A regular reader sent me a fantastic article from the early 1990s written by economist Patrick Foley of Lloyd's Bank of London. The article, A market like no other is unavailable online these days, and out of respect for its source, I won't post it here, for reasons of identification. But I'll give you a synopsis of his arguments for your debate/commentary.
Foley's argument is based on the RE market in England back in 1990. At that time, prices were stable, but sales were stagnant. How can this be? As Foley suggests should be the case "the seller would simply reduce the price until buyers were attracted." The RE market is different though, "many sellers would prefer to take their house off the market rather than lower the price."
Maybe we bears should pay closer attention to the number of expired listings happening lately? If we see more listings removed prior to sale, then we know what is happening is similar to what Foley describes. What about the other's though, the ones who must sell? Foley says those indicate the next shift in the cycle.
When that happens, we see a reduction in prices. Who are forced to sell? There are plenty of reasons why someone might be forced to sell, but perhaps the first indicator would be broad reductions in new home prices, especially in completed condo developments with unsold units.
The first sign we'll see is a reduced number of sales. And the number we need to focus on is year-over-year sales, not month-to-month because the market is so seasonal. When the number of sales is reduced, so is the corresponding sales prices, so we must be careful that the weakness in the market isn't over-stated--the same factor exists on the upside, and we see it every time a high priced home sells in Victoria.
What part of the cycle is Victoria in according to Foley? Foley says prices are slower to react. In fact, when volume falls, sometimes prices spike before they begin a decline. But we witness a sharp decline in price inflation. (Considering that inflation is roughly half of what it's been over the past 2-3 years, I'd bet we fit somewhere in this part of the cycle).
What has been the trigger for cycles to end according to Foley? "...the end of the boom for all three of the most recent cycles coincides with a tightening of macroeconomic policy by the government of the day."
Foley's study period had governments raising rates due to exchange rate weakness, rather than domestic demand. Today we see the opposite: the BoC is concerned about domestic inflation, not exchange rate weakness. Foley felt that the previous economic policy would contribute to a deeper than normal trough.
Today's situation is not so black and white. In the US, it's expected that the Fed will reduce rates due to weak economic fundamentals, while their currency takes a hammering on the world market. But in Canada, it's expected that the BoC will have to reign in inflation and potentially drive the $CDN to parity. Both of these could have considerable economic constraining effects.
Based on Foley's example, it isn't clear where this Victoria market sits.