JOSH BUCHANAN

October 19, 2015

Months of inventory:

The “months of inventory” measure is a useful way of determining how quickly homes are selling, how long existing inventory will take to sell off and how to forecast where prices are headed.

Most Real estate agencies suggest that a rate of 4-6 months inventory is considered a “balanced market” with under 4 being a seller’s market and over 6 being a buyer’s market. A seller’s market essentially means that sellers are in the driver’s seat and usually prices are rising. A buyer’s market means that the buyers have more bargaining power and are able to drive down prices. The ability to move prices largely depends on the number of months of inventory. An extremely low level like 2 months will create sharp increases in prices, whereas an opposite extreme rate like 10 months will create a sharp decrease in prices, and anything around 5 months should keep prices fairly flat.

Saskatoon has been in a strong seller’s market situation for approximately eight years now but it appears that the position of power is changing to the buyers, especially in the condominium market.

Using the following chart to further explain this analysis, for condos in the $100,000 – $299,999 category, we currently have 424 units for sale on the MLS system. Over the past month, we have sold 46 units, over the past three months we have sold 186 units and over the course of the year-to-date we have sold 597 units. Based on current inventory, it would take 9.22, 6.84 and 6.89 months respectively to sell off current inventory given those averages across the three time periods.

Based on the above chart, we can see that all price ranges of condominiums are in the territory of a buyer’s market. Over the past 30-day period, all condos are now in more extreme territory which means we should begin to see noticeable price drops. You can see that from the years 2011-2014, condo inventory was closer to a level that was balanced with very slight upward pressure on prices.

Not only is there currently a significant oversupply of condos, but there is also a large amount currently under construction which will increase the already excessive supply and put further downward pressure on prices.



Single family houses, on the other hand, are still in balanced territory with the exception of those falling in categories above the $500,000 mark. For houses below the $500,000 mark, we should not expect to see a significant change in prices in the near future as those categories are still within a balanced range. For houses above that price, it’s reasonable to expect that we will see significant downward pressure on prices in the near future.

Not only are single-family homes generally in healthier territory, but there are far less units under construction than the condo market. Single-family home construction is easier to react to the market compared to condos. Condo construction is a far more lengthy process which creates much slower adjustment times.

Main factors that will lead to price drops in the short term:

Regardless of interest rates, demand and unemployment, if there is a huge oversupply of homes, it will put downward pressure on prices especially if that supply is growing and demand is not keeping up.

1) Current oversupply: this will give buyers far more options and create very long waits for some sellers to get rid of their homes. The longer it takes for sellers to sell, the more likely they are to drop their prices.

2) Less new home build completions: this subsequently means that there will be less new home sales. New homes are, on average, more expensive than resale homes. Even if resale homes do not lose value, the average sales price of all homes will likely drop as we have less new home sales recorded.

3) Large number of units under construction: this will add to swelling inventory and continue to strengthen the power of buyers to drive down prices.

4) Slowdown in new home build starts: although this is good in a sense that it will eventually reduce supply, it does have some bad spillover effects for an economy. If you consider all the professions that are involved in real estate construction, a slowdown in building will create negative job growth in Saskatoon in many sectors. Architects, engineers, interior designers, plumbers, electricians, pavers, roofers and other such fields will see their work slowdown which may create a growth in unemployment. If we do see a decline in employment, many of those out of work may be forced to sell their homes as they will no longer be able to make payments without a steady income. This situation could lead to further supply and add to the already excessive inventory.

Conclusion:

Based on current inventory, sales trends and units under construction, the condo market is at far higher risk of seeing a significant price correction in the near future than single family homes. Single family homes under the $500,000 mark are still within a balanced range with a smaller number of units under construction. This category of homes should be the safest in the end of 2015 and throughout 2016. For homes above $500,000 don’t be surprised if we begin to see large price reductions as demand is quite low for these houses and supply is so excessive that it has created a very strong buyer’s market in this category. Whatever correction Saskatoon does see, the condo market is looking like it will get the worst of it.

Data sources:

CMHC: https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?lang=en&cat=108&itm=9&sid=76A2NxqrSbftaOBw8xETdQ1hswMdfChUwJ0jnlMjGi58oY8WiUaReb29MQ1L3cc9&fr=1445231289540

Multiple Listings Service Database

Royal Lepage Viddora: http://teamfisher.com/blog

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