If you’re a relatively new REALTOR® or even a multi-year veteran, how do you convince buyers that prices are ‘sticky’?
By showing them.
Every month, we include an updated graph in our Monthly Statistics Package – second last page, Average Price Residential Detached – All Fraser Valley. The timeline goes all the way back to 1979 (Mork & Mindy and Three’s Company were the hot TV shows.)
The graph is above. Your clients don’t need to worry about individual months, or even specific years; but you can point to the peaks and valleys, differing cycle lengths, and the fact that virtually all new price peaks surpass the previous highs.
Prices of course, moderate and react during every cycle – that’s the nature of all markets, they must have a run-up and a recovery – but few market downturns in our region resulted in prices plummeting quickly and sharply.
History shows that sales can decrease quite suddenly, but dramatic price corrections – or the bubble bursting, as the media like to call it – is actually quite rare.
The worst correction our region has ever seen was during 1981/1982 housing crash, due to sky high interest rates. From peak to trough, prices decreased 38 per cent. In a recent interview with FVREB, long-time Fraser Valley Realtor, Jim McCaughan, said, “The 1980 market was the worst one I have ever been in.
“We had to say Mr. Smith, ‘I know you’ve got money problems, health problems and matrimonial problems, but here’s the reality, you bought at the peak for $110. Your house today is worth $76. And you owe $95 thousand dollars. You can’t sell. You just can’t sell.’ A lot of those people just declared bankruptcy. It was awful.”
As you can see above, over the last four decades, there have been approximately eight up and down market cycles, some less than a year and others up to a decade long, with shorter mini-cycles contained within the longer ones.
The next ‘worst’ price correction was during the 1990 Canadian recession. Detached average prices in the Fraser Valley decreased by 12 per cent. A similar decrease happened during the 2008/2009 global financial crisis, and then again between 2011 and 2013. After the introduction of the BC Foreign Buyers’ Tax in 2016, prices decreased 5 per cent over four months. And starting in 2018, prices dropped 6 per cent over one year as a result of the introduction of the federal mortgage stress test.
As you well know, those decreases would have been absolutely disheartening, even devastating, to any of your clients who bought at the peak and then had to sell at the valley. However, compare those price corrections to the run-ups.
Between 1990 and 1997, average prices increased 63 per cent; from 2001 to 2008, 136 per cent; from 2013 to 2016, 69 per cent; and, between 2019 and 2021, 41 per cent.
Brendon Ogmundson, BCREA Chief Economist, explains why prices are slow to adjust, “This is due for a number of reasons, both psychological and economic.
“Firstly, sellers tend to have price expectations that are very closely anchored to recent peak sale prices. In a declining market, buyers are expecting lower future prices. As a result of this mismatch in expectations, markets take time to adjust.”
Ogmundson adds, “It’s important to remember that if sellers do not have to sell, they have the option to withdraw their listing and wait until market conditions improve, which lowers supply and reduces downward pressure on prices.”
Over time, a new cycle begins, and excess inventory gets absorbed by renewed economic growth and population growth. Currently in the Fraser Valley, sales are decreasing, but so is supply – both have been on a downward trend since our 2020/2021 sellers’ market peaked in March.
Remember, bubbles are predicated on speculation driving up demand – think of the US predatory lending practices, which lead to the 2008 global crash. When demand stops and supply continues to increase, prices decline. Ogmundson still stands by his comment in a conversation with us earlier this year, “Given a recovering economy, strong demographic fundamentals and population growth, and persistent low mortgage rates, I see no reason to put any stock in the latest round of housing crash prognostications.”
BCREA’s second quarter forecast predicts that Fraser Valley home sales will decrease by almost 17 per cent between 2021 and 2022, but average home prices will continue to rise – by 2.6 per cent year-over-year. For more market intel BCREA, head to www.bcrea.bc.ca.
Source: FVREB Communications