Blogs & Comment

The housing-crash bears have been wrong for 6 years. Why stop now?: Larry MacDonald

While they were predicting doom, house prices appreciated 65%

Row of Suburban Townhouses on Summer Day

The housing bears seem to see a crash around every corner. The latest call comes from Capital Economics economist David Madani. He thinks recent softness in cities such as Halifax, Winnipeg and Victoria is the beginning of a decline of up to 25% in house prices.

We have been regaled with these gloomy prognostications for about six years now, ever since the U.S. housing market buckled in 2008. It’s not only getting a tad wearisome but the parade of dire scenarios may also be influencing some Canadians to take decisions that are not in their best interests.

Ex-politician and serial author of financial books, Garth Turner, sounded the housing alarm in 2008, when he published Greater Fool: The Troubled Future of Real Estate. The main theme of the book was that the U.S. real-state crash was about to roll into Canada and many of us in the Great White North should consider selling our properties or delaying purchases.

Since this forecast was made, Canadian house prices have appreciated about 65%. Hopefully, not too many Canadians heeded the advice to sell or wait for better prices to buy.

Madani has been predicting a 25% decline for over three years. In that interval, house prices have climbed more than 13%. Anyone giving credence to his view has foregone a substantial gain.

In addition, the appreciation since his prediction raises the performance hurdle. Madani now needs a drop of about 35% for house prices to descend to the level he first envisioned.

Independent housing analyst, Ben Rabidoux, was bearish when he started out many years ago as a blogger. In an Oct. 20, 2010 post, he speculated that house prices “will start to experience year-over-year declines soon … with prices off 5% to 10% by the New Year. Next year [2011] will be the big show with a 10% to 20% melt, followed by a multi-year grind lower.”

I’m not out to bash the individuals mentioned above. The main point here is that trying to forecast and time the housing market is very hard to do.

This challenge is well recognized in financial markets. Most investment advisers warn their clients that what happens in the stock market during the short term is virtually a coin toss; what happens over the long term is way more certain given the historical tendency of stocks to rise.

Investment advisers thus tend to preach that trying to time the stock market is a loser’s game. Few people have consistently been able to sell at the tops and buy at the bottoms.

It’s a perspective worth keeping in mind within the housing context, especially whenever the latest prediction fills the headlines. House prices could turn down after you buy, but if the intention is to stay in the house for the next 10 to 20 years, chances are its value will be better than what was paid. Like stocks, real estate tends to go up over the long run.

Perhaps the reason why stocks and real estate appreciate long term is the fear governments have of deflation. They would rather try and inflate away problems because it’s the easier thing to do politically. Inflation brings jobs, rising incomes and a sense of wealth via higher stock and house prices; deflation brings the opposite and greater disenchantment with the political party in power.