Bankrate.ca

October 29, 2013

Title: Will latest housing warnings prove right?

Subtitle: By the time experts’ projections about a possible slowdown prove correct, they’ll be ignored.

The Bank of Canada left its policy interest rate unchanged again this month, but backed away from previous upwards guidance regarding future moves. This came as a shock to many housing sector stakeholders. The central bank, which also warned of risks of a “correction” in residential real estate prices, had been hinting that increases were on the way.

“The elevated level of household debt and stretched valuations in some segments of the market remain an important downside risk to the Canadian economy,” the bank said in its latest Monetary Policy Report.

The Bank of Canada isn’t alone in its warnings. Commentators ranging from big bank economists to gadfly blogger Garth Turner have been forecasting for years that Canadian residential real estate is due for a fall.  Their projections have ranged from versions of an imminent “soft landing” which private sector experts generally expect, to an outright crash, which Turner predicted in his 2008 book The Greater Fool

The forecasters do have a point. Canadian house prices are indeed overvalued on a historical basis relative to both rents and family incomes. Furthermore, residential real estate valuations have been hit hard all around the world, in countries ranging from The United States, to Spain, Germany and Japan. 

The only problem is that the doomsayers here have been consistently wrong, as the latest housing sector data showed once again.

According to the Canadian Real Estate Association, the average price of existing homes sold in Canada during September rose by 8.8 percent compared to the same month the year before, to $385,906. As Greg Klump the association’s chief economist points out, that is close to the $389,001 record hit in May of 2005.

Not surprisingly building activity has been ploughing ahead too. According to the Canada Mortgage Housing Corporation, housing starts rose to 193,637 units in September. That’s up from just 183,964 the previous month. Sadly, forecasting is a tough profession, particularly for those who offer anything less than what former US budget director David Stockman calls a “Rosy Scenario.” Governments, banks and private businesses all have strong incentives to paint a bright picture. Bullish forecasts by governments are used to convince voters that the country is on the right track under their sound leadership.

Bright outlooks by private sector players provide customers incentives to borrow and spend, which in turn creates jobs, which in turn creates more spending power. Indeed if you have enough positive growth forecasts, they can become a self-fulfilling prophesy.

But history does show that what goes up also often comes down. That applies to house prices too. The big challenge that forecasters have relates to timing. Cynics often say about bearish prognosticators that “even a stopped lock is right twice a day.”

In fact many of our more prominent seers have been warning that the end is near for so long, that by the time they are finally right - like the boy who cried “wolf,” – many people will have stopped believing them.

peter@peterdiekmeyer.com

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