Housing market sputtering

Real estate agents are often accused of being congenital optimists. In the case of Dave Watt, that looks to be literally true. Mr. Watt's grandparents got into the real estate game in 1931, just as the Great Depression was pulverizing the economy. Even for a real estate agent, that was a leap of faith.

Seventy-seven years later, no one is talking depression in British Columbia, or even an Ontario-style recession-lite. But the rocket-ship housing market in the Lower Mainland is sputtering, in a bad enough way that even Mr. Watt, president of the Real Estate Board of Greater Vancouver, has a tough time putting a happy face on it. Gone is the brave talk of a “balanced market.” Nope, now is the time to be a buyer – you can have your pick of worried-bordering-on-desperate, price-slashing sellers.

The stats are bad, and likely to get ugly. First, the bad. Sales are down across the board by a whopping 44 per cent from a year ago. At the same time, new listings are up 24 per cent. For every property sold in July, nearly three were put on the market. Housing prices have begun to retreat, although for the moment, it is an orderly withdrawal. Detached properties have dropped by 2.3 per cent since May, while attached dwelling and apartments are down by 1 and 2 per cent.

Modest as the decline is, it is a world of difference for owners used to annual double-digit appreciation in property values. Since the start of the housing bull market in 2001, prices have more than doubled in Greater Vancouver, and have come close to tripling in some slices.

And that is where the ugly comes in. Homeowners are still adjusting to the dramatic shift in the market, and the current price declines are only the beginning. Increasingly, discouraged sellers are simply withdrawing from the market, unwilling to drop their asking price to a level that buyers might contemplate. Those housing market refusenik sellers won't ever show up in real estate industry statistics. Nor will the stubborn ones who keep their overpriced properties on the market for months on end. One key indicator of a housing market slowdown is the time on market, the number of days that properties are listed before being sold. But that average only takes into account consummated deals – those without offers don't get counted. So far, there has only been a slight increase in the time on market, but it's likely not capturing the dynamic of the current housing market.

There is a similar argument to be made over prices. Cameron Muir, chief economist for the B.C. Real Estate Association, says homeowners hate, above all else, selling for less than their original purchase price. A close second is selling for less than your neighbour's recent sweetheart of a deal. As a consequence, the housing market is “illiquid” or, translated from the original economist-speak, it takes a while for sellers to readjust their mental picture of what a fair selling price looks like.

The likely result? A small price drop in the short term combined with a steep drop in sales volume, followed by a second wave of a bigger decline in prices as sellers finally capitulate. The Lower Mainland's housing market looks to have been hit by the first, and headed for the second.

This might seem to be an academic matter, since as the industry argues, you gotta live somewhere and those who sold high also had to buy high. But that ignores the follow-up effect of rising equity prices on consumer spending. Mr. Muir estimates that Canadian homeowners typically spend 5 per cent of any appreciation in their home's value. In the Lower Mainland, that adds up to a big bundle of consumer dollars. A 10-per-cent increase on a base of a half-million dollars adds $50,000 a year to a homeowner's net worth, and kicks in about $2,500 in consumer spending, according to Mr. Muir's formula.

B.C.'s housing market woes are no Great Depression, but coming as they do on top of high energy prices, a wobbling forestry sector, and the lowest level of consumer confidence in a half decade, they may qualify as the Pretty Big Hangover.

(prepared by Patrick Brethour/Globe & Mail)