Wednesday, December 03, 2008

 

And The Real Estate Board Says ...

A lesson in Marshallian economics.
_____________________________________


The most recent bulletin released by the Real Estate Board of Greater Vancouver (REBGV) has stirred up a lot of apprehension in the Lower Mainland on the part of Sellers and Realtors alike. Sellers are clearly concerned by what they perceive as a drop in value of possibly their most treasured asset. Realtors, on the other hand, are fearful of the decline in sales with the corresponding decline in commission earnings. Following is the full, integral text of the REBGV Release, with highlighted in red the parts that seem to be causing a great deal of anxiety and widespread concern just about everywhere.

FOR IMMEDIATE RELEASE:

Slow home sales create window of opportunity

VANCOUVER, B.C. – December 2, 2008 – November reductions in home sales and prices have helped improve affordability in Greater Vancouver. However, November also saw a corresponding decrease in the number of new homes coming onto the market.

In its most recent statistics release, the Real Estate Board of Greater Vancouver (REBGV) reports that
residential property sales in Greater Vancouver declined 69.7 per cent in November 2008 to 874 from the 2,883 sales recorded in November 2007.

Residential benchmark prices, as calculated by the MLSLink Housing Price Index®, declined 12.8 per cent between May and November 2008, amounting to an 8.3 per cent year-to-date price reduction for detached, attached and apartment properties in Greater Vancouver between November 2007 and 2008. In May 2008, the overall residential benchmark price was $568,411, compared to $495,704 in November 2008.

“Times of turmoil, from which we always emerge, offer excellent opportunities to buy quality real estate,” says REBGV president, Dave Watt.“For those whose personal finances allow them to get involved, there are opportunities in today’s housing market that have not been seen in many years.

“The local real estate market is not immune to the current economic challenges globally; however, Canada’s disciplined lending structure has kept the mortgage landscape steady in these uncertain times.”

New listings for detached, attached and apartment properties declined 10.8 per cent to 3,012 in November 2008 compared to November 2007, when 3,377 new units were listed. Active listings in November declined 4.7 per cent to 18,348 from the 19,257 active listings in Greater Vancouver in October 2008.

Sales of detached properties in November 2008 declined 69.8 per cent to 322 from the 1,067 units sold during the same period in 2007. The benchmark price for detached properties declined 8.6 per cent from November 2007 to $666,525.
Since May 2008, the benchmark price for a detached property in Greater Vancouver has declined 13.6 per cent.

Sales of apartment properties declined 67.9 per cent last month to 410 compared to 1,276 sales in November 2007. The benchmark price of an apartment property declined 8.6 per cent from November 2007 to $342,315. Since May 2008, the benchmark price for an apartment property in Greater Vancouver has declined 12.2 per cent.

Attached property sales in November 2008 decreased 73.7 per cent to 142, compared with the 540 sales in November 2007. The benchmark price of an attached unit declined 6.4 per cent between November 2007 and 2008 to $426,287. Since May 2008, the benchmark price for an attached property in Greater Vancouver has declined 11 per cent.

In light of the foregoing figures, which are all but rosy, it would seem to be somewhat anachronistic for REBGV President Dave Watt to talk about "excellent opportunities to buy quality real estate", many of which opportunities have "not been seen in years". Afterall the bulletin speaks of a fall in residential sales to the tune of almost 70 percent for this past November compared to a year ago, as well as of a 13 percent decline of the benchmark price from May to November. And yet if there is one person who would wholeheartedly agree with what would appear to be at first glance Mr. Watt's somewhat optimistic stance, this person would be none other than Alfred Marshall, one of the founding fathers of modern-day Economics.

Prof. Marshall (1842 – 1924) was the first to attempt to explain price behavior within the context of the equilibrium between supply and demand in competitive markets. More specifically, as it relates to inefficient markets, the Marshallian Curve describes how prices vary as a result of a balance between product availability at each price (supply), and the desires of those with purchasing power at each price (demand). A market is defined as "inefficient" when prices of traded assets do not reflect all information about those assets. As such, prices are subject to variations depending upon information that is unknowable at the time the price is set - just like real estate.

Price elasticity of demand is measured as the percentage change in the level of demand that occurs in response to a percentage change in price. In general, a fall in the price of a good is expected to increase demand for that good. More specifically, price elasticity is said to be high when a small increase in price causes demand to fall substantially. An increase in price arises also in the situation wherein the general value of the commodities in an instant segment market falls. Thus, entering a market at a price level that is not in line with market value for similar goods causes demand for that particular good to drop, if its price level is even only slightly higher than the general market value. Lesser demand, of course, causes a fall in price for that particular good which, in turn, has the proximate effect of increasing demand, all of which, therefore substantiates Dave Watt's statement as it relates to the opportunities available in the present market.

Alfred Marshall, during his tenure at the University of Bristol in England, opined furthermore on the concept that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services or, in the case of real estate, capital assets. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behavior in terms of rational attempts to alter prices. Hence, as the pool of buyers dwindles, sellers must apply leverage on the perceived value of the interest in land they are offering , that is alter their utility so as to motivate buyers to purchase. Which, in turn, helps to consolidate the market. And this, of course, explains how real estate, among other markets, always rebounds from times of turmoil, as Dave Watt announces.

Thank you for the lesson in Capitalism, Mr. Watt.

Luigi Frascati

http://www.luigifrascati.com/

Real Estate Chronicle

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