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Inventory Levels Mounting At The Higher End of The Market

 

Under Nanaimo

 

Written by on April 8th, 2019
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Inventory Levels Mounting At The Higher End of The Market


Single Family Prices and Volume

95 single-family homes sold in March, 24 more than the 71 sold in February, but 6 less than the 101 that were reported as sold in the same timeframe last year. The average home price decreased by a fraction in March to $546,656 from February’s average of $546,662, which is 0.86% lower than reported last March when the average home price was $551,392. The median sale price increased almost 3% to $530,000 in March from February’s $515,000 but this is 1.4% lower than the same time frame last year when the median sale price was $537,500. 198 homes were listed in March, which was actually 65% more than the 120 homes listed in February, and 2.6% more than the 193 listed in March of 2018.

Insights: For the second month in a row, the average home price is down when compared to the same month a year ago, albeit marginally. Similarly, sales volume was down slightly and the number of new listings up slightly when compared against March of last year. By and large, this falls in line with our 2019 Forecast, where we predicted prices, volume, and listing volume to remain relatively flat when compared against last year’s numbers, suggesting by the time we turn the page on the calendar year, we may have experienced a slight pick-up in sales volume on the condition that sellers’ expectations on price become more realistic, otherwise we could be looking at a further decline in annual sales volume. Looking at the first quarter of 2019, sales volume totaled 221, which was down noticeably for the third consecutive year (275 in 2018, 307 in 2017), after reaching a cycle high of 351 sales in 2016. The takeaway here is that so far in 2019, many sellers are not pricing their homes where they need to be priced in order to sell. In higher-priced neighbourhoods, sellers are likely still referencing what their neighbours sold for in 2017 or 2018 and using these figures to anchor their opinion of value. Until this changes, and it will at some stage if sellers want to sell their homes, sales volumes, especially at higher prices, are poised to stay relatively subdued.

So how did Nanaimo stack up against other Island communities north of Victoria for the month of March? Nanaimo is actually doing relatively well. Looking at average price, the Comox Valley and Cowichan Valley were up on significantly lower sales volume, while Campbell River was up on slightly elevated volume. Parksville/Qualicum and Port Alberni posted double-digit average price decreases on declining volume. Looking at the entire Vancouver Island Real Estate Board totals, the average sale price was essentially flat, up less than half a percent, while volume was down 23% from March of 2018.

Strength of the Trend

Factors we also look at when analyzing a market to validate its strength are sell/list ratio; sell price; days to sell, and current inventory numbers:

The sell/list ratio decreased from 59% in February to 48% in March, which is also down from March of 2018 when the ratio was 52%.

February’s sell price/list price remained at 98% in March, which is down from March 2018 when the sell price/list price was at 100%.

The average days on the market increased by 1 day to 33 in March, which is 65% higher than March of last year when the average days on the market came in at 20.

As of the end of March, the number of active listings was 312, up 20.5% from February’s 259 active listings, and almost 15% higher than at the same time last year when there were 272 active listings at month end.

Insights: When considering both month-over-month and year-over-year figures, 7 of 8 market indicators in this section deteriorated, with only month-over-month sell price/list price remaining constant at 98%. Nothing improved. While the market is taking a much-needed break after such a strong run over the past few years, the results we are seeing are not suggesting that a market crash or significant correction is imminent, as these numbers by historical standards are still all quite respectable. The deterioration here is more of a reflection of the fact that the strong market action experienced over the last number of years was simply not sustainable.

Top Performing Neighbourhoods & Categories

9 of the 18 sub-areas defined by the real estate board in Nanaimo saw an increase in the average selling price (trailing 12 months) from February to March, with 14 of the 18 also experiencing increased prices year-over-year. When looking at these neighbourhood figures, it is important to note that we use trailing 12-month figures to limit volatility caused by lower transaction volumes in some neighbourhoods, where a few high priced or low priced transactions could tremendously skew results. A trailing 12 figure will always be slower to react than simple month-over-month, so that is why the results here are not going to be as pronounced as the figures used in the stats we report above. This also explains why we reported in the previous section, that year-over-year, the average home price has decreased, and then report in this section that 14 of 18 neighbourhoods are up – it is simply different reporting periods, as the year-over-year figure from a year ago that we are comparing against this year’s trailing-12 figure also incorporates the previous 12 month’s results into the average. Moving on, these year-over-year average price changes range from -4.07% in Lower Lantzville to 13.37% in Pleasant Valley, topping the chart since August 2018. The top riser month-over-month was the University District with Upper Lantzville the second highest. Top performers year-over-year were Pleasant Valley, Diver Lake, Old City, and Cedar. Looking at volume, 7 of the 18 sub-areas saw increases month-over-month with Brechin Hill and Cedar the top risers, while no neighbourhoods experienced increases both monthly and annually.

