Pent up Demand, I saw this phrase used for the first time in quite a long time today.
This term is used to describe one aspect of lagging consumer behaviour in any given market. Economists use this term to explain the cyclical nature of the economy and a factor that drives a fast moving recovery from a recession. The theory holds that consumer demand never really disappears on an aggregate level. Buyers simply delay making purchases until they have a higher degree of confidence in the market.
In the attached article, the President of Royal LePage Canada makes some bold statements about housing values. One of the “experts” contacted by the Vancouver Sun states that while she doesn’t see things the same way as he does, she goes on to say “If we have pent-up demand this year, (Royal LePage) may very well be correct”.
So, do we have pent up demand? I believe the answer is “yes”. Consider this:
- From 2001 through 2011 the average number of homes sales registered by the Greater Vancouver Real Estate Board each year was just under 34,000. Then in 2012 and 2013, the number of annual sales declined to 25,000 and 28,000 respectively.
- In my opinion, this implies that there are roughly 15,000 buyers out there who, based on the performance of the previous 10 years, would have normally bought homes, but didn’t.
- Another interesting statistic is that from July of 2010 until September of 2013, a period of 39 months, there were only 3 occasions where the number of monthly sales were at or above the 10 year average for that month. Additionally, from May of 2012 until June of 2013, a period of 13 months, monthly sales never exceeded 80% of the 10 year average for that month,
I also think that this pent up demand began to ease a bit in July of 2013 for the following reason:
- Between July 2013 and December 2013, the last 6 months, there were 2 occasions where the monthly sales exceeded the 10 year average (October was 103% and December was 108%). Furthermore, there were 3 other occasions where monthly sales were 99% of the 10 year average and once where they were 97%.
My point here is that while the last 6 months have indeed seen an increase in sales compared to previous months, the 15,000 buyers mentioned above are still waiting to sign on the dotted line. These buyers haven’t left the market; they have simply deferred their purchases. These buyers are going to enter the market at some point and when they do, both sales and prices will be on the rise.
UPDATE: Read Pent up Demand Part II
Posted April 23rd, 2015