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Navigating a transitional housing market

June 2011

In April 2011, The Greater Montreal Real Estate Board announced that sale transactions in the Montreal Metropolitan Area were 18 per cent below April 2010. Of greater importance is that this was not an isolated observation. Indeed, April 2011 marked the 12th consecutive month where sales for the current month fell below the same month of the year before.

The board reported that the increase in the median sale price of various property types was more modest in April 2011 compared with April 2010. According the GMRB, these numbers provide evidence to support the fact that the real estate market in the Montreal area is becoming balanced.

The balance is between the supply of property by the seller and the demand for it by the buyer in a particular location at a particular time. A balanced market, also known as a transitional market, occurs when the balance between the supply of property and the demand for it reaches approximately five to seven months on inventory.

A buyer’s market occurs when the supply of property exceeds seven months of listing inventory available (buyer demand increases, while supply decreases). In a seller’s market, the supply of property available is less than five months of listing inventory (buyer demand decreases and supply increase). Traditionally, sales transactions follow a seasonal pattern, peaking between March and May, then slowing down during the summer. Sales increase again in the autumn, only to fall during December and/or January. It is like two different sized humps on a camel’s back, and the pattern is cyclical and predictable.

The market began to slow down just after January 2010. However, sales transaction numbers did not begin to shrink until May 2010. You could compare this with sprinting up a hill: At the beginning you are fast, but by the time you reach the top, you are moving much slower. At this point, the market really began to change, as inventory or properties for sale on the market began to increase relative to the year-earlier month. By September 2010, there was a greater number of new MLS listings on the market than the year-ago period.

The board commented on the modest increases in the median sale price of various property types in Montreal in 2011 compared with 2010. Average sale price transactions were examined because the data for the total region were unavailable for the median. Average sale prices continued to increase. The current monthly average is always higher than the year-ago month despite monthly fluctuations. But like the more modest increases the board reported on in April 2011, there is also a trend for more modest increases in the average sale price per sale transaction.

In the last eight months, there has been an increase in the number of properties for sale on the market this year compared with last year. This has provided more of a choice for buyers. With a larger inventory to choose from, buyers may be taking longer to choose a property and/or wait to see if prices are going to drop. Evidence to support this hypothesis is provided by the fact that the median and average sale price increases in 2011 are not as robust as they were in 2010. So properties may be taking longer to sell this year.

Between and between January and April, properties stayed on the market a bit longer and sale numbers are dropping. Thus, the real estate market in Montreal is transitioning and becoming more balanced. The shift is moving away from a seller’s market toward neutrality Sales prices are still growing, which means buyers are still willing to pay more for property than they did last year, but not as much.

It is certain that there will be transitioning markets in the next little while. In one area, the market may be balanced but in another, unbalanced. That is why it is very important to communicate with a real estate broker to determine the direction the market is taking in the area(s) you want to sell and/or buy in. Overall, however, the market still favours the seller. Furthermore, it is uncertain just how far the market will transition and depends on a number of factors, which include interest rates, buyer confidence, economic recovery and employment rates. Unfortunately, it is very difficult to predict what the state of the economy will be in six months to a year.

However, interest rates are bound to increase this year, the Bank of Canada promises. Also, interest rates have been fluctuating for months, but the general trend is up.



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