A steady slide in property values grabbed media headlines as 2008 drew to a close, and a further drop is expected in 2009 – a nine per cent drop, if the Canada Mortgage and Housing Corp. is right.
While developers and realtors fret over the potential for sales to rise or fall, the average homeowner faces the key challenges of a down market: determining how to sell a property that’s not moving and renegotiating the mortgage of one that’s a keeper.
The big questions, of course, are how deep the down cycle is and how long it is going to last. While home prices in Vancouver have been on a steady decline since May 2008, the latest housing market forecast from Central 1 Credit Union (formerly Credit Union Central of B.C.) reports that sales across the province have been in recession for three years. The average downturn is half that long, meaning the current recession is longer and deeper than people are aware.
Moreover, even if sales rebound onto more bullish ground, prices typically remain in a recession phase twice as long as sales. Given the extended length of the current sales recession, the stats from Central 1 indicate that we could be well into 2012 before prices begin to strengthen.
Of course, there are bright voices: Cameron Muir, chief economist with the B.C. Real Estate Association and a former senior market analyst with CMHC, expects things could begin to pick up as early as spring 2009 and anticipates the 2010 Winter Olympics instilling optimism in local buyers.
But as Gary Serra, a realtor with Sutton Westcoast Realty remarked in a recent letter to clients, buyers can either listen to what they want to hear or they can face up to reality.
“We are in a significant downmarket,” his letter continued. “They last a minimum of 18 months and up to four years. After that, it does not bounce back. It stays flat for three to 10 years. Then we will get prices soaring again.”
The softening conditions that have seen markets for everything from debts to assets drop in value demands a strong dose of realism. Assets to be sold have to be treated at current values rather than some past expectation of value, and Serra advises the vendors he works with to price to sell.
“People who have listed recently, they still are pricing them based on what the market was not what the market is,” he said. “There’s a lot of property out there that isn’t really priced accurately to today’s market.”
The imbalance is clear from recent sales-to-listings ratios, which are half those of a year ago. Available properties exceed demand, prompting owners to cut prices in an effort to attract potential buyers.
Serra says a price slightly ahead of the market is good, and a price that’s aggressively ahead of the market may be even better. The goal is to attract the kind of interest that will result in a final price that maximizes the return to the vendor.
“If you’re always following the decline, then the only time you catch up to it is at the bottom, when the market bottoms out,” Serra says. “If you lead the market – in other words, if you’re ahead of that curve – then you will definitely capture the attention of buyers.”
A half-duplex he listed this past fall in Strathcona hit the market at $70,000 below comparable properties in the area, but it attracted three offers. The final price was $40,000 above asking, meaning the vendor took a $30,000 hit on the property upfront but sold quickly and with fewer concessions than the buyer might have won through protracted negotiations.
“My client was very happy because she ended up netting more than she would have if we had just followed the market down, because it ended up selling for a little bit more than the average would have been,” Serra says.
A similar phenomenon works in a condo development where several units are on offer.
“If you’re the best price in the building, then you’re leading the market and chances are you’re going to have buyers walking through your door first,” Serra says. “Even in this market, well-priced and -marketed properties are still going to get multiple offers and full market price.”
A vendor taking the money to invest in another property has the luxury that other buyers have, of being able to negotiate down other vendors and so making the proceeds of the last sale go further.
Making financing go further in the current climate is more difficult, but not impossible.
Muir believes that many homeowners will feel better once the recession hits and they realize that the fundamental strength of the B.C. economy has left them with their jobs. It’s a good point, but for buyers seeking refinancing, particularly those who purchased within the past 24 months, dropping home prices mean it will be more difficult for them to secure financing.
That’s because a negative equity scenario could be playing out – the case when the value of the property is less than the amount of the mortgage outstanding. While residents of B.C. typically pay down their mortgages faster than those elsewhere in Canada, many presale buyers may be caught in this bind.
This will require them to either source additional capital to address the shortfall, or sell.
While there aren’t signs of this happening to any great degree yet, it’s a danger to avoid.
Throwing cash at the asset is one option, and sourcing cash is difficult in a downturn. However, speaking with a financial planner to rebalance your portfolio – including real-estate holdings – will be an important first step. The planner may be able to look at what other assets you have, and determine an effective means of repaying your debt.