JOSH BUCHANAN

August 10, 2017

Typically in Saskatoon, the 4-month stretch from April to July is considered peak season for real estate because that’s when the market is busiest and the most sales are happening. In post #86 I broke down the average monthly sales, listings, and the average ratio of sales to inventory to determine which month gave you the best odds of making a sale. Not only do these months typically have the highest number of sales, but they also have the highest ratio of homes sold to homes on the market. This is why I have deemed April to July as “peak season.”

When I look at the numbers for 2017 from the start of April until the end of July, all I can think is that things are going from bad to worse. Back in mid-2014, it was already fairly clear that we were approaching tough times but now it seems everything is significantly worse than it was three years ago.

When looking at the statistics above, you can observe 6 notable things:

2017 sales numbers are the slowest out of the last 6 years by a significant amount Listings are down slightly from last year but inventory is still up The sales-to-listings ratio is the lowest out of the last 6 years Closing inventory is the highest in the last 6 years, up by a significant amount including a rise of 1,000 units from 2012 The months-of-inventory ratio is the highest out of all 6 years and by a significant amount The rate-of-sale ratio is the highest out of all 6 years by a significant amount

What this means:

Low sales numbers aren’t necessarily all bad. A slowdown in sales is bad in the sense that the market is slowing down and there is less demand for housing. However, this does not necessarily mean the market is out of balance or that prices should be falling. Regina has seen a slowdown in sales compared to recent years but they are still managing to maintain a balanced market which is why prices haven’t really fallen. The issue is that, while sales have fallen in Saskatoon, listings have risen and so has inventory which has created a very over-supplied market. The oversupply in the market is what creates downward pressure on prices, not the slowdown in sales, per se. Despite construction numbers falling, listings are still not falling significantly from previous years which tells me that the high number of listings probably has a higher portion of resale homes than in previous years. This means that a lot of the new listings coming onto the market are not new builds but instead, they are from homeowners who may be selling because they have lost their jobs and can’t afford payments anymore or have lost jobs and have decided to move. The sales-to-listings ratio is a key indicator for determining the balance of the market and anything below 0.50 is considered over supplied and will put downward pressure on prices. With a ratio as low as 0.39 this year during peak season, this is very much a ratio that signals over supply which means we will experience significant downward pressure on prices and inventory will continue to build compared to last year due to the imbalanced flow of supply coming to the market. Closing inventory levels are at all-time highs, which, again, is not necessarily a bad thing. If sales were rising at the same time as inventory, it would allow us to maintain balance despite inventory growth. However, because sales numbers are falling, the rise in inventory is creating a big imbalance between supply and demand which will create very long wait times for many sellers to make a deal. The months-of-inventory ratio is the second key indicator used to determine the balance of the market and we are currently sitting at over 6-months worth of inventory. A ratio of below 4 is considered balanced so this is another sign that we are highly oversupplied and can expect further price drops. The rate-of-sale ratio or days it takes the average home to be sold is roughly 6 months for this particular time period where a rate of around 3 months would be considered balanced. This means homes for sale will have a very slow turnover and sellers will be forced to be very patient and very competitive.

Here are some more statistics to kick us while we’re down:

This shows that Saskatoon’s unemployment percentage is currently at 8.1% which is significantly above all of the previous 5 years and above the 5-year average by 3%. The current number of units under construction is just 878 units which is down incredible amounts from previous years where we had an average of 2,229 units under construction in the city as of July.

The slowdown in construction is good in the sense that we want less supply coming, though this hasn’t really seemed to reduce supply yet considering that the current inventory level is significantly higher than last year. The negative side is that the decrease in production is going to hurt the unemployment rate in the city which can have many different side effects.

To conclude, without using any curse words: Saskatoon is pretty flipping screwed right now.

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You could put the blame on the government for pushing immigration beyond what the market required, for pushing home ownership on its citizens, for not restricting foreign investment or for adding new fees, taxes and mortgage rules in the midst of a highly oversupplied market.

You could put the blame on central banks for toying too much with interest rates, cutting them too low to overstimulate the market and then raising them once a bunch of people overextended themselves.

You could put the blame on developers for ignoring the signs that they should have started building more in the mid-2000s in order to avoid undersupply and cause a big price jump and also for failing to slow down construction in the mid-2010s in order to avoid oversupply that is causing a fall in prices.

You could put the blame on Realtors for ignoring the market indicators and failing to communicate trends with developers, buyers, sellers, and investors to help stabilize the market.

You could put the blame on banks for becoming such a sales-driven industry that is pushing ultra-low interest rate borrowing on consumers that led to excessive borrowing and subsequently inflating housing prices.

You could put the blame on the general public for blindly listening to the government, borrowing excessive amounts of money, living outside of their means, failing to understand and observe market indications of imbalance, trusting salespeople for market forecasting or for getting hooked on the banks’ ultra-low lending rates and thinking real estate prices only ever rise and interest rates won’t ever increase.

You could put the blame on foreign investors and immigrants who bought into the market without really understanding the market conditions or long-term consequences of buying.

Ultimately, all of these demographics are at fault to varying degrees for the current housing bubble we have in Saskatoon and now most of them are going to have to suffer the consequences of their actions. Perhaps this will be a reality check for those who believed that housing values never fall and that interest rates never ever rise. This will be a reminder for those who have witnessed such market conditions decades ago but forgot what happened previously or believed it wouldn’t happen again. This will be a learning experience for those generations who have not lived through such poor market conditions, and, this will be a wake-up call for those who thought their employment was safe, borrowing absurd amounts of money was okay, wages would never decrease and real estate is always a safe investment.

Data sources:

Government of Saskatchewan Unemployment: http://www.stats.gov.sk.ca/lfs/

CMHC Construction Report: https://www03.cmhc-schl.gc.ca/hmiportal/en/#TableMapChart/1700/3/Saskatoon

Team Fisher Royal LePage Vidorra: http://normfisher.com/

Saskatoon Region Association of Realtors: http://www.saskatoonrealtors.ca/web/SRAR/SRAR/Market_News_and_updates/News_Release/2017/08_-_August_2017_SRAR_News_Release.aspx

The views represented are solely those of Josh Buchanan and are independent from any professional organization.