Keeping track of Canada’s volatile housing market hasn’t been easy during the last several years. After almost a decade of extremely strong growth, the market took a dive during the recession. In 2009 it roared back and made up everything it had lost, catching most observers by surprise. Then 2010 was a tale of two markets – busy and active during the first half, then dropping into a stable, calmer state in the second half of the year.
Adding to the confusion is that everyone in the housing industry issues monthly reports and forecasts – the local, provincial and national real estate boards and associations; real estate companies; banks; mortgage brokers; home builders and their associations; private consultants – everyone has their say about what the market is doing and where it’s going. It’s not unusual to see a news headline stating the market is great, and another claiming the market is in the tank – on the same day.
Throughout it all, Canada’s federal housing agency is responsible for predicting where the real estate markets are going, by providing market forecasts. It has done pretty well, nailing its predictions within about five per cent of the final numbers in recent years. Ted Tsiakopoulos, Ontario’s regional economist for CMHC, shared his top 10 tips for forecasting the real estate market.
1. Beware of year-over-year comparisons. Comparing what’s happening now to a year ago has its pitfalls because it doesn’t take into account what happened during that year, says Tsiakopoulos. Such comparisons can make a balanced, stable market look like a disaster if compared to a booming market, or like a boom if the year before was extremely slow.
2. Track the trend lines. Headlines in the Toronto market in the fall of 2010 claimed that average prices were still climbing, since they were up from the same month a year before. But in fact, prices had peaked in the spring and were dropping slightly month-to-month. It’s important to know the current monthly market trends.
3. Discount seasonal activity. “People love to buy in May,” says Tsiakopoulos. In the Toronto market, May activity is usually about 35 per cent higher than average, as families prepare to move in the summer so their children can begin the fall term at their new schools. Conversely, sales drop off in December when people are preoccupied with the holidays and the winter weather kicks in.
“Forget the raw sales data and whether the sales and prices are up or down during those months – it just creates noise in the data,” says Tsiakopoulos.
4. Remember the “handoff” effect. “The beginning of a year is probably going to start the same as the previous year ended,” says Tsiakopoulos. Beware of making snap comparisons of one year over another.
5. Build in scenarios. “When you are forecasting, you are dealing with very volatile numbers,” says Tsiakopoulos. “You have to look at a number of economic drivers and build in a number of different scenarios.” For example, what impact will a hike in interest rates have on the market? An election? A major plant closing in a local market?
6. Units under construction are not necessarily a measure of supply. Toronto’s downtown core has dozens of construction cranes building high-rise condominium buildings. It’s easy to look at all this construction and wonder where the buyers will come from to fill all those buildings, and from that determine that the condo market is over supplied. But lenders typically do not provide financing to begin construction until up to 75 per cent of the buildings are presold. Some of the units will find their way back to the resale market as investors cash in their equity.
7. An aging population doesn’t necessarily mean a supply glut and a price collapse. Tsiakopoulos says that most baby boomers are still many years away from retirement age, but even then, not all of them plan to move. Figures show that homeownership remains strong until the age of 75. The so-called “echo boomers” – the children of the baby boomers – are a large population group that should keep housing demand strong for many years.
8. A rule of thumb is that if mortgage interest rates rise by one per cent, housing sales will drop by five to seven per cent.
9. Housing sales rise six to nine months after jobs are created.
10. Immigrants buy a home three to four years after arriving in the country.
Perhaps the most important thing to remember is that all real estate is local. Average house prices for a country, a province or even a city don’t matter as much as the prices on your street, which can vary widely from the prices a block away.
Written by Jim Adair, Realty Times
November 9, 2010
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