In 2008, GTA realtor Ross Kay invented an ‘engagement index’ to statistically chart house horniness. For five years he’s been diligently amassing data, filtering and weighting it, and watching in fascination as 60 to 90 days later changes in his index appeared as official published real estate data.
His track record (he says): 100%.
Hours ago he released what he considers ‘drastic’ results, in a warning to his clients. “Over the course of the last 9 weeks, our index has revealed a downward spiraling real estate marketplace, with results that will not reveal themselves in MLS sales data until finally reported by Organized Real Estate Associations,” he wrote on his site.
In a note to me, he adds:
“On May 19th, 2013 we recorded the lowest value of Canadian consumer engagement in real estate since 2010. What is scary here is that on April 8th 2012, we reached an all time high engagement value. The May 19th numbers for 2013 represent about a 72% decline over that peak number. This massive decline raises grave concerns not being reported in newspapers across the country.
“So we project 60 to 90 days from May 19th that MLS sales will be reported that will reveal the market died on May 19th. Our numbers have not been wrong since 2008. So as it turns out the peak of the real estate market in Canada was April 8th 2012, as posted here on Greater Fool. Peak pricing was established and as recorded MLS sales prices now show, anyone who bought in competition around that date paid too much.”
Is this credible? Obviously we’ll find out in a couple of months, but it’s consistent with the market news reported here daily. Fewer buyers are chasing fewer houses, rendering average prices almost irrelevant – certainly eliminating them as a leading indicator. The overwhelming advice to potential buyers: don’t.
Meanwhile, here’s Claude. He moved back to Canada after living in China for several years. He landed in Vancouver, and was struck by this big slowdown in the real estate market, but not a corresponding drop in prices.
Real estate’s sticky. Once prices in a hood go up, everybody living there figures the new valuation ceiling is suddenly the floor. An instant permanent benchmark is established and homeowners great creamy thinking about their windfall net worth. But when markets turn ugly and sales slide away, human nature says the reversal’s temporary. Listings fall as owners wait for bull conditions to return, and those people selling stick to their pricing, because ‘that’s what it’s really worth.’
This can go on for a long time. Six months. A year. But once it becomes obvious the market may continue to weaken, rather than recover, prices tumble and listings swell. Have no fear. This pattern will repeat.
But Claude’s eyes bring another valuable epiphany. He writes me:
I also observed upon my arrival in this city that even though small bungalows were searching a million or so, Vancouver was the home of many ‘dollar’ stores and food discount stores. I had lived in China for several years prior to coming back to Canada and the city where I lived there was crowded with Benzes, Audis, BMW, a young man who lives in my building even owns a yellow Ferrari. Also that City ( Guangzhou) is the host of many luxurious shopping malls occupied by very expensive stores, such as Hermes, Dior, Chanel, Louis Vuitton to name but a few.
My observations in Vancouver were that the majority of cars were, Hyundai, Chevrolet, Nissan, nice but ordinary cars. This didn’t add up in my eyes. How can a city with so many expensive houses be inhabited by people driving ordinary cars and shopping in discount stores? Vancouver doesn’t in my opinion project an image of wealth there.
Could it be that people here kept buying each other’s houses, creating an artificial demand for properties? If this is so, then someone is without any doubts going to be left holding the bag. Could you comment on this?
He’s right. Many a time has this pathetic blog compared and contrasted the average household income in Van ($83,300) with the cost of the average SFH ($1,100,000). The latest RBC home unaffordability survey shows it takes close to 90% of pre-tax family income to buy a bungalow in that city. And BC has had a negative savings rate ever since the median detached house passed the seven-figure mark. Currently folks in the province spend an average of 108% of income, and are so invested in real estate that it’s turned into a Kia and Wal-Mart paradise.
Making things worse is the urban myth that foreign money’s been responsible for jacking Van prices. Now every time eight Chinese-Canadian couples born in Richmond line up for a new condo opening, we get a “HAM alert”, suggesting an Airbus full of horny industrialist millionaires from Guangzhou has landed at YVR. But while some Mainland Chinese dudes have scooped higher-end properties around the city, there’s zero evidence it’s been enough of an impetus to boost market values. Claude’s correct. This is a Van-on-Van creation (as is the case in Victoria), aided and abetted by the country’s most gullible and bush-league media.
How will it end?
That’s easy. Prices will indeed fall considerably, and stay low a lot longer than many owners will stay solvent. People will look back at 2010 and 2011 – when speculation was rampant, realtors cried ‘buy now or buy never’ and a yellow peril was invented to whip the locals into a buying frenzy – in awe. This was right out of the Phoenix playbook, circa 2004.
There’s simply not the income in Vancouver (or Toronto) to support current prices. Homes have climbed a wall of debt. Without a giant leap in household earning, it’s a mirage.
May 19th. Write it down.