Insights: As alluded to above, the trailing 12-month figures are not telling the whole story, as these averages are still benefiting from the stronger months that were experienced at certain points throughout 2018. With a bit of a lag here on the trailing 12-month figures, we are starting to see more neighbourhoods’ reporting periods showing month-over-month average price decreases. The areas that are still showing strength are primarily the more affordable neighbourhoods, as a fair contingent of buyers have been priced out of the highest priced neighbourhoods.

On relatively low volume, lots, townhouses, and single-family waterfront homes were the only categories that saw an increase in average sale price from February to March, while only townhomes saw increases year-over-year. All categories with the exception of patio homes experienced month-over-month increases in sales volume, with only single family waterfront and lots experiencing increases year-over-year.

Insights: It is not a huge surprise that townhomes are continuing to perform strongly, given the affordability challenges that are impacting the single-family home market. If you think about it, what do you do when you are priced out of the single-family home market? Sit on the sidelines and hope that prices come down, or alternatively, buy a townhome which offers many of the same benefits (without the maintenance requirements) at a more affordable price point. If you have been following our commentary for a while, you will know that we are quite bullish on the market for patio homes given the demographic-driven demand. Over the past couple of years, we have seen patio homes consistently exhibit both strong price and volume action. Seeing (my beloved) patio home category as the poorest performer in March initially drew an extended double-take. However, when you consider where the demand for ground-oriented retirement residences is coming from, it does actually make some sense. Local downsizing baby-boomers are struggling to sell their 3,000+ square foot homes (more on this to come) as the local population, by and large, cannot carry the debt load required to purchase these homes at the prices sellers are expecting. Out-of-town buyers who are hoping to make Central Vancouver Island their retirement destination of choice are also being constrained by their local market conditions. It is important to remember that while the Nanaimo market is slowing, relative to other communities across the country, Nanaimo is actually fairing better than many other communities. Take the Lower Mainland, where a significant percentage of buyers originated from over the past 4 years, and the sales volume reported by the Greater Vancouver Real Estate Board for March dropped 46.3% below the 10-year average, a decrease of 31.4% from March of last year when volume had already slowed significantly. Prices are also down significantly from their cycle highs, so taken together, if far fewer homes are selling, there are far fewer buyers in a position to make the move to the Island for retirement.

Opportunities

From our perspective, overall we see the market increasingly moving towards more balanced market conditions. However, this is the “broad strokes” take on the market. When you zoom in on different price ranges in the single-family market, there is some noticeable disparity between price range. Again, while we don’t like to generalize, you could look at the sub-$600k range as still being very much a seller’s market as long as the home is priced reasonably. The $600k – $800k range is more balanced, but trending towards a buyer’s market at the higher end of the range, with the $800k + range very much a buyer’s market. At the time of writing, there are 152 active listings of homes priced beyond $800,000 in Nanaimo, yet there were only 4 sales in March above $800,000, which is down from 5 in February, despite overall sales volume being up 34% from February. At the end of February, there were 102 homes on the market priced above $800,000, so in one month inventory levels increased by 50, nearly 50%, and we haven’t even approached the busiest listing months of the year. At this rate of absorption, we are now sitting on more than 3 years’ supply, with mounting listing numbers…How quickly things change.

Sellers take note…the sub-$600k market is still overheated, as affordability constraints of local buyers and a subdued supply of listings in this price range has created a competitive market in this price range. If you are a homeowner or investor thinking about selling your home priced below $600 – $650k, this spring likely represents your best opportunity over the next few years to do so. With inventory levels continuing to grow at higher price points, at some stage motivated sellers are going to adjust their pricing expectations to secure a sale. We’d anticipate that there will be somewhat of a ripple effect, where we are going to see more value at various price points than we are seeing now. While we don’t foresee average prices correcting much, if at all, in the coming year or two, what we do see is that dollars will likely stretch further and buyers will be able to buy nicer homes at more affordable prices than they can today. When you have 2,000 square foot 60s and 70s homes in marginal areas on the verge of needing $50,000 worth of work to replace all the majors (windows, roof, furnace, etc.) listed above $500,000, we don’t see that as sustainable, as Nanaimo household income levels simply won’t be able to support it. The only reason sellers are getting away with this so far this spring is that there is limited supply at this price and lots of buyers. When the homes that are not moving at higher prices start to be priced more competitively and become competition, these homes will eventually have to be priced more attractively to move. The other important factor is that if prices start to come down and the masses become fearful that prices could be declining, those fearful of a falling will list their homes to limit their downside risk. The result of this is increasing inventory, more choice for buyers, and the weaker options at a given price point will need to adjust their pricing to remain competitive. In summary, if you are thinking about selling a home that may need a fair amount of work or that isn’t in the most ideal location, sell into strength – strong buyer demand and limited inventory, don’t wait until inventory levels pick up and buyers have more choice and room to negotiate, as is starting to happen at high price levels.

