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December 12, 2013

 

Think long-term when investing in housing

 

There’s an old expression "Prediction is very difficult, especially if it's about the future," by Nils Bohr, a physicist, that illustrates the limitations of modern economics forecasting, much of which is short-term in nature.

 

That’s particularly true for housing sector stakeholders, whose outlook is inherently longer-term.  While data in Canada are scarce, according to the National Association of Home Builders, fully half of American home owners have owned their properties for more than ten years. When you make an investment decision whose consequences stretch our over such a long period of time, what will happen in the next couple of months is only part of the story.

 

That said, a closer look at how financial sector, central banking and government economists think, provides excellent clues, as to what potential homeowners should study, when deciding whether to buy, sell or invest more money into what, for many, is their most valuable asset.

 

The weaknesses of traditional forecasting

Each week, newspapers and web-sites publish scores of experts’ “projections” on subjects as varied as economic growth, interest rates and job creation. Businesses use the forecasts to estimate how much they need to produce. Governments use them as baselines when calculating how much tax revenue they can scoop off the top. The problem is that in ensuring weeks, those experts issue innumerable “updates” as to why previous forecasts were wrong, or need to be adjusted, based on the latest economic data.

 

Knowing how strong the economy will be can help you assess a range of trends, including the employment picture to what housing demand will be. However the shear mass of projections and updates made, coupled with their general nearsightedness, make them almost unusable to the regular guy.

 

Late last month for example, the International Monetary Fund provided a perfect example of the absurdity of the process, when it “estimated” that Canadian GDP would grow by 1.6 percent in 2013 – a not particularly bold forecast, considering that the year was already 11 months over.  On a slightly more helpful note, the IMF also projected that growth would be 2.25 percent in 2014.

 

Doing your own homework

The upshot is that Canadians who want to effectively manage their housing investments need to their own homework. For example some targeted short-term data are quite useful. These include the Canadian Real Estate Association’s projection on resale home prices (which are expected to rise 1.4 percent in 2014) and the Canada Mortgage and Housing Corporation’s projections about housing starts (which are estimated to remain stable, at about 185,000 units next year).

 

But to make a decision whose consequences stretch out ten years or more, you’ll need to assess factors such as how the industries that you and your wife work in (most families these days require two incomes to buy a home) will look five and ten years down the line, to assess the chances of you remaining employed. Short term forecasts won’t help much on that score.

 

In short, do look to experts when deciding whether to buy a home. But do your own homework too. Because those predictions as to how the economy will perform next year tell only part of the story…and those that predict how the economy did last year … won’t help at all.

 

peter@peterdiekmeyer.com

 

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