Rob Carrick – The Globe and Mail

A question for everyone who thinks houses are an investment: How much would a market decline hurt you?

Comment: But it is a moot point when the market is not going to decline.

Help yourself be a smarter homeowner by using The Globe and Mail’s Housing Price Correction Calculator to find out. Housing bulls, don’t self-combust. Our calculator shows the result of both price gains and losses over the next five years. Just plug in the current value of your house price – c’mon, you know you know it – and select from among our preset levels of price gains or declines.

Comment: Yes, the calculator does increases as well, but it defaults to a decrease. And the title of the article is about being hurt in a market correction. This whole piece is spun to suggest a price drop is coming. And it isn’t. There is no data to support that. So this is just fear mongering, pure and simple. And that is what makes me self-combust.

Houses are a financial asset that can rise and fall in price, just like stocks, bonds and gold. It’s important to remind ourselves of this after a 25% price gain between 2008 and 2013 on a national basis and a doubling of prices in Vancouver, Calgary and Toronto over the past 10 to 12 or so years.

Comment: They “can” fall and rise, though they have risen for some 45 of the past 50 years. And have not fallen for almost 20 years. So the correct thing to say is that “real estate prices will likely continue to rise”.

In fact, there are already signs of market softness in some parts of the country. “The markets that are strong in Canada are very strong,” housing analyst Ben Rabidoux said. “And the ones that are weak are showing weakness that we haven’t seen since the late 1980s and early 1990s.

Comment: Really? You are comparing Ottawa’s current 2.5% price drop to Toronto’s 23% price drop over 20 years ago? NOT THE SAME!

Ottawa home prices are down 2.5% on a year-to-date basis, according to the Teranet – National Bank National Composite House Price Index. Montreal is off 1.0%, Quebec 1.2% and Halifax 2.6%. “The next markets that will crack are the Prairies outside of Alberta,” said Mr. Rabidoux, president of market research firm North Cove Advisors Inc.

Comment: Actually, the Ottawa Real Estate Board says that prices ROSE 0.3% last month, year-over-year. The Greater Montreal Real Estate Board says that March was the 6th consecutive month with a price increase, up by 2% over March 2013. I can’t read the Quebec stats, as all I can find are in French. But Halifax prices do seem to be dropping. Saskatoon prices have been up for the first 3 months of the year. Winnipeg dollar volume of sales was up 11% in March and 4% year-to-date. So where is the market softening? Other than Halifax for one single month?

Much larger price declines happened long enough ago that the most recent crop of buyers may not have any recollection of them. In Calgary, troubles in the oil patch caused a house price decline from $107,739 on average in 1981 to $80,462 in 1985, or about 25%. After a few years of rampant speculation in Toronto, the average resale home price fell from $254,197 in 1989 to $195,311 in 1995, or 23%. Vancouver, always a volatile market, plunged more than 25% in a year in the early 1980s and has a couple of times fallen more than 6% in a year.

Comment: But 1981 has no bearing on today. Just because something happened in the past does not mean it will happen again in the future.

Want to see what a 25% decline would look like in today’s market? Our Correction Calculator shows you the numbers for the Canadian market as a whole, as well as the Big Three markets of Vancouver, Calgary and Toronto.

Comment: But why would you want to? I would be checking what a 10% increase would look like – it is MUCH more likely!

The calculator in no way predicts a downturn in housing prices. It’s only a tool for helping people understand how both declines and increases in house prices might affect them.

Comment: But you sure make it sound like you are predicting a downturn. Why else would you encourage people to check out what their house would be worth if prices fell 25%?

Be cautious when viewing how a rising market will increase the value of your home. Interest rates are close to rock bottom levels after a 30-year down cycle and likely to rise in the next couple of years. The impact on affordability will be significant.

