No Need to Run, Bidding is Fun.

In our previous post we discussed that the bear market in Vancouver had gone away, at least for now. But why?

Let’s first start by remembering a bit how prices change with supply and demand. As we discussed in an older post, prices go up when sales to active listing ratios are high. Remember, we get this number by dividing the sales (demand) by the total inventory at the end of the month (supply). The data basically allowed us to create the ranges for buyer’s market (blue), balanced (yellow) or sellers’ market (red)

This figure illustrates basically how the market operates under these different scenarios. In a buyer’s market (shown in blue), there are more sellers than buyers, so not a lot of bidding goes around, and prices tend to drop. In a sellers’s market (shown in red), on the other hand, there are more buyers than sellers, and often they go engage into a bidding war where the winner often pays above the asking price, setting up a new high benchmark for future sales, and hence driving up prices.

So what brings buyers? What brings sellers?

Let’s start with the buyers, the demand side. The following figure illustrates some of the factors that tend to affect demand:

And now the sellers, the following figure illustrates some of the factors that tend to affect supply:

So what happened in 2017-19 that changed demand? Let’s see the chronology of the events highlighting some of the factors that changed in this period:

As seen, in 2018 a number of cooling factors came into place, more remarkably new taxes, regulations and higher interest rates. In 2019, a number of heating factors came into place, including more incentives to buy, and a significant drop in interest rates. Another factor at play that might have played a role was that in 2018 the Federal Reserve was removing money from circulation by reducing their balance sheet. In mid 2019, they reversed that trend and started printing money again, in the so-called QE4 (you can see how this works in this nice new video by the Plain Bagel guy). That brought more money into the world economy, and in an environment of low (and even negative!) interest rates, the money has to go somewhere. Where? Equities (Stocks) and Real Estate are two places where investors tend to put their money.

Source: https://fred.stlouisfed.org/series/WALCL

So did that extra demand translate into bidding wars? Let’s look at the data (as usual, thanks Johnny for the data!). The following chart illustrates units selling below asking prices (blue) or above asking prices (red) for 2017-2019.

Only REBGV units included, filtered out units with House Age < 3 years

In spring of 2017, when interest rates were low, more than 50% of strata units were selling above final asking price!!! A clear indication of bidding wars at the time. As interest rates increased in late 2017, the market cooled down, and most units starting selling below the final asking price in 2018, and prices dropped. This trend continued over 2019. This chart shows how prices dropped in this period of time:

Benchmark House Price Index is the relative price to prices in January 2005, corrected by inflation

Recent trend

So that was 2019. What has happened so far in 2020? If we look at the units selling below the final asking price as reported sale date (entry date), it is seems that bidding wars are increasing

Only REBGV, no filter applied by house age.

This appears to be driven by strata (condos and townhomes):

Only REBGV, no filter applied by house age.

If you break down the number of unit sold above (red), at (yellow) or below (blue) asking price per unit price from Jan 1st to Feb 19, it appears that there are thresholds for the different unit types (<$1.6M for detached, <$800k for condos):

Only REBGV, no filter applied by house age.

It is important to note that although units are once again selling above asking prices, it is not to the same extent as in 2017-2018, see this comparison chart for condos at different price points for the same period of time:

Only REBGV, no filter applied by house age.

At the moment, extrapolated SAL for strata units is about 30% in REBGV, and about 15% for detached. Price increases for strata in the short run seem inevitable.

Factors to watch moving forward

What next? Who knows… Many factors are at play to make any predictions. Things to note are that recently the government eased the stress test, this should increase demand. There is a lot of chatter on significant increases in strata fees, this could decrease demand. There is also a lot of construction ongoing right now, which should increase supply. Interesting times ahead…

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