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Last week, lots of media stories mentioned “sales” of residential properties as though they was a sign of some important change: e.g.

followed by anecdotes and interviews with happy buyers and sellers. To most people, this news is something to talk about which means surprisingly little.

First, don’t confuse “sales” with “revenue” or “price”. It is possible that more houses were sold, but it matter whether prices are higher (i.e. excess demand) or lower (i.e. panic selling). Journalists may recognize this difference because the titles used in the print edition of the newspaper are shorter than the more informative titles used on-line.

The number of houses sold in a city might be educational to an individual real estate agent, since their income is proportional to sales, but not very.

To a home seller, the fact that a lot more other homes were sold is not a big deal. “Waiting” is a part of a seller’s strategy. So, I think that the measures of “time on market” or “days on market” are more personally relevant.

In Toronto, that number is well under 30 days. This measure is not perfect since, in many places, only houses which sell are counted. The Toronto Real Estate Board has started to report on the SNLR (sales to new listings ratio) and, for the last year, it is about 60 to 70 percent for most parts of the GTA: i.e. for every 100 new listings, about 30 to 40 are not sold by the listing agent.  These houses can be listed for a long time before being withdrawn.  In Vancouver, the SNL ratio is closer to 80 percent. (The board in Vancouver does not routinely report the time measure.)

Waiting is also part of a buyer’s strategy: e.g. If I find a good enough place, how long can I wait? How many homes are listed for sale or, more precisely, how much choice do I have?

Which raises a question:

  • Is “sales” a measure of the demand side or the supply side of a market?

Actually, and unlike the markets for other kinds of goods and services, sales does not measure either side. Unlike the demand for bread or clothes, which is based on a “flow” concept, housing is a kind of “stock” and people can live somewhere without buying a different home every month.

Better measures of the shifting demand curve for homes are found in demographic and psychographic statistics. A better measure of the supply side of a market is found in new construction.

“Absorption” statistics are a better measure of excess demand. The net figure is usually positive but can be negative. Econ 101 teaches you that price trends depend on excess demand not supply or demand separately.

There is one subtle way in which the number of sales is important information. Real estate is an illiquid asset. Having lots of other people buying and selling makes it easier for the “marginal” person to buy or sell: it lowers transaction costs and improves the flow of information. As experienced after the 2008 crash in the US, this factor will become more obvious in Calgary if the current slowdown continues. But, that was not mentioned in the media.

So, for all of the media attention that it attracts, the number of sales is only a conversation starter.