Last Friday I was invited to answer questions about Toronto’s real estate market in a live online discussion on globeandmail.com. I enjoyed the format because it allowed me to briefly touch on many of the issues that have been on my mind lately.
One issue I have been meaning to write about was raised by a reader named Marg who pointed out that economists and experts have been forecasting a slowdown in Toronto’s real estate market for years, but prices continue to rise. This of course raises a couple of important questions. Firstly, why have economists and experts been unable to accurately forecast Toronto’s real estate market, and secondly, why is this forecast for a slowdown any different from previous forecasts.
When looking at forecasts for Toronto’s real estate market, or any market for that matter, it’s important to understand that these predictions are only as good as the information that experts have at the time. Unexpected shocks or changes to the market can impact the accuracy of a forecast. For example, the introduction of 40-year mortgages had a significant impact on Toronto’s real estate market in 2007 (see my previous post, Extended Amortizations and Toronto's Real Estate Market: Real Opportunity or Bubble Booster?). Roughly 10,000 more people bought homes in 2007 than in either 2004,2005 or 2006. Much of this increase had to do with the fact that housing suddenly became more affordable, driving up demand in that year.
So why didn't experts anticipate this surge in demand in 2007? One possibility is that forecasts for a slowdown were announced before CMHC introduced the 40-year mortgage. Another possibility is that forecasters who did take the 40-year mortgage into account, underestimated the impact it was going to have on the market.
Forecasting the real estate market is a tricky business. Economists have to spend a lot of time forecasting countless variables before even looking at the real estate market. Where are interest rates going to be a year from now? How much will gasoline and food appreciate in the years ahead? How will the US economy impact Canada’s exports and how will that impact employment levels? How stable are world financial markets? What are average real incomes? These are a few of the questions economists worry about when coming up with a forecast for Toronto’s real estate market.
In the case of today’s market, the general sentiment is that Toronto’s real estate market will slow down and be quite “boring” for the next few years. But even this forecast may prove to be wrong should we see significant shocks to our market. Some of the factors that we should be concerned with include:
- What happens if the credit crunch plaguing financial markets worsens?
- What happens if gas goes up to $1.40 a liter by this summer?
- What if the US slow down has a bigger than expected impact on exports and Canadian jobs?
Today’s market is very different from the past because we are seeing more negative factors that may influence the housing market. Shaky global financial markets, a US downturn and rising food and gas prices are all factors that were not a big threat to our market several years ago.
Given the overall negative sentiment in the market, I think home buyers should consider the “boring” outlook for Toronto’s market to be a best case scenario.
May 2, 2008Market |