JOSH BUCHANAN

March 10, 2017

In November of 2015, I wrote a blog post analyzing the real estate market cycle of Saskatoon and where we were at during that time. We have now progressed further into the cycle and I thought it would be a good time to reanalyze the market.

At the time of that original post, we were in phase 3 of the real estate market cycle quadrant which is deemed the “hypersupply” quadrant. As the image below implies, we were beginning to witness an enormous rise in rental vacancy rates and ample amount of new construction coming onto the market which fueled excess supply and created an imbalanced market.

Fast-forward to early 2017 and it’s now safe to say that we are getting into the next phase of the real estate cycle which is the 4th quadrant and deemed the “recession” quadrant. Vacancy rates are now at all-time highs in the city and still rising while we are also seeing a high number of completions for housing units as further discussed in post #98.

You can see by the chart above that we have moved out of quadrant 3 because new home construction has drastically fallen off but now we are seeing more completions come to market just as the 4th quadrant explains. We are well below the long-term occupancy average and due to the huge slowdown in construction, real estate output is falling which is causing recessionary conditions.

In the future, we should expect to see construction continue to slow down even more until supply and demand balance out. Once there is a proper balance, we will then begin the recovery where vacancy rates stop declining and slowly begin to rise and the market begins a new cycle. However, let’s not get too far ahead of ourselves here because we likely still haven’t bottomed out and the recovery does not happen overnight. In fact, it usually takes many years before getting back into the 2nd quadrant which is the expansionary phase. We are still not out of the 4th quadrant yet and may not be this year or even next year depending on how the relevant variables play out.

When it comes to prices, they have been very slow to react to the market changes due to a few major reasons that I have covered in previous posts. 1) prices are always slow to react and always take at least a year to respond to market changes regardless of the direction of the market 2) prices in a falling market are a lot more hesitant to fall than they are to rise in a rising market 3) falling home values have largely been masked by incentives 4) many of the processes we have in place as well as most of the people of influence within the real estate market have a preference and interest in keeping housing prices high. However, sticky prices may be explainable but they do hinder our ability to get the market back in balance, through the recessionary period and into the recovery period.

Conclusion:

If there’s anything we can learn from history, it’s that we don’t learn from history.

Data sources:

Cycle Monitor – Real Estate Market Cycles by Glen R. Mueller: http://www.dce.harvard.edu/professional/blog/how-use-real-estate-trends-predict-next-housing-bubble

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