JOSH BUCHANAN

July 18, 2017

Below is a chart showing the SRAR’s statistics for Saskatoon from 2001-2017 with 2017’s statistics only accounting for half of the year so far. The data includes total sales, listings, sales-to-listings ratio and average sales price on the year. I have adjusted the average price by one year to make up for the typical delay we see in prices for corresponding sales-to-listings ratios. For example, the average sales price for 2016 was $350,348 but I have bumped it up to line up with 2015 because it is essentially the delayed result of 2015’s sales-to-listings ratio. This is something I have covered many times in previous posts. I have also calculated the price change over each year in dollar amounts and also the dollar amount of price change we see for every 0.01 point deviation away from 0.50 for the sales-to-listings ratio. This may take some previous reading to understand completely but the comment section below is available if there are any questions.

You can see that from 2001-2007, the sales-to-listings ratio was 0.60 or higher every single year and prices also rose every single year during that time. This is no coincidence. Once you get to 2008, you see the ratio not only fell below the balanced threshold of 0.50 but as far down as 0.43 which led to a significant price drop. This, again, is no coincidence.

When you look at the years 2009-2013, the sales-to-listings ratios were all above 0.50 and every single year within that time frame saw prices increase. Again, not a coincidence. However, once we get to 2014, the sales-to-listings ratio fell to 0.50 and stayed below it from then until present day. Notice that prices have been falling ever since. This is not a coincidence!!! Supply and demand, more than anything impact the price of homes. Following the sales-to-listings ratio is the simplest way to determine the balance of supply and demand and determine where prices are going. The months-of-inventory ratio is also very useful.

When you make the 1-year price adjustment, every single year with a ratio above 0.50 led to a price increase and every single year with a 0.50 ratio or lower led to a price reduction. It’s simple:

Oversupply pushes down prices

Undersupply pushes up prices

Below I have graphed the sales-to-listings ratio from 2001-2017 along with the dollar value price changes throughout those years applying the 1-year price delay to demonstrate how closely they are correlated.

You can see by observing the graph that prices move in a very similar pattern as the sales-to-listings ratio. This is because that ratio dictates the behaviour or prices. It also becomes quite obvious that current sales prices are not trending downward appropriately and this is for a few reasons such as incentives masking price reductions which I have covered further in post #72. This slow reaction means we are still in store for more and bigger price drops to come in the near future and we are far from bottoming out.

Look, I get it. Some people are just going to say: “I don’t really care to time the market, I just want to buy a home, get settled in and stay here and I can’t be bothered to try and time it right. I need a place to live, I don’t want to rent and I don’t really understand that real estate economics stuff anyway.” This is fine, I understand. However, the consequences of this type of thinking could quite literally add up to hundreds of thousands of dollars.

For someone who bought a home in Saskatoon in 1990 when the prime rate was 14.25%, for, say, $100,000, what they have witnessed is the value of their home increase by roughly 300% and at the same time, they have been able to reduce their mortgage payments every time they renegotiate. At the time of renewing their mortgage, if they were willing to keep monthly payments equal, with a lower interest rate, they also could have reduced the amortization period of their mortgage. So you have an asset that has soared in market value, reduction in interest paid compared to what you were originally expecting at the time of purchase and potentially a reduction in your mortgage term. WIN, WIN, WIN.

On the flipside, if you were to buy something in 2014 when prices were at their peak, the sales-to-listings ratio fell to 0.50 and continued to fall, and interest rates were still near their lowest, you will most likely, if not already, see the opposite. Your home will fall in market value, your interest rates will go up when you go to renew your mortgage and you will either have to pay more monthly for an asset that has depreciated in value or else extend the length of your amortization period if you keep monthly payment amounts fixed with a higher interest rate. LOSE, LOSE, LOSE.

Conclusion:

If you want to buy a home that is going to increase in market value, buy when the sales-to-listings ratio is above 0.50 and rising, especially if interest rates are high. If you want to buy a home that is going to decrease in market value, buy when the sales-to-listings ratio is below 0.50 and falling, especially if interest rates are low.

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