John Greenwood Financial Post- Please see my comments at the end-
You don’t have to look far to find someone willing to share their opinion on where house prices are headed, but the thing is, everyone has a different point of view, with many insisting that prices are going for the moon while a comparably sized group warn darkly of impending collapse. Maybe the reason Canadians are muddled about real estate is because even experts can’t agree.
It was only on Wednesday that one of the world’s premier bankers declared that real estate is a good place to invest. Speaking to a business group in Toronto, Goldman Sachs chief executive Lloyd Blankfein declared that in the current environment he would “go long” on property. Central banks are “putting a real penalty” on holding cash with all their money printing and that’s driving investment in real assets such as property, he explained. And while policy makers are loath to allow the formation of asset bubbles, they’re even more worried about deflation, which is the alternative, because it’s a lot more damaging and difficult to fight, he said. So go with the bubbles.
Chalk one up for the housing bulls.
But what about Bank of Canada Governor Mark Carney? Mr. Carney — one of the world’s most highly regarded central bankers and a Goldman alumnus to boot — has taken almost every possible opportunity to warn Canadians not to make big bets on housing, even chastising households for excessive mortgage borrowing. A rise in unemployment or interest rates is all it would take to bring the whole housing market down, with harsh repercussions for the broader economy, he has suggested.
A point for the bears.
Then there are the banks. Experts say that one of the characteristics of the housing market is that it’s surprisingly difficult to predict, affected as it is by the whims of consumer sentiment and demand. “[Economists] do tend to look at common sets of facts when they look at real estate but in reality prices can deviate from averages for months, years and even decades,” said Finn Poschmann, vice president of research at the CD Howe Instititute.
Surprisingly, two of the country’s big banks recently came out with nearly identical forecasts for housing. TD Economics this week slightly tweaked its outlook and is now calling for a gentle 10% decline prices, down from a potential drop of 15%. The new forecast puts TD in line with Bank of Nova Scotia which is also calling for a drop of 10%.
The Royal Bank of Canada is also in the optimists’ camp. Earlier this year Mr. Carney expressed concerns about the red-hot Toronto condo market. It didn’t take long before RBC, the country’s biggest bank by assets, said that Toronto condos are not in a bubble. In a July 24 report, RBC’s senior economist Robert Hogue said demand is actually in line with supply. (One of the unique aspects of Toronto is that it has more condos either in the planning stages or under construction than any other city in North America.)
More points for the bulls? Or the bears? We’re actually not sure.
Given the zero interest rate environment and the grim outlook for stocks, it’s easy see why Canadians are eager to gain a better understanding of the housing market.
There seems to be alot of misinformation when it comes to housing, particularly when it comes to investing in real estate. Speculating in any investment, especially the condo market has seen its share of horror stories. I feel that a piece of property should be putting cash in your pocket from day one, whether from cash flow or from a large equity position where you can refinance out any of your own capital as well as creating cash flow.
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