Timing the market

The real estate industry wants you to believe you can't time the real estate market. You can. It's incredibly easy and they give you all the information you need to do it, for free! Consider it a public service from people who care.

Here's the most important thing you need to know about real estate history in Victoria: it repeats itself. If you've been talking to anyone involved in the business, you've no doubt heard "Victoria real estate always goes up" or "Victoria real estate doubles every ten years" or "it's time in the market not timing the market."

All three statements take advantage of an ethical gray area the real estate industry continues to exploit. None of them are really true but neither are any of those statements outright lies. But no one involved in selling anything to do with real estate should be allowed to utter them without having to also make a mandatory disclosure, like the one a mutual fund salesperson has to make when they talk about the financial performance of one of their products: you know the one that says past performance doesn't guarantee future performance and all that. Anyway, I digress, and the industry will just regress to "we're selling homes, not investments" if we try to debate this point any further.

Back to my story: real estate market cycles are very slow. How slow you ask? This slow:


Did you know that when those ships you see off Victoria's waterfront go by, they are already slowing down and planning their turns to get into Vancouver's ports? Ships that size have huge momentum. It takes a lot of power to get them up to speed and it takes a lot of distance to slow them down. If you've spent any time on the water, you know to look for the signs of movement in these ships so you can avoid them. And it's the same thing with the real estate market, except your motivation is different: look for the signs of momentum so you can exploit them.

There are several basic tools to use (which Roger shows you graphically here):

• Supply versus demand ratios: the number of active listings divided by the number of sales and the number of new listings versus the number of sales
• The 3-month trend in median and average prices
  
• Price to rent ratio using the published CMHC average two-bed rent versus the average price of a two bed apartment (yes, that's a condo) in Victoria

Here's three indisputable facts about Victoria real estate:

1. Every past market correction saw owning (using a 25% down, 25-year mortgage) become cheaper than renting
   
2. Every past market correction saw the average price over-correct beyond the inflation trend line
3. Every past market correction required the same amount of time that it took prices to rise for prices to bottom out
   

You can see what that looks like here thanks to Roger's great graphic:


Here's where we are today:

• The low-end of the market, the so-called entry level condos and SFHs have not yet begun their correction (they're still in a seller's market with low supply)
  
• We have more supply on the market today than we've seen in almost ten years (dominated by high-priced properties $600K and above)
  
• We have less sales in the market than we've seen in almost ten years
  
• We have a three month price trend that is clearly down
• The top end of the market is about 20% off peak prices (waterfront and million dollar plus properties)
• The new condo market is murky, but we can see that they are also off at least 20% from previously over-inflated asking prices (they were never counted as part of the market stats, and therefore you should never fool yourself into believing that because Bear Mountain discounted themselves 40%, they are suddenly below market)
• Owning will still cost you roughly 18% more per month than renting, even after last year's price decreases on an equivalent property using a 25% down 25-year mortgage
  
• We are one year into a potential six- or seven-year correction (despite the calls from industry insiders telling us we'll return to price increases in 2010, that would ignore fact 3 above)
  

Given that interest rates basically double your purchase price, waiting to save 15%, is really like saving 30% over the lifetime of a mortgage. Sounds good to me.

Of course, past performance doesn't guarantee future performance. But I'm willing to bet, for the near future at least, that this correction will be exactly like the past corrections, or maybe a bit worse, only because the global economy seems a bit more strung out on the housing crack than it has, well, ever.