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!