Sunday, September 20, 2015

Leading vs. Lagging - Staying Ahead of the Pack in Real Estate

The stock market has its P/E ratios but what are the best indicators worth watching for real estate to know when a change in strategy is needed?
As real estate is a slower moving and less liquid asset class amongst stocks or bonds, it is important to see change approaching while it is still off in the distance.  The two largest drivers of real estate value movement for an urban market are the population and per-capita income changes within that region.  The problem with waiting for data on these two indicators is in some cases they can lag the market by 6 to 18 months.  The census data collected by the government on population figures which may be one of the more reliable sources can be well over a year behind the date it is needed. 
Given the lag in these indicators we must find ways of inferring up-coming shifts in market trends before those stats are released.  Three important leading data-points to understand and pay attention to are: Housing Starts, Sales to Listings Ratio, and Local Unemployment. 
Housing starts is a less frequently talked about indicator but is posted every month. Housing "starts" are tracked as the number of new building permits taken out by builders in each  municipality and can be treated as part of the housing supply.  Along with the number of active MLS listings which would include some of these new homes being built, the combination of these two represent the homes that buyers can choose from.  Some builders do not list all of their condos or houses on the MLS and prefer to sell them through direct advertising so it is important to watch both numbers.  
The Sales to MLS Listings Ratio could be viewed as a better and more timely indicator than population change although it is a mixture of a number of different factors including interest rates and effect of changes in the economy.  The sales to listing ratio in some of the Greater Vancouver sub-markets during the summer of 2015 was between 60-80%.  Anything over 30% is considered to be a sellers market, and in some cases there were more sales than the number of listings on MLS, showing a market where literally everything was selling. This stat is available monthly within weeks of month end making it a great leading indicator.
The last signal is unemployment.  The home buying power within an urban market is based on how much mortgage a buyer can afford to make payments on.  The level of unemployment is released every two weeks making it a great leading indicator. Taken in account along with recent changes in the prime interest rate and we can see how much change has occurred in the home buying power of the existing population within a city.  Right now Vancouver is seeing the lowest unemployment rate in recent history at 5.8% and with the lowest prime rate in the last five years at 2.7%, the fundamentals seem to be positively supporting home prices.
With strong GDP growth forecasted in BC for the rest of the 2015 calendar year, along with a relatively low level of MLS listings, extremely positive employment trends, and continued inward immigration, it is reasonable to expect the home price index will out-perform inflation (CPI).  
In future posts we will come back to these leading indicators and watch how changing real estate trends can be predicted.  If you have any more of your own favourite leading indicators feel free to share them in the comments below. Our collective goal should be to avoid the kind of exuberance which pushes markets beyond their fundamentals all the while ensuring we have the insight to make timely intelligent decisions about our real estate portfolios.