4 Reasons Why Economists Can't Forecast the Real Estate Market

10 September 2010
  1. THERE IS NO SUCH THING AS A ‘NATIONAL’ REAL ESTATE MARKET Economists like to talk about a national market because it makes good media copy. Unfortunately, the last time we checked, housing is not a moveable product. And people don’t move across Canada much either. So if there is excess housing in B.C. and excess buyers in Toronto, you can have a balanced market according to economists. And then of course we have national income averages too. Does anyone doubt that downtown Toronto people have higher incomes than in Digby Nova Scotia?
  2. DEMAND & SUPPLY Economists are trained that when demand and supply are not in balance, then the price adjusts to bring an equal numbers of buyers and sellers into any market. That does not work in real estate. When we have an excess of listings (sellers), the price of real estate does not fall – unless owners are forced to sell due to foreclosure – the U.S. experience. What usually happens is that sellers just take their property off the market if they don’t get their price. That is what happens in most real estate markets. We have no foreclosure pressures in Canada so don’t expect prices to fall dramatically.
  3. THE LAW OF SUBSTITUTION The second factor that economists fall back on is the law of substitution. In markets where the product is fairly homogeneous it works quite well. For someone buying a pair of pants, if one make is not available then you can substitute another. For real estate, the product is not homogeneous. If you want a two bedroom condo downtown and all that is available is a studio, then there will not be a sale no matter what the price is.
  4. UNREPORTED INCOME Why do economists rely on Government statistics for income, employment and a host of other statistics? That’s because it is available and they have few other options. As taxes have risen in Canada, the cash or unreported market has grown significantly. Just ask yourself how many people do you know who ask for an ‘all cash’ price? Even mortgage lenders have figured this out. Did you know you can get a mortgage based on your ‘stated income’ and not that reported to Revenue Canada? If you have a good credit score and you have a little larger down payment, then you can get a mortgage for which you would not normally qualify. So when economists tell you that employment and income numbers do not support the current level of real estate prices, don’t accept this at face value. Start asking your neighbours and small business how they are doing. That is a more accurate gage of the economy.

TO REALLY UNDERSTAND REAL ESTATE, you need to know the local market and you won’t find it out reading national media who rely on economists for their economic views. So to get the local stats, talk to a local expert who has the street information that seems to escape people who work on the 43 rd floor! P.S. What really hurts is that I was an economist by training in a former life!!