can be seen from the illustration above, rental returns are not able to sustain current home prices.

You can view the metro Vancouver housing price chart here. The correction in 1994 took 4 years to bottom out in 1998 and another 5 years to recover to the 1994 level .

Market confidence & low interest rates

The critical factors affecting home prices today are buyer confidence, low interest rates and low supply of homes. The market dynamics can shift over-night with a change in market sentiment if interest rates rise significantly. Current low interest rate environment is not expected to last long. Eventually, higher interest rates will result in the housing market making a correction. A balance market will come about when the rental return from the investment is more in-line with other investments.

When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the near future.

Click the link to view Vancouver and Richmond homes currently listed for sale.