JOSH BUCHANAN

January 18, 2020

Ever since my 2nd post of the blog back in October of 2015, I’ve been looking at supply ratios to determine the state of the market. It has been a long time since I’ve looked at these ratios but I thought it’s time to make another assessment.

For other posts on this topic, you can check out the following:

POST #2: HOMES AT HIGHEST RISK FOR A PRICE CORRECTION

POST #49: HOMES AT HIGHEST RISK FOR A PRICE CORRECTION – PART 2

POST #55: HOMES AT HIGHEST RISK FOR A PRICE CORRECTION – PART 3

POST #61: RATIOS BY CATEGORY

POST #80: RATIOS BY CATEGORY – PART 2

All of these posts looked at the two most important ratios: sales-to-listings ratio and months-of-inventory ratio for various categories of homes in Saskatoon. Essentially, all of the posts were saying that an oversupplied market leads to price declines and at those times, we were very much oversupplied in most categories with detached houses under $500,000 being about the only category of properties that were near balanced.

If you read those posts, it’s easy to see why the condo market got hit so hard in recent years while most categories of detached houses performed much better relative to condos.

I would usually include the past 30 days as one sample size for these ratios but decided to cut them from this post because the past 30 days are a very unusual time of year in terms of real estate activity due to the holidays and the numbers would not properly reflect the state of the market.

Here’s a look at where ratios stand as of January 17th, 2020:

sales-to-listings ratios:

This ratio tells us where we are heading in terms of housing supply. When the ratio is 0.50 or less, it means downward pressure on prices is on the horizon. When it is 0.51 or greater, it means prices will stay flat or rise depending on how far the ratio deviates from 0.51.

Based on the table above, you can see that the condo market is still well below the 0.50 mark overall which means we are still seeing too much supply come onto the market relative to sales. If you look into some of the subcategories, the only ones that have a ratio above 0.50 are townhouses for the 3 most recent timeframes.

This is good news for the townhouse market that got hit the hardest in terms of market value declines in recent years and it shows that the ratios are now helping move towards a balanced state.

For houses, the ones listed below $500,000 are all hovering slightly above balanced ranges for all the timeframes I’ve included. Once you get over the $500,000 mark, the ratios are very much oversupplied.

Remember, this ratio measures the current flow which eventually affects the inventory levels which then affect market values so their impact is felt in the future, not the present day.

months-of-inventory ratios:

This ratio tells us the current state of the market for housing supply which dictates what is currently happening with prices. Most analysts will say that a ratio of 4-6 months is balanced but in my observation in the history of Saskatoon, ratios need to be under the 4-month mark in order to see any kind of upward pressure on prices which is very evident if you look at historical ratios and corresponding market price behaviour.

For condos, every single category and every single timeframe shows that we are still currently oversupplied. The one category closest to balance is actually the townhouse market.

For houses, overall, the market is actually in decent shape right now. The ratios aren’t high enough to put significant upward pressure on prices but they look safe enough that price declines should be behind us, generally speaking. Houses below the $500,000 mark actually have pretty healthy ratios. However, once you get to properties listed above the $500,000 mark, there is still a significant oversupply.

So what does this mean?

If you’re considering buying:

Assuming the following two conditions:

You don’t want to buy a property that is going to lose significant market value in the near future You’re okay with living in a detached house and taking on the responsibilities that come with it

The only categories of homes I would seriously entertain buying would be detached houses below $500,000. I would not go near the apartment-style condo market and I would still be patient with the townhouse market. Even higher-end houses also are not safe to buy into just yet.

If you’re trying to sell or considering selling:

If you have a detached house below the $500,000 mark, you shouldn’t have a terribly tough time selling as long as your property is well presented and you’re asking a fair price. If your house is above the $500,000 mark, it won’t be as easy and you may have seen more significant value decreases in recent years but you still have a shot at selling if you’re willing to be very honest with yourself about pricing due to the state of the market over the past 5 years.

If you have a townhouse or apartment, I wouldn’t bother trying to sell right now unless you have to. If you’re able to hold it out for the long term, that might be best. If you need to sell now or in the next year or two, you might just have to cut your losses and sell for significantly lower than you would like because the ratios really aren’t working in your favour. The longer you wait and the more stubborn you are with your asking price, the worse it will get, at least for the next year or two and who knows what will happen after that.

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One other thing to mention is that the higher-end properties will likely always have higher months-of-inventory ratios even if the market is more balanced. This is mainly because they are a luxury good, not a normal good. Everyone needs a place to live, no one needs a luxury home and for that reason, they will usually not move as quickly as the lower-priced homes.

Conclusion:

My position on the market from around early 2014 until early 2019 was “don’t buy now because the market is oversupplied. Wait until prices fall.” Now that the market is starting to turn around a bit, I would say “avoid buying condos and high-end properties if you care about future market value, but looking at detached houses under $500,000 is a reasonable purchase if you are strategic about it.”

I bet Realtors are going to slowly start warming up to me now.

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