Forecasting house prices a rough science

When Bank of Canada Governor Stephen Poloz warned in December that Canadian house prices could be overvalued by as much as 30 per cent, he raised more than a few eyebrows.Toronto-based mortgage expert Calum Ross was among those who cocked his head, saying the Bank was no more qualified to comment on the specifics of housing markets “than the Canadian Real Estate Association is qualified to comment on monetary policy.”Even Canada Mortgage and Housing Corp. chief economist Bob Dugan, a few weeks earlier, said CMHC didn’t see overheating as a problem in Canada.Now you can include Phil Soper, president and CEO of Royal LePage, among those who has a different view.Forecasting house prices a rough science“Forecasting house prices is a coarse process; some might even refer to it as more art than science,” Soper told New Home & Condo Guide.Canadian house pricesHouse prices are determined when individuals agree on the value of a property. “Macro factors such as consumer confidence and employment levels move the tide, but supply and demand at a very local level is what determines the price a property trades at,” Soper says.Note the word local. We’ll come back to that.Canadian home prices have appreciated at about five per cent per year in recent decades. Today, with inflation so low (with corresponding modest increases in wages and salaries), we should be experiencing appreciation levels below that level.VancouverSoper points out that Royal LePage’s quarterly House Price Survey (HPS) has tracked and reported on home values across Canada for 40 years. It feeds important economic models, such as the Royal Bank’s Affordability Index and the Bank of Canada’s housing reports. In the third quarter of 2014, the HPS showed the average national selling price of detached two-storey homes appreciated 5.5 per cent.“This is greater than the underlying expansion of Canadian wages and salaries, and somewhat above the real appreciation we have experienced over the years (that five per cent number, adjusted for inflation).However, “as a standalone data point, it is hardly reason to declare an emergency. And a 30 per cent decline in home prices (a la Poloz) would be tantamount to a national economic crisis.”House in OntarioSo, what should we make of the BoC’s recent statement?“First, there is a significant difference between a ‘valuation’ and the price a home will actually sell for. The HPS shows that a standard two-storey home in Vancouver’s west end will sell for approximately nine times that of a similar home on the opposite coast in Moncton. Teachers and engineers do not earn nine times as much in B.C. as in New Brunswick, but market demand yields this wide home price differential.”Remember: real estate is local Second, homeowners should remember that real estate is local. You don’t buy a national market, or even a provincial or municipal one.Candian money crystal ball“Real estate prices are very local in nature,” says Soper. “While still more expensive than Moncton real estate, a similar two-storey home can be purchased in the Greater Vancouver Area’s southern suburbs for one quarter the cost of a west end property.”However, says Soper, it is worth noting that the Bank is worried about the economy, has relatively few tools at its disposal, and for the most part must use persuasive argument to sway financial behavior.Subprime mortgages have never been an important form of lending in Canada, but years of persistently low interest rates have encouraged some lenders to finance “risky” clients. Thus, the BoC has reason to be concerned.“The Bank of Canada needs to raise red flags when more homebuyers engage in risky behavior,” says Soper. “The vast majority of Canadian homeowners, however, have safe, traditional mortgage financing in place.”As the North American economy strengthens, more people are working and earning higher incomes.“Will the rate at which major city house prices are rising slow? Of course. Will prices collapse? That is highly unlikely.”Monopoly moneyAnd as Ross points out, “there are two times that real estate values matter – when you buy and when you sell. What happens in between is no more relevant than the total cash you have in the middle of a game of Monopoly.”

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