Boom, Bust or Balance, the road to Kelowna's Real Estate Recovery

Even though we cannot predict the exact future, we should be able to recognize solid fundamentals when they exist. And for the Central Okanagan, the fundamentals look quite good.

The history of Kelowna and Area (Central Okanagan) residential sales in the past 10 years is quite interesting. In the first chart you can see the rise and fall of prices, median prices, listings and sales volume. One could write a book on the data analysis behind these simple looking charts but I will summarize.

The Green Line is listing volume. Notice the peak in 2008 at over 5500 residential listings!  In addition, notice how in 2003 the number of listings fell from 3613 in 2002 to 3276 in 2003. When the Green Line and Red Line (Sales) are close together it shows that a higher ratio of homes are selling compared to those that are being listed.  Therefore when selection of homes is lower we often see prices rise over time.  This is what happened from 2004 to 2008.

The blue bars represent Average Sale Price and the green bars represent the Median Sale Price.

Around late 2004 listing inventory had not really changed but buyer demand was starting to move - ever so slightly. The balanced market of 2001 thru 2003 had changed to a sellers market in 2004.  Why? Albertan's and retirees started to check out the Central Okanagan. Sellers noticed the change and prices began to rise.

In 2004, Central Okanagan real estate must have appeared to be very affordable for Edmontonian's and Calgarian's.  The average home prices of $380,000 made Kelowna seem like a bargain. In response to this builders started to build!

Above is Central Okanagan residential sales and listing performance up to 2008.

If I showed you this graph in 2008, would you have rushed out and bought a house?

Isn't hindsight wonderful?

I should note that as Average Sale prices separate from the Median Sale Price it means that a larger number of much more expensive homes made up the sample on the high end and from 2004 onward, the luxury home market in the Central Okanagan started to expand.  Luxury homes came up for sale and a large number of these homes were purchased in the Upper Mission, Lakeview Heights and Wilden areas. (Note, these charts do not include Waterfront Sales).

This chart is very telling.  The metrics are all wrong. Interest rates in 2008 were hovering around 5.75% on a 35 and 40 year mortgages and buying power was actually quite low.  Buyers from out of town did not seem un-phased until April of 2008 (the month I started in Real Estate). Then the telephone stopped ringing. 

So, what are we looking at today and in the future?

Notice how the listings versus sales line are converging closer together. If they get closer we could see another sellers market. For now I think we could call the market balanced. I have seen some bidding wars on well priced unique homes and this chart shows a healthy tug of war between listings, sales and prices.

In 2004 interest rates were 7% and the average house was bought for $282k. Payments were $1,580 per month with 20% down (25 year amortization). Interest costs were $1,300 of that payment. So, even with a "lower" price home and a fair payment, home owners were paying down their mortgages slowly.

Today, interest rates hover at 3% and the average home price is $467k. Payment are $1,780 per month with 20% down yet only $930 goes to interest

In net "equity" terms, home payments are slightly less expensive today than there were in 2004 by a savings of more than $450.

Please remember that there are a number of important factors that go into making a purchase decision. My famous line has always been "foreclosures start from bad purchase advice, not from accepting a lower price when selling".

There are many things pointing to Kelowna truly being in a balanced market and it looks like we will stay this way.  Europe and USA economic woes imply that interest rates will stay low for a number years and demographic pressure for both retirement and lifestyle in Kelowna will only increase. In fact, in certain sectors, we could see a boom again... if Alberta has a particularly nasty cold winter!

Low interest rates mean solid equity pay down. Those with modest mortgages will see great gains in the coming years. As the current balance trend is showing, buyers are not reaching for the higher prices and sales versus listings trend at a fair distance.

Current media rhetoric suggests that Canadian real estate is crashing as if it is some sort of out of control 13 year old driving on the 401 through Toronto without brakes however careful analysis shows that market forces are easily measured.

Dean Desrosiers

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