Wednesday, 16 September 2015

The Trail of Failed Real Estate Predictions

I'm feeling a little nostalgic lately. Maybe it's the Star Wars trailers I've been watching. Maybe its the Back to School blitz I have been seeing everywhere. But it also has to do with the Fall market in real estate. Yes my nostalgia does, not surprisingly, extend into real estate.

So, I did a little journey back in time to see what a few naysayers were claiming to know about Toronto and Canadian real estate from the past ten years. In many cases, the naysayers were claiming to be very certain that the real estate market was going to crash in Toronto and even in Canada. All their indicators are going off like alarm bells. And yes, their arguments seem very convincing.

And I'm not here as a cheery real estate salesperson to tell you that a market will never correct itself. It might. As I aways say, I'm not a fortune teller. I did not anticipate the rise in prices we have seen in the past year.  I don't know when or if the housing market of Toronto will undergo a correction. Real estate prices are cyclical. Prices rise and then fall or level out temporarily before rising even higher the next time. Not at regular intervals, because that would make things too predictable.

 So, I'm always amazed at how many people are so certain. Usually it's to sell a book.  Almost every publication has had predictions from Toronto Life to the Toronto Star.  From German banks to those guys who comment on the end of any real estate article.  My favourite is Garth Turner. I don't think he's such bad guy, really. He does make some good points, but he has been calling for the fall of Toronto for a long time. Check out this clip back from 2008:  Garth 2008. I think there was a climate of fear here because in 2008, the Great Recession was underway. It would be easy to be fearful in this time. And let's face it. I have the advantage of hindsight. Hindsight is always 20/20, right?

Still, if you did follow Garth's advice here, you may have sold your home and seen the market run ahead of you. It may have seemed wise to sell your place. It may have looked like you were going to be the smart one who avoided losing their shirt buying real estate. What you really would have done, by 2015 standards, is sold your 2008 home and lost a lot of appreciation that would have happened between 2008 and 2015, particularly if you bought a house. You may have also priced yourself out of the market.

My point here is that it's hard to predict a downturn in a market. If it was easy, a lot more of us would be very rich. In the U.S., those who said the U.S. market was going to tank in 2008 took full credit when it did happen. Guys like Nouriel Roubini. Smart guy. He had some very valuable things to say. I wonder though, if his guru-like status was just a bit too much. Personally, I think many of the gurus who predicted the crash in the U.S.  were lucky with their timing or they just said it long enough that finally, they had to be right. The truth is, there are signs of an overheated market now in Canada. There were signs of an overheated market in 2008 for Canada.  But there is no way to know when a market will change. It appeared in 2008 that Toronto was destined for a correction. It didn't look good. Price were slipping. The world was panicking, and people were losing their jobs. But the market didn't crash. It did the opposite. Logic did not apply, though Canada was much better set up with safeguards in the real estate market to protect itself in ways other countries had not. 

With all this said, my advice would be: Don't let fear be your guide. If you are planning of flipping a house in a short period of time, that is always risky. If you want to play it safe, buy a house you can carry financially now and for awhile keeping in mind that interest rates can change.  If the worst thing happens and your house falls in value, you'll still be able to carry it. And if you hold on long enough, prices will recover and start heading back up again. This may sound like a prediction, but really, it is my thoughts based on what has happened over the last one hundred years.

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