What is really going on in the real estate market today?

I still remember paying my first mortgage back in the 80’s and thinking the world was in a much better place when interest rates dropped below 10%. It was an incredible moment, and one we thought would not repeat itself during my tenure in the Real Estate Industry. No doubt, this caused the market activity to increase as everyone thought this was cheap money! (laughter). I’ll get back to this.

Today, I see a lot of ink being dedicated to the "dropping real estate market", or the "10% market price reduction..." Then the "15% market price reduction..." Then the "20% market price reduction...", and so on and so forth. If I took the combined market decrease of all the articles written, we should be ready for single family homes selling at $50,000... Well, maybe not.

Truth be told, the market price for Real Estate has come down, and it currently sits at approximately 10% to 20% reduction over last years values, depending on price point, locations, etc.

One thing we must understand is that it is perfectly normal for any free market, assuming we don’t have too much government intervention, to have price fluctuations. And, as always, price is a function of supply, demand, and current interest rates... which inevitably leads to the price adjustments discussed. From a purely academic standpoint, incredibly low interest rates, a linear reduction of MLS listings (supply) in which we are now experiencing, a reasonable economy of which BC most certainly has, should logically lead to a greater demand, and housing price increases. So why aren’t they? Why is the opposite happening?

Because this is a normal response to a changing market environment. We must go through a period of adjustment as we are doing now, in which prices adjust to a point where the market responds favorably... and quickly. This takes time, but I believe its on the cusp of happening now, as people are getting new mortgages pre-qualified at record numbers, for the following reasons:

1. Incredibly low interest rates. An open mortgage is available at under 3%, and a 5 year closed is 4.35%. I consider this free money, given that double digits were once the norm. I have never seen money this cheap in my life! This is an opportunity that i hope people take advantage of as we really may not see the likes of this again.
   
   
2. Price reductions of up to 20%. Although price adjustments are normal for any healthy market, a price reduction combined with steadily decreasing interest rates, a decreasing MLS listing supply, and a continued trend on net-in migration out pacing net-out migration usually means a price increase. However, the short term demands put on developers ( from their banks) to meet sales criteria means there are some incredible short term opportunities for buyers today, and this can be seen on two of our current developments in Vancouver. The Scene and the Rai. Check out each of these sites on this web page to see for yourself. When the banks put additional pressure on the Developers to meet a pre-determined sales criteria, the result is always a favorable situation for the buyer. That’s the good news! The bad news is that this unfortunately can not, and will not last, given the current overall economic conditions in BC.
   
   
3. A steady reduction in housing supply. MLS stats show a reduction of listings by approximately 15% in January 2009... with the projected trend to continue throughout the year. Add to this the number of NEW developments that have been shelved in the last 10 months, and you have a situation where there is guaranteed to be a lull in the market supply on new homes, in the very, very near future. If my predictions are correct, and demand increases, then this could easily affect the market by beginning an upward pricing trend once again.
   
   
4. Rental units and rental rates. Outside of larger developers who may be converting their strata units to rental for the short term, there is no sign of any significant increase in the supply of rental units in the lower mainland. I have seen new 2 bedroom suites in east Vancouver rent for $1,600.00 per month, with people waiting in line to see the place. With this trend continuing, the economics and logic of home ownership become a stark reality given the low interest rates and reduced prices compared with rental rates.
   
   
5. Conclusion. Although there is much more to a real estate market prediction/analysis than what is mentioned here, it is extremely important to note that after every economic downturn, financial meltdown, etc... there has always been a recovery. Black Monday 1987, the Asian financial crisis 1997, Russian financial crisis 1998, 911 and many, many more. These crisis have always occurred throughout history but a snapshot of real estate values in Greater Vancouver through 1977-2009 would reveal that had you bought at the time of any crisis during 1987, 1997, 1998, or September 11, 2001, you would have been far ahead, because long term, you would have made tremendous gains. Even if the market had not moved upwards, your tenants would have been providing you with retirement income for years to come!
   

Thanks for taking the time to read my thoughts on our Real Estate market, and please take the time to surf this site and some of the incredible opportunities available to you at this time!

I'm interested to hear what you think as well. Drop me a comment below to discuss this further. If you have questions or requests for future topics, feel free to email me anytime.

- John Skender