Real Estate Market Update: Mania, Peak, Bust
Thank goodness September has arrived! Don’t get me wrong, I love summer and all that goes along with it; hot summer days, beach time, grilling, and of course, my favorite water sport kitesurfing (which is much more enjoyable when it is 30 degrees and the water is warm). As wonderful as summer is, September brings back schedules, a refocus on business, and more importantly for me, a renewed interest in the real estate market. All eyes will be watching the fall market because of the changes we have seen over the last number of months. This seasonal change is common but the change from what our market was over the last number of years to what it has been recently, feels significant.
I have written and presented several times on the Fraser Valley and Vancouver real estate market conditions; the cause and effect, and framing it with the cycle of boom, slump, and recovery. Recently, I have had many sophisticated investors, homeowners, and buyers reach out to me questioning where we are in the cycle. The common question is this, “Is the boom over and the slump on its way?” If you follow John Rubino from DollarCollapse.com, he believes that a large portion of the world’s real estate markets are heading for a meltdown. He describes the cycle as mania, peak, and bust, instead of boom, slump, and recovery.
Rubino describes stage one as mania; prices rise at an accelerating rate, fueled by foreign investment and bidding wars. Stage two is defined as the peak; jittery sellers wanting to cash out before the party ends and inventory begins to surge upward. The final stage is described as bust; inventory is at all-time highs and sellers start reducing their prices. The bust stage begins a cycle of buyers sitting on the sidelines causing further price reductions from the sellers. Personally, I like Rubino’s cycle descriptions but I don’t believe it fits all markets. Specifically, markets like New York, San Francisco, Hong Kong, and Vancouver. These markets are not immune to a cycle change, a slowdown, or a correction in price, but from my viewpoint, they are insulated from major cycle corrections and it’s all in the numbers.
First of all, it’s about supply and demand. Yes, demand has diminished in the Fraser Valley and Vancouver markets over the last number of months, but supply outside of the luxury markets remains relatively low. This supply issue in the previously mentioned cities will always remain a constant. The immovable objects such as mountains, bodies of water, borders, or environmental protection that create a scarcity of development land will continue to cause supply issues into the forseeable future.
Let’s compare Vancouver to another popular city like Phoenix. Both have foreign buyers. Vancouver has the wealthy, educated, and uber rich looking for a secure country or city to secure their generational wealth from around the world. Phoenix on the other hand has mostly Canadians looking for a place to escape the cold winter months during the year. Which city will continue to attract more foreign buyers? Which city will entice buyers with real money and wealth that will eventually lead to a supply and demand problem? The answer? Vancouver.
Now for the numbers. The city of Phoenix is 518 square miles, while Vancouver is only 44 square miles. Metropolitan Phoenix as a whole is 14,599 square miles, whereas Vancouver is 1,100 square miles. The population of Metro Phoenix is 4.5 million and Metro Vancouver is 2.4 million. Doing the math, Vancouver has half the population of Phoenix, but it is also physically only 1/10 the size of Phoenix.
When I look at these numbers and stack up cities like New York, San Francisco, Hong Kong, and Vancouver to cities like Phoenix or even Toronto, I see no dramatic bust as Robino describes it. Don’t get me wrong, I definitely believe that the Fraser Valley and Vancouver market can and will see a slowdown and price correction, but I do not see a bust. A bust would be more that 25%, while a slowdown over the next year could see the median prices adjust by 10%. The Fall market is about to kick into gear and time will tell whether we are in a bust or slowdown cycle. Review the August STR stats and let me know your thoughts, bust or slowdown? I am betting on a slowdown.
Personal Real Estate Corporation
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STR (Sell Through Rate) Formula = Sales ÷ Active Listings + Failed Listings + Sales