Thoughts on predicting the next correction…

Published August 24, 2015 by Real Estate Leads

Market Trends Balance

Various economists, the news media, and some economists, have been diligently anticipating corrections, some like to use the word “crash”, in house prices every year since at least since 2010, about 5 years so far.

But each year so far, the market has continued to go up, to many of the bears – defying gravity. Those who fear the end is near have been and are, at the time of this writing of this article, relied by this summer’s surge in home prices.

Economists like to think that bubbles are inflated by irrational behavior. How irrational are Canadians being by buying homes for these unprecedented prices? Simply, folks have only been doing what makes sense to them: borrowing money as borrowing has been cheap.

The Toronto market has been hot, and the detached home category has been exceptionally hot. Around downtown Toronto, the average sale price is about $1.1 million, or 19% higher than 2014. We have heard stories of old termite-infested homes selling for $200K above the asking price. Bidding wars are the norm. Hardly anybody asks for an inspection before signing contracts. Those of you who old were around to remember the big 1989 Toronto housing crash, you might sense it all eerily familiar.

Vancouver, continues on a tear, and the BC, Real Estate Association said in the spring that demand for homes has been the highest since 2007.

Similar stories are playing out across the country. Across Canada, the CREA reported that resale home prices rose by 9.5 per cent the past year.

For the bears, all of this is only more evidence that a crash is coming. But looking around, it’s still hard to see from where or how the sky is about to fall.

Toronto’s Real Estate Board’s “affordability index” reflects that the share of average family income which goes to mortgage, property tax, and utility payments is around 36%; the highest it has been in 2 decades. Even at that level though, we’re not anywhere near where we were in 1989, when carrying an average home for sale took about per 50% of a family’s income (source: TREB).

The biggest threat to the housing market isn’t an interest rate increase. This past summer months the overnight rate has been about 0.75 per cent. And you can get an 18-month mortgage from one southern Ontario credit union for 1.49 per cent. We began 2015 with expectation that rates would be going up soon. It is clear now that they haven’t. Of course, rates will inevitably go up, but that looks still over the horizon.

When interest rate increases eventually come, they are anticipated to not be dramatic. The U.S. Federal Reserve has pretty much promised that its interest rate increases will be low and slow, whenever they happen. We can expect the same here in Canada. Not that the BoC’s job is to protect house prices, but let’s face it: it serves nobody’s interests to choke the one segment of the economy that is building wealth for Canadians.

The real threat to the housing market is the dreaded word, “recession”. And that is often interpreted as a fuzzy word. If there is a change in this year’s trend so far with increased job creation, then there could be some downward pressure on housing values and sales. If that does become the case, the BoC still has a collection of tools at its disposal to stimulate the economy by freeing up money; which, logically, would be supportive of home prices.

Also high real estate prices are not completely a good thing. High home prices are creating a real problem for some families, because those of us on the lower end of the income ladder simply are unable to afford a home. The market we serve will correct, some day, some month. That’s the thing about bears. Bears are excellent at predicting that a downturn will happen; they are just very uncertain at letting us know precisely when.