On that note, where do we see opportunities for buyers? Well, with increasing inventory levels for homes priced above $800k and sales few and far between, there has to be a few motivated sellers out there getting increasingly anxious and who may be ripe for reasonable price concessions. For buyer’s looking at higher end homes, we’d caution you to take your time as seller sentiment is still optimistic that the current slowdown is still just a hiccup on a further trek upwards in pricing. Unfortunately, there is a decent contingent of industry players who continue to validate this outlook to their clients in this market. When you start looking at what has caused the higher end of the market to stall out, our take is that this is going to get worse before it gets better, so some patience from buyers is likely going to be rewarded. So what has caused the higher-end market to stall out? Here is our take… On the demand side, the cooling lower mainland market and intensified media coverage of the slowdown is making lower mainland buyers fearful of buying, and the foreign buyers’ tax and speculation tax has nearly killed demand from foreign buyers. When you look at who was gobbling up the higher priced homes at the peak of this cycle, much of it was mainland and foreign buyers who had the income levels to finance or the cash required to purchase these higher priced properties. When you remove the out-of-town buyers, local buyers simply can’t support the current price levels. Looking at the supply side, contributing to what we feel will be some pain here is the fact that increasingly you have the largest block of our population (aging baby boomers) who are living in these $800,000+ homes and are looking to downsize in the coming years. This will likely only lead to an increase in the supply of homes priced towards the top end of the market, as Nanaimo income levels will not qualify buyers for financing to absorb the increased supply of homes coming on the market. Until we see substantial renewed demand from out-of-town buyers with deep pockets, this should result in even more choice and negotiating strength for buyers at the higher end of the market.

While sellers of higher-end homes may have missed the top of this market cycle, life circumstances will continue to drive sellers to list their homes. With more listings currently on the market and fewer buyers, it is all the more vital that the home is priced accurately and competitively to maximize exposure when interest is the highest. So if you are listing, selecting a Realtor with a strong marketing platform and an active approach to marketing your home is becoming increasingly important. While we went through a period for the last few years where a For Sale sign and an MLS listing were enough to entice buyers to write an offer (definitely not our approach), in this market that haphazard approach is simply not going to cut it.

For investors, on the buy side, patience is going to be rewarded. If you are considering an income property, you are likely best served by looking at other markets or waiting it out as there is no way you are going to cash flow on a leveraged purchase. Given what we have outlined above, we would not recommend speculating on further price appreciation with a negative cash flow property in this market. For multi-family investors, cap rates are at historic lows and therefore valuations at all-time highs. Factoring in the significant number of purpose-built rental apartment buildings currently in the development permitting or building permitting stage, the increased supply of rental units in the coming years is going to potentially put downward pressure on rental rates, and push up vacancy rates which are already starting to increase. While expectations are that further interest rate hikes are likely on hold for the foreseeable future, rates are still below historic norms, so it is likely that before too long we will continue the climb to a more normalized interest rate environment. When that happens, eventually cap rates will start to see a similar increase towards more normalized levels. Without the upward pressure on rents, this is setting the stage for decreasing values. We’ve not exactly described the ideal conditions for investment.

Remember, over time real estate generally appreciates. We just know there are peaks and valleys. Buy on the way to the peak and you are positioning yourself for success, buy on the way to the valley, not so much. It is our mandate to provide you with information that you can use to determine which side of the peak we are on, and ultimately to help you make informed decisions that you will not regret. On that note, a word of caution: Be very careful where you get your information on the real estate market. The reality is most who are providing an opinion (us included), have their income level influenced by the real estate market and therefore have a vested interest in keeping this juggernaut going. There were sponsored social media ads in our market early in 2019 claiming “the Nanaimo market is just heating up.” Be cautious… watch the headlines…Make sure you get the full story…

For a consultation specific to your situation, or if you have any questions about market conditions, please contact us at info@jahelkagroup.com and we would be happy to help.

Check out the Nanaimo Market Statistics Here: Monthly Statistics March 2019

Source: VIREB