Chapter 3: Economics and the Real Estate Market

Factors of Production

All economies require 4 elements to produce goods and services:

1. Land
2. Labour
3. Capital
4. Entrepreneurial skills

Economic Principles and Primary Indicators

Canada - mixed economy. Certain key indicators demonstrate a high degree of reliability in predicting economic swings including real estate are:

1. Resource Markets (land, labor, capital, entrepreneurial skills)
2. Businesses (supply)
3. Consumers (demand) 

Labour

The national employment rate, job creation, and job vacancy statistics is a very important info when analyzing local markets. Labor indicators not only measure the strength of the economy, but also efficiency with which manpower is being utilized in addressing consumer demand.

GNP - Gross Nationa Product. Measures total production by residents, corporations and individuals in the economy, overall prosperity within the country.

GDP - productions located solely within the country, a complementary indicator for GNP.

Retail Sales - these statistics are viewed as a lead indicator foreshadowing overall trends in the economy.

Consumer Confidence and Spending - quarterly reports. If attitudes are positive - increased expenditures on goods and services will result.

CPI (Consumer Price Index) - a measure of supply and demand. This is a valid measure of purchasing power.

 

Indexes - economists use indexes to show the change of a particular indicator over time.

Market Bubble - expansion of the market due to excessive buyer confidence resulted in inflated values. Real Estate bubbles have a significant negative impact on the overall economy. Government controls the bubbles.

Business Cycle - a series of economic events (prosperity, recession, recovery), that takes place in the same approximate order and time interval.

Government Interventions: 

• Spending Policies - gov directly impact the market through its acquisition of goods and services.
• Crown Corps - gov owned companies influences the natural supply and demand equation in the economy.
• Taxation 
• Statutes/Regulations

 

Analyzing The Real Estate Market

No Standard Product - no 2 houses are ever exactly the same. Each property is adapted to the needs of the owner.

Local Real Estate Market - real estate retains its local character.

Fixed Location - residential and commercial buyers differentiate identical properties by location (access to trnasportation, proximity to services, surrounding properties, travel distance etc.).

Market Not Standardized 

Slow Supply/Demand Adjustment - with an oversupply, production can usually be slowed. The market seeks a balance between supply and demand.

Private Transactions - The purchase of real estate is a private transaction, the results are not published at large. Info regarding the ownership is available through the docs registered at the provincial land registry.

 

Influencing Factors

Demographic Changes  - ex. family composition is a significant factor impacting the market. the family is the primary housing consumer unit. An increase in family formations creates an increase in demand for housing.

Employment Conditions and Wage Levels - a strong demand for housing is associated with periods of prosperity and increased employment. Also, pensions have enabled seniors to continue as homeowners after retirement.

Mortgage Volume and Interest Rates - loans are based on the lender's confidence in the borrower and the security that the borrower offers. If interest rates are high - people tend to stay put in their existing housing accommodations. As debt is frequently a major component in a house purchase, any significant interest increase directly impacts the market. If interest rates are low - mortgages become more affordable.

Building Activity - Substantial building activity indicates a strong real estate market.Overbuilding may depress real estate values by new supply in excess of demand.

 

Types of Markets

Seller's Market - the # of buyers wanting properties exceeds the supply. Properties sell fast, rising prices, many buyers looking and a minimal inventory available for sale. 

Buyer's Market  - the supply of properties exceeds the demand. Longer selling periods, fewer buyers compared to properties available, higher inventory and stabilized or declining prices.

Balanced Market - supply = demand. Properties selling within a reasonable period of time. Reasonable offers and prices.

 

Real Estate Market Cycles

Long vs. Short Cycles

Many believe that the long cycle is driven by demographics, transportation, macroeconomic growth etc. The shorter cycle affected by interest rates, consumer confidence, and general economic conditions. Others believe that the reals estate market demonstrated consistent short-term cycles every 6-10 years.

Real Estate Cycles vs. Business Cycles

Differentiate from each other.Variations occur due to unique factors - fixed location, supply/demand adjustment. 

 

Tracking The Ontario Residential Market

3 sources of market information:

1. Brokerage Files - specialized data collected to specific market areas or niches.
2. MLS Statistics - boards offer detailed statistics to assist in establishing market trends, preparing competitive market analyses for sellers and guidance to buyers in negotiating the process. Data is separated into active and historical. 
3. Other Sources - ex. Canada Mortgage and Housing Corp. offer housing and construction trends resources. 

Market Indicators - provide sale prices, average prices, median prices, average sale to listing ratios and # of days on the market.

Market Trends - statistics are often focused on measures of central tendency, most notably by mean (average) and median. The mode, which is the 3rd measure is used for real estate appraisal statistics.

ex. Mean: 5 selling prices of homes (1+2+3+4+5) / number of figures (5) = Mean price

ex. Median: is the middle figure (1,2,3,4,5) or (1,2,3,4,5,6)

ex. Mode: most frequently appearing # in an array of figures (1,5,5,5,8,3)