The Aug 8th 2012 edition of Canada’s Globe & Mail newspaper boldly stated that the country’s economists had reached a consensus: the bloated housing market will first slip 10-15%, and then “stagnate for years.”
The Frost Report has been warning prospective buyers about the coming decline of Canadian (and world) home prices since the first peak of February and March 2010 (see Spin City). So, why are economists lagging so far behind?
First, the news is coming out now because it can. The economists in the article -- who are employed by financial institutions -- have nothing left to lose since the market is “effectively exhausted” (their words). People who have already bought homes have given the banks and brokerages their business, and can no longer benefit from the advice. Those who don’t have homes after years of low interest rates either can’t afford them or don’t want them.
Secondly, economists have virtually no natural incentive to accurately predict slowdowns and price declines. Nasty predictions about the most popular investment in the country (real estate) are unpopular, unwanted, and of no benefit to the companies who employ economists.
And then there are the clients…
It’s dangerous to advise a client not to buy real estate. Contrary to what is taught in most investment psychology manuals, clients take declines in prices (“who could have known?”) far better than missed opportunities (“you said not to buy and prices went up 50%!”). Furthermore, a client who has already decided to buy (which is typically why they are speaking with a banker or real estate agent in the first place) will never, ever listen to advice anyway. If a client, who has already decided to buy, asks a banker if it’s a good time to do so and the banker replies, “I don’t believe it is,” that client will usually spend the next 15-20 minutes explaining to the banker why he is wrong.
The Cinderella party in Canadian housing is officially over. I sincerely hope that the moderate 10-15% decline predicted by the nation’s top economists is accurate – but I doubt it.
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See also:
Canadian house prices to slip, then likely stagnate for years
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