Predictions for Real Estate Prices: Boom or Bust?

Recently, on Alberta Primetime’s Money Panel, I was asked to comment on real estate prices and some conflicting predictions about whether real estate will boom or bust.  Not a day goes by these days without someone predicting what is going to happen to housing prices.  I was in a restaurant and the server was talking to the table next to my about why housing prices are going up and she needed to get into the market ASAP.  My last visit to my barber, the gentleman getting his haircut before me was complaining how his realtor was an idiot because his house was still on the market after 60 days and he had only one lowball offer.  Everyone has become real estate experts which is really scary!

Despite my fondness for home ownership and investing in real estate (17 properties in 20 years),  I’ve never been able to predict real estate prices.  Here’s an interesting article I wrote exactly 4 years ago in 2007 on booming real estate prices then). Predicting real estate prices is like predicting stock market prices . . . you can’t do it!

Real estate has become a commodity

If you go back 20 or 30 years, real estate was less of a commodity and more of a lifestyle purchase.  In other words most people bought homes but they just bought 1 house, not 2 or 3.  They lived in that house for a long time to build equity mostly by paying off their mortgages.  The value of their property would appreciate but slow and steady more like a GIC.  Those that bought second properties rented them out and held them long term so that the rental income would pay down the mortgage and build the equity.

Today, real estate has become more speculative than ever because the product has become a shorter term commodity.  Think about the last real estate boom and how many people you know that bought second properties with the intent of flipping?  How many people were building new houses while keeping their old ones thinking it was crazy not to hold two appreciating properties at the same time.  How many people thought making money with real estate was easy?

Price changes on supply and demand

The price of any commodity is based on supply and demand.  In the past demand was based on simple basics . . . population growth which was slow and steady.  Now demand is affected by so much more, including speculation.  Speculation comes from more people buying and selling because they are speculating on the short term price of real estate.  Speculation is more common because of the internet and how quickly information travels.  When some expert says real estate prices are going to crash, the media picks that message up and spreads it very quickly.  All this speculation has enhanced volatility and also creates more unpredictability.

The fear of rising interest rates

Many people have justified and rushed the purchase of homes because of the fear of rising interest rates which will make housing less affordable.  This fear of rising interested rates is not new.  We’ve been hearing about this fear for the last 10 years (Here’s another article I wrote in 2004 on predicting interest rates from what I called 50 year lows).  Interest rates and housing prices are two things we cannot control nor predict.  Real estate purchasers need to focus on more tangible and concrete factors when buying.  They need to make sure they are buying homes they can afford today and if interest rates rise in the future?  They need to make sure they are not extending their financial abilities to service a mortgage and all the other expenses that go along with home ownership.

Buying a home is a big purchase that should not be rushed.  It’s OK to be impulsive when buying a $80 pair of shoes but don’t rush a $300,000 investment into a home based on speculation of where interest rates may or may not go.

My two cents

I predict real estate prices will fluctuate in the short term and they will go up in the long term. How’s that for a sound prediction?

If you are buying real estate as a place to live, there’s more to picking the place than just the speculation of pricing in the short term.  Try not to worry about housing prices and whether they will go up or down over the next year.  Focus on getting good value and finding the right home you can live in for a while.

If you are buying real estate as a long term investment, then really look at the rental income that you can get and see if it can cover your expenses and give you a margin of profit.  If not, then they only way you can make money is on the appreciation in price.  Remember in the short term, that is speculative.  Over the long term, prices should go up.

If you are buying second property for recreation, like a cabin or a vacation property in Arizona, just remember it to know your primary reasons for buying the property.  Every decision has two key aspects:  logical and emotional.  The problem is it is hard to put a dollar value on the emotional issues.

Be careful what you hear and all the predictions about where real estate prices are going to go.  The last realtor I talked to thought prices were going up and I better get in to take advantage of it.  In fact, every realtor I have every talked to thought the same.  I wonder why that is?  Take your time and make good decisions based on sound financial analysis.  Long term it will work out.  Short term, it could go many different ways you and you can’t predict it or control it!  Good luck!

