The PropRate blog has looked at demand side of property market. In prior posts, we have analyzed the impact of interest rates, GDP, earnings, affordability employment and mortgage approvals, on the property market. This post will review the supply side, with emphasis on sales to inventory.
The Winnner is?
The tug of war between buyers and sellers appears to be pulling in the buyers’ direction.Chart.1 below highlights the ebb and flow of RICS sales-to-inventory ratio (SIR) and house price inflation. The RICS ratio is comprised of RICS average stocks per chartered surveyor and the average sales per surveyor.
Chart.1 Sales-to-Inventory Leads House Price Growth
Chart.1 shows that the RICS SIR has a strong correlation with house price inflation. It is evident from the chart that sales-to-inventory leads house price growth by 3-9 months.
Table.1 Correlation between Sales-to-Inventory and House Price Growth
Table.1 reports the contemporaneous correlation between sales to inventory and house prices. The intensity of correlation increases has the SIR is lagged to 9 months; peaking at 0.89 at a lag of 5 months.
Chart.2 Inventory buildup Starting to Pick-up
It appears that inventory build is showing signs of rising. Inventory per surveyor has risen since May 2009, from 60.9 to 67.2. The current reading is well below the September 1990 high of 196.2 and series average of 106.2 (average is 77.6 when calculated from Jan 1996 when 1990’s cycle bottomed). Conversely, the average sale per surveyor is below the series average of 34.7. Sales per surveyor have been declining since Nov 2001; 38.9.
However, new instructions by sellers can influence inventory levels. Anecdotal evidence has highlighted the emergence of the “reluctant landlords”, who have opted to let as opposed to sell. Analysts have suggested that shortage of property on the market led to the bounce in house price inflation that began in Nov 2008 and peaked in April 2010.
Chart.3 RICS Survey in New Instructions/Enquiries
Typically, new instructions and new enquiries are inversely related. Intuitively, it appears that buyers’ enquiries lead new instructions. Lower prices attract new buyers’ enquiries, while sellers may wait for higher prices, before placing property on the market. However, the recent trend in both series is downward. These trends result in a lack of transactions on the market, as buyers wait for lower prices and sellers hold out for a price bounce.
Chart.4 Low Property Transactions on Leads House Prices
Low transactions volumes usually indicate a stalemate between buyers and sellers. Chart.4 above points out that peaks and troughs in property transactions heralds the peaks and flows in prices. Transactions are necessary to reduce the inventory over-hang resulting in an improvement in sales-to-inventory ratio. As inventories, decline properties begin to improve.
The ebbs and flows in the sales-to-inventory ratio usually capture the actions of buyers and sellers. Recent reports have shown that time on the market has risen. However, low base rate has resulted in low levels of repossessions, and the emergence of “reluctant landlords”. In addition, more support may arise due to rising rents, as an increasing number of potential buyers prefer to rent rather than buyer. Our guess is that prices will slowly fall, but the average stock per surveyor may not reach the levels reported in the early 1990’s. The indicator to watch will be the direction of interest rates. How long will interest rates remain supportive?