Ramblings on Evaluating the Changing New Home Market

Ramblings on Evaluating the Changing New Home Market

by Steven Hurst, informedadvantage.wordpress.com
December 21st 2012

I spend my days preparing a multitude of charts and graphs which present the GTA new home market in a wide variety of ways. As I’m curious about these things, I attempt to discern meaning from each chart and what it might indicate regarding the future performance of the new home market.

I’m under no obligation to do this. We don’t provide “official” interpretation or prepare forecasts on what we think will happen next year. We stick to the facts.

But curiosity, years of chart making and pattern watching, and reading all manner of media reports and analysts commenting on the market leads me to believe the metrics typically used to analyze the market are not changing as the new home market is changing.

Perhaps it’s more about perspective and perhaps the metrics used are fine but we just need more of them now to paint an accurate depiction of the market.

As an example I have written about the “shift” from a mostly low rise (detached) market to a mostly high rise (apartment) market and how this limits the ability of the metric of Housing Starts to fully explain and evaluate the market. But there are other complexities related to the evaluation of Sales, Remaining Inventory, and Units Under Construction, particularly in the High Rise new home market, that require additional perspective. Any one metric has a few ifs and buts attached to it…

Here’s an example: November high rise sales were 1,556 units. That’s down -60% from the same month last year. However, our research team pointed out that there were 10 new projects that had their first firm sales in November (opened Oct20 to Nov19) and they were collectively 49% sold out in their first month. The 904 sales in these 10 projects accounted for 58% of November’s high rise sales. Maybe we should call it a Tale of Two Markets (3 if you count Low Rise).

So, now we want to quantify the difference between the sales performance of “new inventory” vs. “old inventory” and see if we can learn anything.

First, let’s look at yearly sales from 2007 through Nov. 2012 compared with total units from the new openings of each year (finally some charts…)

yrly-sales-and-new-openings2.jpg?w=1024&h=787

In the above chart their is definitely a relationship between high rise sales and new openings. It appears that sales will track the number of units in new openings for each given year. Yearly sales (not incl Dec2012) are averaging 94% of new openings (sales/openings) over the last 6 years – ranging from 79% in 2008 to 142% in 2009. So far 2012 is at 81% but will change slightly when December sales are added.

Now if we drill down and look closer at the makeup of monthly sales based on when the sold unit was originally available for sale (ie year of project opening) we get the following chart…

mnthly-sales-by-opening-year.jpg?w=1024&h=787

From this chart we find that on average, over the past 6 years, 61% of the sales in any given year were units that opened that year.

Specifically, so far in 2012, 63% of the yearly sales were in projects that opened in 2012. In 2011 it was 69%, in 2010 65%, in 2009 40% (openings were mostly in H2), in 2008 57%, and in 2007 64% of yearly sales opened in 2007.

Also, of the total units opened in a given year, on average over the past 6 years, 58% are sold during the year they opened. So far in 2012 51% of the new openings have sold. In 2011, 66% of new openings sold. In 2010 62% sold; in 2009 57% sold; in 2008 45% sold; and in 2007 59% of new units sold that year.

So now, I’m convinced that most of the units sell in a given year were units in projects launched in that same year. So if “new inventory” sells faster than “old inventory”, how long does it take the “old inventory” from a given year to sell out?

Here’s a chart of monthly remaining inventory over time with each colour representing the year of project opening – the year that inventory was first available for sale.

mnthly-rem-inv-by-opening-year.jpg?w=1024&h=787

The chart above does a great job illustrating the long tail of supply (remaining inventory) from each year. The long tails are the “old inventory” which get taken up at a much slower rate than the “new inventory”.

At the end of November 2012 the remaining inventory of 21,398 units were 51% from 2012 projects, 29% from 2011 projects, 9% from 2010 projects, 3% from 2009 projects, 4% from 2008 projects and 3% from 2007 projects.

Now here’s some general speculation on my part (please send me your comments or questions directly). So with the majority of marketing efforts, and resulting sales, occurring at the beginning of project sales cycles, and with the sales of older inventory likely somewhat dependent on the progression of a project’s construction schedule we’ve got two high rise markets from a timing perspective. Alternatively, if investors are the predominant buyer type at the beginning of the sales cycle, does that mean owner occupiers are the more typical buyer toward the end of the process?

There are lots of implications to be investigated here. Things like the suite mix and price changes throughout a project impacting sales or financial performance; or do more projects under construction slow delivery timelines and thus slow end of tail sales.

Anyway, I have many more charts and numbers to share on this (check back next week) but feel the need to wrap up for now. Generally however, I think we need to now consider a wider variety of metrics, including the sub-components of new home sales in the high rise market as the marketing approaches and delivery timelines of today’s predominant new housing form are now so different than 10 years ago. It’s the only way to accurately gauge ongoing market performance.

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