Friday, 15 March 2013

What Opinions Really Matter in Real Estate?

Every body has their opinions. Especially when it comes to real estate. I know I do. But I also know my limitations. No one can really tell you flat out that they know where the real estate market is heading. Still, I do work in the real estate trenches, and I have my hunches. And I go on about my hunches often in my blogs. 

But enough about me. Let's talk about those opinions bigger than me. The ones that come from  "experts", those who represent organizations that feel their opinion on real estate matter enough that they make public declarations on the direction our properties are heading and at what speed. 

So, what exactly makes someone an expert? And what makes experts worthy of a sought-after opinion? And more importantly, is there any bias or political bent to their opinion?

For the most part, in Toronto, the media tends to favor certain organizations when it comes to real estate opinions. Experts on high rotation tend to come from one of five groups:

1. Credit Rating Agencies
2. the Canadian government
3. Real Estate Associations
4. The International Monetary Fund
5. Banks

So, let's turn things around a little. Instead of these guys telling us what to think about real estate, let's explore just how credible they are. 

1. Credit rating agencies like Moody's, Standard and Poor, and Fitch Group are all from the United States. They are considered the Big Three, and to some extent, they are a big deal. They have been circulating around the news recently because they claim there will be a flatlining of real estate prices with the potential to fall 44% if the economy tanks in Canada. The thing you need to understand about these guys is that they completely failed to predict the economic meltdown that started in the U.S., their own country, five years ago. And rightly so, they received some flack for that. So now, they tend to be a lot more gloomy in their predictions. I guess they don't want to mess up and miss another potential downturn, if one ever occurs. 

2. The Canadian government likes to pipe in every once in awhile about real estate, but it is not entirely to inform you of the facts. They also use their information to effect the real estate market. And some times it's for our best interest. The respected and coveted Mark Carney has announced that individual Canadians are carrying too high of a debt load, and we need to be careful. And within a short time,  people did take his warning and pulled back on their debt loads. His public declaration changed how we, as Canadians, spend our cash. Other times, it's posturing.  Jim Flaherty, the Canadian Finance Minster, had recently remarked  that the banks should not lower interest rates. It's his government's way of not interfering with the real estate market by making stricter rules or raising rates, but just making remarks that look like they are protecting Canadians.

3. Real estate associations like the Canadian Real Estate Association, the Toronto Real Estate Board or the Ontario Real Estate Association are also quoted regularly.  These folks are often the most optimistic of the bunch because these organizations are largely run by realtors. And realtors can benefit from a healthy market. Still, their data is pretty sound. They have one of most extensive collection of data through the mls, and they hire out other real estate data researchers like RealNet to bring some thorough stats to the table. Their interpretation of this research can often be a little rosy, but it arises some of the best data.

4. The International Monetary Fund have quite a bit else to do besides comment on real estate, and yet they do any way. With a mandate to stabilize and supply money to nations around the world, the IMF still has a thing or two to say about real estate in Canada. Like the credit rating agencies, these guys tend to make macro-sized remarks on national real estate. Yes, there are important things that happen on a national, marco level that can effect the real estate market across Canada, like raising interest rates, but to suggest that a nation's real estate will act the same  all over the country is a bit too simple. I believe micro real estate markets say a lot more about a property. We can learn more about the value of a house based on its neighbourhood or a similar sold on the same street. To say a condo in Vancouver will function the same way as a cottage outside of Halifax is a bit of a stretch. Even in the U.S., the real estate collapse was not the same in Florida as it was in Texas or even Washington State. Cities and suburbs didn't perform the same. And condos and houses act differently too. Like the Credit Rating Agencies, the IMF has been questioned on it's poor predictions in the past. And they fall on the side of gloomy as well. 

5. Banks are more in line with real estate associations. They receive good data, and they tend to give rosier predictions. Not always though. Banks will dare to publish less than happy stats. And not all banks will say the same thing.  Yes, they rely on mortgages to generate money. So, they would prefer to present data that will sell more houses and condos,  but they also need to keep their investors informed. They have to be a credible source of the real estate economy so that their investors trust their opinion. 

All in all, predictions are a funny business. We will usually have a rough idea of what may come, but usually no one really knows. And there is no opinion from any expert that does not have some kind of biased or political slant, even though the data may be sound.  Buying or selling real estate always carries some risk. But that's how money is made.

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