Comment: Not necessarily. People have been calling for mortgage rates to rise for years now, and they haven’t. Even so, the drop in amortization from 25 years to 30 years was equal to a 1% rate hike. Slowed sales – but NOT prices – for 10 months. Last summer saw mortgage rates jump 0.6% – with no change to sales or prices. That was like a 1.6% hike in mortgage rates in about a year – and prices and sales keep rising.

“I think it’s going to be a huge shock to the Canadian real estate market,” said Craig Alexander, chief economist at Toronto-Dominion Bank. “I do a lot of real estate presentations from coast to coast and an awful lot of young people think these low interest rates are normal. They don’t see anything abnormal about a 3% five-year mortgage. I always have to say, can you please have a conversation with the grey-haired gentleman at your table about the normal level of interest rates.”

Comment: What is normal? Not the 20% of 30 years ago, that was abnormally high. In 1951, mortgage rates were 5%, not far off where we are now. In the 1960s, rates were in the 6.8% – 7% range. In the 1970s and 1980s things got out of hand, that’s for. But there were all sorts of external events, from a recession to the oil crisis, behind those high rates. In 1999, when I bought my first place, my neighbours got a 6.16% 5-year rate. The first 10 years of the millennium saw rates go down as low as 2% after 9/11 with a lot of the decade spent around 5-6%. Then in the past 4-5 years we have seen these low 3%-range rates. So aside from the 70s and 80s, the past 63 years have seen rates mainly in the 3% – 7% range, mainly in the middle of that. If I had to pick a “normal” rate out of the past 6 decades, I would say it is around 5%. Deciding to focus only on 1981 when rates hit 21.46% is cherry-picking the data.

As you’ll see in a chart included with our correction calculator, five-year mortgage rates reached 18% in the early 1980s. The runaway inflation that drove rates to that height is extinct today, but even a small rise in borrowing costs will have an impact on housing.

Comment: Exactly my point. Trying to scare people with the rates of 30 years ago is dirty pool, as the world is not the same now as it was then. Why bring up past rates only to then explain that they are not going to occur again? As I showed above, a 50% rise in borrowing rates had essentially no impact on housing.

Mr. Alexander’s 10-year view is that housing prices will increase by an average rate of inflation plus one to 1.5 percentage points, instead of the real returns of 2 to 3% in the past several years. But he also warns of a “reversion to the mean,” a term that stock market investors should be familiar with.

Comment: I doubt house prices in Toronto will only rise by 2.5% to 3% this year. Not after 5.6% last year and prices setting records ($1 million average detached price anyone?) each month.

It means that when a financial asset has a really good run, it’s wise to expect a period of weaker performance that brings the longer-term numbers back to the mean (the midpoint between the high and the low). A period of price stagnation could bring average price gains back to the mean, and so could a price decline.

Comment: No, that is the common mis-perception of statistics and odds. That is why Vegas posts the last 20 spins at the roulette table. When people see 5 reds in a row, they think the “odds” are on black the next spin. Nope, each spin is 50/50 as to which colour the ball lands on. Same as this argument, since things have been going up for X years, they must then go down. No, only if people need to sell, there is a problem, some sort of sell-off. That is how it works with stocks. Apple has been rising for a long time, and will continue to do so unless people decide to dump the stock and the market is flooded with people competing to get rid of what they have. That is not going to happen with Toronto real estate. People will keep the houses, they need them to live in. Barring some sort of catastrophe that we have not even been able to imagine, people will simply not be fire-saleing their homes. Even if it starts, there are still so many buyers waiting in the wings that it would take a glut of biblical proportions to satisfy their needs – and then have enough left over for people not to want to cause prices to fall. The implausibility of this theory is immense.

When you invest in the stock market, you’re supposed to keep your eye on the long term and not worry about upsets along the way. The same applies to housing, although keeping a cool head in a declining market will be hard. A lot of owners have only lived in a world of rising prices.

Comment: But there WON’T BE a declining market. Stop saying that! How can you ssay you do not predict a housing correction when you tell people to keep a cool head in a declining market?

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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