Here’s The Difference Between A Real Estate Correction and A Crash

Despite a number of people throwing down the terms “correction” and “crash,” not a lot of people know what these terms mean. Just so we’re all on the same page, we thought we’d put together a quick guide. This way you millennials will understand what all of those old bears mean (or if they’re just making s**t up).

What Is A Real Estate Correction?

A real estate correction is relatively minor drop in the market. The market is in correction territory when the home price index falls not more than 10% from the highest price within a year. Corrections happen with greater frequency than you might expect, and are generally good for balancing market demand.

What Is A Real Estate Crash?

A real estate crash is much less common than the media would have you think. When the home price index falls by more than 10% from the 52 week peak value, you’re experiencing a crash. Crashes are relatively rare, and are usually accompanied by a strong decline in economic macros. Strong declines in macros are also known as recessions.

In August 2016, Vancouver saw a correction that was triggered when prices hit a peak of $933,100. The market saw a 4% decline shortly after, with prices re-tracing to an all-time high after hitting a bottom of $896,000. The last crash was seen in June 2008 when prices hit a peak of $570,100. Prices declined afterwards, hitting a bottom of 490,600 – 13.94% lower. Data Source: REBGV.

What Is Real Estate Capitulation?

Way back in ancient Rome, there was a politician and entrepreneur name Marcus Licinius Crassus. He’s known as the second richest man in the Ancient Roman Empire, and the guy that took down Spartacus. A little known fact is he made most of his money by owning a fire fighting service.

When a building would catch on fire in Ancient Rome, he would appear soon after with his a slave army of firemen, and a bag of money. Homeowners had two options, they could sell their home to Crassus who would then put out the fire – or homeowners could watch their wealth literally burn to the ground. This is where the term “fire sale” originated, and is the first example of real estate market “capitulation.”

Real estate capitulation is an extremely rare sight to see, but it does happen. This is also known as panic selling, and is marked by a more than 10% decline in a very short period of time – often less than a month. Market capitulation is usually followed by a brief pause, and maybe even a bump up in prices before resuming declines. These are unlikely without a massive loss in confidence over the currency, and local government.

Real estate markets generally don’t move as quickly as many people would like you to believe. When they do move fast, usually only a segment or two are impacted in this way. If you’re from Canada and the US, chances are you’ll never see market capitulation. However, you’ll likely see many corrections, and maybe even a couple of crashes. Constant evaluation of the real estate cycles will help determine if you end up like Crassus, or Nicolas Cage.

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Photo: frankieleon.