Death Rattle

Over the last year, since the central banks of the world collapsed interest rates and provided a short-term game changer, I’ve been often asked when the real estate market would again turn down. To which I’ve replied it’s hard, if not impossible, to pin point an exact time, but I could tell you what it would look like… that being an inventory surge would signal the market turning.

So, knowing that, let me take this opportunity to state that I am now fairly confident in saying that we’ve arrived. The market turn is upon us.

That may seem like an odd statement, especially coming off the release of the March numbers which saw the biggest jump in average prices ever… but do not be fooled by the death rattle, that was the result of one final wave of dumb money and desperation, not of market forces. There could still be some upward drift left, these rallies typically have such blow-off tops… but all the legitimate market forces have turned, and are now pointing down.

We here in Edmonton know exactly what such a turn looks like… we’re not even three years removed from the end of the Alberta bubble. But then just as the bust was really taking root, interest rates were plunged and we ended up with a little suckers rally last year, one that took practically the entire country by storm. The rally was rather muted on the price front locally, as all the prior downward momentum saved us from setting new highs as much of Canada experienced, but it still goosed a market that was already over priced here. So, we made our hole wider, but not deeper.

Month-over-Month Inventory Change

Change in inventory is a great measure of a markets mood when it comes to buying vs selling, and while it is certainly dependant on seasonality, we know from history that such fluctuations are largely limited to within +/- 500 properties from one month to the next. That was true right up until the bubble burst in 2007… at which point the market started to cool and sellers suddenly flipped from reluctant to desperate and the market was soon flooded.

Soon that month-over-month change blew way past +500… and +1000… and +1500… before finally topping out around +1900, almost 4x anything that had been witnessed before. This didn’t just eke out a new record, this destroyed it… and sent inventory to levels never thought imaginable for Edmonton.

This massive upsides also resulted in massive downsides come each fall, but while the month-over-month changes swung wildly, the overall inventory levels remained extremely high. Then 2008 arrived, and the swings reverted upward again, and MoM changes against broke the +1000 mark, this eventually resulted in inventory blowing well past the 10,000 mark (broke 11K in fact)… more than double what even the record high had been prior to the boom/bust.

But then something interesting happened. Sellers realized they were flooding the market, and started to pull back listings. By the summer of ’08 listings were already starting to plunge, well ahead of when they normally did. Inventory remained historically high, but it looked like levels were dropping… this while sales tallies were poor, and the financial crisis turned poor into dismal, obviously not a result of actual clearing out.

Then we get to 2009, and looking the MoM graph again, and it looks positively normal from an inventory behaviour perspective. Largely back within the +/- 500 range again (other than December). This led some to conclude the market had re-entered balance, and this was just the “new normal”… while others, like myself, suspected this balance was an illusion caused by the interest-rate induced rally, that there was really a significant shadow inventory out there, and that when consumer sentiment shifted that the inventory problem would again rear it’s ugly head.

So, for the “new normal” crowd… this is where I say, “I told you so!”

As we can see, as soon as 2010 rolled around, inventory again started to take off, and surpassed the 500 threshold. I was hesitant to make any declarations in light of the January and February numbers, as while in excess of +500, it wasn’t by extreme margins and wanted to make sure it wasn’t just and anomaly caused by the recoil from fall delistings.

But with the March release of numbers, any doubt was removed… stick a fork in this rally, it’s done. And according to the preliminary April numbers, we’re in for another similar jump this month.

The same story also appears to be playing out in markets right across the country this spring. Even the CREA acknowledged the massive wave of listings, almost 100,000 nationwide. We in Alberta has seen this show just three years ago, we know how it plays out… now the rest of the country is going to get unfortunate opportunity to find out for themselves.