Lack of liquidity brings big price swings

History in different types of markets shows that lack of liquidity can bring big price swings.

As the inventory of homes for sale in the County shrinks, we are moving closer to an illiquid market with the potential for a significant spike in prices.

Buyers should be aware that illiquid markets can also arise from a lack of demand, leading to a precipitous fall in prices.

Let me share two examples from personal experience regarding liquidity and prices – one happy example and the other one not so happy.

Big Gain From Lack of Liquidity

In the mid-1990’s, the consulting firm I worked for asked us to relocate to the company’s head office in Philadelphia.

We brought our sailboat with us and spent some time looking for the best place to dock the boat. In the end, we found a dockominium in New Jersey on a bay just minutes from the Atlantic Ocean.

I have never run into a dockominium in Canada, but in the States they are just another form of condo. Instead of owning an apartment, you own the dock and then share things like the clubhouse in common with other owners.

The dockominium project we found was very new and very nice – clubhouse, pool, nice docks, etc. However, in those days dockominiums were a new concept and there was only a trickle of buyers for docks.

When we bought ours, there will still a couple left to sell before the project was sold out.

Sales proceeded by dribs and drabs and it was six months before the remaining handful of docks sold…and as soon as they were all sold, the price doubled. When there’s limited or no supply, you find out what people are really willing to pay.

When we moved back to Toronto a year later, our dockominium proved to be a very good investment.

Big Loss From Lack of Liquidity

That’s a happy example that illustrates the upside when lack of liquidity brings big price swings, but the results can also go the other way.

During the summer of 1990 I was trying to sell my house on the Scarborough Bluffs. Home prices rose rapidly that year until July, when market sentiment changed almost overnight and house prices started to fall $20,000 a month in today’s dollars.

Unlike the dockominium where there was too little supply, there was suddenly too little demand in the Toronto real estate market and no one wanted to “catch a falling knife”.

When prices start to fall quickly, buyers can sit on the sidelines becasue they don’t want to buy a house, only to see it worth less the next month. My house eventually sold in November at a significant loss. Toronto house prices took 13 years to recover to the 1990 price level.

County Can Go Either Way

In my opinion, the County real estate market is entering a period of limited liquidity with the potential for significant price swings in either direction. Right now, we are looking at an extreme shortage of listings leading to a rapid increase in prices…but the opposite could also happen as the public begins to feel the impact of the deep recession gripping the Canadian economy.

I believe that, over the long run, demographics (particularly the growing number of people working from home) point to strong and growing demand for County real estate.

However, in the short run, there are pressures which could lead to either significant price increases or price declines and no one knows for certain what will happen.

What does this mean for buyers? Given that lack of liquidity brings big price swings, this is not the time to over-extend.