Many thanks to Pacifica Partners who sent me updates to their Chart Book. Click on the thumbnail to the left to get their Canadian Home Prices Over Rents Chart and their Price Correction to Historical Average Table. The originals are here and here.
Now that market sentiment has changed and buyers believe that prices will fall, and Realtors are advising their vendors to list their properties at below the last comparable sale, where will prices pool?
There are 3 ways to value property. Comparable Sales, Replacement Cost and by Income. In a falling price market, comps are used by Vendors to get liquid by getting ahead of the selling crowd by pricing below the last compared sale. At this point in the selling cycle only appraisers and developers are looking at replacement cost; in a deflation, input costs fall as well as price (see my real price chart).
The gravitational pull is towards the Income approach. In the absence of capital appreciation (ie: deflation) buyers will step back into the market in a big way when the return on investment becomes attractive.
If we use Pacifica Partner's price correction percentages required to bring Canadian property prices back into "historical fair value" we get valuations that are in the range to what the Plunge-O-Meter has been suggesting, ie: Spring 2005 Prices.
PACIFICA PARTNERS July 2012 Price Less % Correction vs
PLUNGE-O-METER Target of Spring (March) 2005 SFD Prices
- Vancouver less 40% = $570,120
Plunge-O-Meter = $503,141
- Calgary less 30% = $334,970
Plunge-O-Meter = $276,776
- Edmonton less 28% = $276,780
Plunge-O-Meter = $216,187
- Toronto less 32% = $407,901
Plunge-O-Meter = $411,529
Pacifica Partners makes the point:
"Any increase in interest rates to even pre recession levels (which were also historically low) causes Canadian real estate as a whole to appear grossly overvalued."
Plunge-O-Meter says "Interest Rates and Yields are currently negative or pointing at the nadir. If they start to tick up then the Plunge-O-Meter price targets will seem obvious to everyone."