Canadian real estate prices are headed up… no wait, they’re headed down… no that’s not right, they’re headed up! (or are they?)
I always get a chuckle out of reading news articles that attempt to forecast where real estate prices are headed.
Can you guess which one of the following headlines is correct?
- Home prices expected to keep rising next year – going up
- CREA boosts annual resale housing forecast – going up
- Housing prices to drop 25% over next few years – going down
- Residential values expected to climb next year – going up
- This year’s housing sales to be flat – staying the same
- Canadian house price collapse forecast – going way down
100% Certain, 87% Of The Time
In my opinion, no one can predict with 100% certainty where real estate prices (or any prices for that matter) will go in the future (and yes, that includes me!). If someone could do that, they would be filthy rich, as they could time the market exactly, buying at the bottom and selling at the top (assuming everything else goes well that is).
Even the educated ‘experts’ can’t get it right… and they are always offering conflicting predictions. Unfortunately it seems that there are simply too many variables to predict anything 100% of the time. Even the Canadian Real Estate Association (CREA) and Royal Bank of Canada (who publishes real estate reports) may at times ‘revise’ their numbers multiple times a year.
Despite that fact that no one can predict with certainty where markets will go, there are a couple of indicators that will give strong clues as to which way prices are likely (but not guaranteed) to be headed.
- Interest Rates – This is one of my favourite things to watch because it can hint at future bargains on the horizon. In the short-term, interest rate increases will affect new buyers, slowing down sales somewhat because less people can afford to buy. In the long-term, as mortgages come up for renewal, it will affect existing property owners, as they are forced to renew at higher interest rates. Cash flow will decrease and some will not be able to afford to hold on to their properties. As more and more people are forced to sell their property, prices will drop and bargains will appear.
- Housing Affordability – How far can you push people to pay for real estate? Just asking people living in Vancouver. According to RBC Housing Affordability measures, recently it took 68.8% of median pre-tax income to pay household costs for a detached bungalow.What does that mean? Line up everybody’s income in order from least to most, and the person in the middle will pay 68.8% of their income for mortgage payments, taxes and utilities on an average priced bungalow. This is a great indicator to show how affordable real estate is in major city centres, but unfortunately it’s not available for all cities and it doesn’t necessarily predict when a drop in prices is due (as can be seen with high rates in markets such as Vancouver and Toronto). This indicator is useful as an overall ‘rough guide’.
Can You Trust Statistics?
Another problem to overcome when trying to figure out price direction is the way statistics are reported by CREA, RBC and other institutions. Here are a couple of examples…
Many experts quote average home prices increasing as a way to show a hot real estate market. However, an ‘average’ is a statistical calculation that includes the most expensive and the least expensive properties. If enough of the most expensive properties increase drastically in price, it can increase the average price, even though an ‘average’ property hasn’t moved in price at all (or the one you happen to own).
Another example is the median pre-tax income used by RBC to calculate housing affordability. The person with a median income has an equal number of people earning more than them, and an equal number earning less. But does that mean they represent a typical Vancouver family? Not at all. That person could be earning more or less than most people in the area, but even if they did represent a typical family, it might not represent the market where your property is located.
The thing to keep in mind with statistics is that they should be used as broad indicators of what has happened in the past, and give clues as to what might happen in the future. You should always confirm statistics such as interest rates and housing affordability with other indicators and, more importantly, you should confirm with exactly what is going on in the particular market you are investing in. That’s because…
Real Estate Is A Local Investment
Real estate is an investment that can vary dramatically across the country, and even within the same city. One area of the country can be experiencing a boom, while another is experiencing a bust. The same applies the provincial level, regional level, city level, and even within neighourhoods. It truly is a ‘local’ investment, with each property having its own unique characteristics that affect its overall price.
For this reason, I recommend investors use statistics as an overall guide, but then focus on:
- Becoming familiar with whatever market you are in (or want to invest in)
- Learning that market inside and out (go to open houses, talk to realtors and city planners)
- Finding deals in that area (get a great realtor on your team, call private sellers, analyze the deal with conservative numbers)
While it can be a good idea at times to go outside of where you live to invest (e.g. if you live in Vancouver), don’t get caught up with chasing the latest hot area to invest in, just because a new forecast comes out from CREA or RBC.
In the long run, much of the profits from real estate come from your tenants paying off your property for you, and from slow market appreciation and inflation increasing its value over time.