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

8 Responses to Predictions for Real Estate Prices: Boom or Bust?

  1. When it comes to interest rates I have to disagree with you that they are not predictable. I strongly believe that they are very predictable. Like any other commodity we look to supply and demand to determine what might happen to the price. Interest rates simple represent the ‘price’ of borrowing money. So the next question to ask is over the next year to 10 years are people going to borrow more or less than they are today?
    I have long been a fan of demographics and if we look at what interest rates have done in the last 40 years there is a clear correlation to the rise and fall of rates with the baby boomers. As we welcomed in the 70’s boomers started buying houses and consumer goods and cars and borrowing a ton of money to do it. over the years they have worked to pay down that debt – borrowing less and saving more (ie less demand more supply) so interest rates have steadily declined for the last 25 years. In the next decade the boomers in Canada will inherit more than $13 trillion dollars some of which will be passed to their children reducing the demand for borrowing once again. This compounded by a weaker global economy for the next decade will likely result in stable low interest rates on debt with the possibility of a slight rise (doubling). But even if the interest rates double from where we are today we will be at the same level we were at six years ago when people thought rates were at the bottom!
    Just my 1frankthought.

    • Hey Frank! Thanks for stopping by with your comments.

      You know I have a lot of respect for the work you are doing but I think we may have different definitions of what a prediction might mean. How specific does a prediction have to be? Where will interest rates be on Dec 31, 2011? What will interest rates be in 2012? What will they be in 2013? What will they be in 2014?

      I could make a prediction that interest rates will stay low for a while and be both right and wrong. Look around the web and you will find smart economists, fund managers, investment professionals who differ in their interest rate predictions.

      Anyhow . . . if you can predict interest rates with any degree of accuracy, you should be a bond trader and make lots of short term winning bets.

      Just my two cents!

  2. “I predict real estate prices will fluctuate in the short term and they will go up in the long term. How’s that for a sound prediction?”

    Hey Jim, you can be more bold than that! :)

    If you are buying real estate as a place to live, I think most people should think about two macro-things: 1) where you will be happiest and 2) your compromises to achieve 1).

    After that, you can always think about the best opportunities to buy an appreciating asset – better to buy a decent home in the best part of town than an amazing home in the worst part of town.

    • It sounds like you and I both believe location, location, location is pretty important when it comes to real estate.

      Buying for a place to live is different than buying a place to flip or rent.

      Thanks for your comments!

  3. Let’s be honest Jim…most REALTORS will tell you it’s always a good time to buy. I’m a REALTOR, and I can’t tell you how many conversations I’ve had about this with colleagues, and that’s what they preach. The only time in the last 6 years that I’ve been saying this was in the late Fall of 2008. Clients of mine that bought then did quite well…..there were some real fire sales after ‘the crash’.
    Anyway – while I don’t think this is a particularly bold prediction, I agree with you 100%. I see Spring 2012 being quite robust for activity.
    Godd stuff Jim.

  4. With 150 billion dollar investment in Alberta oil sands and heavy oil to be shelved until the oil price starts to swing upward, which will not happen in another “18 months”, we will witness considerable layoffs and fear on Albertans that in return will tame migration to Alberta. Layoffs and outward migration will affect housing price in Alberta significantly. I am predicting 10-20% price reduction in housing by mid 2015!!

  5. I used to live in Victoria, then Vancouver, now the USA. My experience of a previous decline in Victoria and Vancouver was that the prices dropped almost overnight. It was far to quick for someone to react, unless you were a professional property speculator. I knew several people who had bought at what I thought were already inflated prices, in the expectation of flipping and making a profit. Several seemed to break even (not counting the stress they were under) but most lost money. The Victoria market is a very much manipulated market and not for the faint of heart,

  6. I have been in the industry for over 22 years and am fortunate enough to be in a city that has missed out on the boom cycles, however we have also avoided the dips because of it. Real estate prices in my city are a near straight appreciating line, slow increases year over year as far back as statistics go. I believe it will come to an end now though, not because of interest rates or economic factors, but because millenials do not seem to have the same desire to be homeowners that those of us old dogs who grew up with the “american dream” lifestyle as the goal.

Leave a reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.