The housing-crash bears have been wrong for 6 years. Why stop now?: Larry MacDonald

While they were predicting doom, house prices appreciated 65%


Row of Suburban Townhouses on Summer Day

The housing bears seem to see a crash around every corner. The latest call comes from Capital Economics economist David Madani. He thinks recent softness in cities such as Halifax, Winnipeg and Victoria is the beginning of a decline of up to 25% in house prices.

We have been regaled with these gloomy prognostications for about six years now, ever since the U.S. housing market buckled in 2008. It’s not only getting a tad wearisome but the parade of dire scenarios may also be influencing some Canadians to take decisions that are not in their best interests.

Ex-politician and serial author of financial books, Garth Turner, sounded the housing alarm in 2008, when he published Greater Fool: The Troubled Future of Real Estate. The main theme of the book was that the U.S. real-state crash was about to roll into Canada and many of us in the Great White North should consider selling our properties or delaying purchases.

Since this forecast was made, Canadian house prices have appreciated about 65%. Hopefully, not too many Canadians heeded the advice to sell or wait for better prices to buy.

Madani has been predicting a 25% decline for over three years. In that interval, house prices have climbed more than 13%. Anyone giving credence to his view has foregone a substantial gain.

In addition, the appreciation since his prediction raises the performance hurdle. Madani now needs a drop of about 35% for house prices to descend to the level he first envisioned.

Independent housing analyst, Ben Rabidoux, was bearish when he started out many years ago as a blogger. In an Oct. 20, 2010 post, he speculated that house prices “will start to experience year-over-year declines soon … with prices off 5% to 10% by the New Year. Next year [2011] will be the big show with a 10% to 20% melt, followed by a multi-year grind lower.”

I’m not out to bash the individuals mentioned above. The main point here is that trying to forecast and time the housing market is very hard to do.

This challenge is well recognized in financial markets. Most investment advisers warn their clients that what happens in the stock market during the short term is virtually a coin toss; what happens over the long term is way more certain given the historical tendency of stocks to rise.

Investment advisers thus tend to preach that trying to time the stock market is a loser’s game. Few people have consistently been able to sell at the tops and buy at the bottoms.

It’s a perspective worth keeping in mind within the housing context, especially whenever the latest prediction fills the headlines. House prices could turn down after you buy, but if the intention is to stay in the house for the next 10 to 20 years, chances are its value will be better than what was paid. Like stocks, real estate tends to go up over the long run.

Perhaps the reason why stocks and real estate appreciate long term is the fear governments have of deflation. They would rather try and inflate away problems because it’s the easier thing to do politically. Inflation brings jobs, rising incomes and a sense of wealth via higher stock and house prices; deflation brings the opposite and greater disenchantment with the political party in power.

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28 comments on “The housing-crash bears have been wrong for 6 years. Why stop now?: Larry MacDonald

  1. We sold our Okanagan home in 2011 and just got out before a long decline in homes and sales ensued and is still faltering. Just sold our Victoria condo last month, it had declined over $60,000 in value compared to units that were selling in the same building 3 years ago. In the area we are in now there has been a big spring market for homes in the $300k to $425k but the market over $500,000 is very slow with many homes on the market for several years, coming down in price all the time. There are no fundamentals in place to support this inflated market in places like Vancouver, Toronto and smaller cities like Kelowna. The next generation, with a few exceptions could not hope to afford the mortgage payments on homes in these cities. The Harper government doesn’t want a “fail” grade on this until after the next election

  2. If current macro geo-politics trends stay on these trajectories then it won’t be long before the USD is dumped globally, even as early as the fall / winter of 2014. And if that happens 2008 will look like a Sunday afternoon picnic. North American real estate could then very well be an asset class that you won’t be able to give away as global currencies and asset classes sort themselves out,… over decades.

  3. If you plan on moving often then maybe the housing market is not for you but if you are like us and plan on living there for at least 10 more years and have lived here 10 years the price of housing doesn’t make a difference when you don’t have a mortgage Our previous home we lived in for 25 years mortgage free for 10 years of that. Don’t use lines of credit on your mortgage and pay it off as quickly as you can then you have that money to save and/or invest. That’s how to retire early.

  4. Lowest interest rates in history might have something to do with it.
    Suspect data/manipulated by the RealEstate Boards
    Banks off loading risk to CMHC (TAXPAYER) current debt is abour 550 Billion. High Ratio Mortgages

    No Mention of the two calculations that are used by Economist, Case Schiller, IMF? Price to rent AND price to income

    Real Estate over the past 100 years has typically increased with the rate of inflation

    Did the author bother to do any checking before submitting this half baked drivel ? Its called Math, reversion to the mean is imminent

    Hire better “journalists”

    • Raincloud says “No Mention of the two calculations that are used by Economist, Case Schiller, IMF? Price to rent AND price to income ….
      Did the author bother to do any checking before submitting this half baked drivel.”

      *sigh* I invite Raincloud to peruse the many housing articles that have appeared under my name on this website for about the last three years (just follow the links), in which various issues such as price to rent price to income ratio are dealt with.

      • Dear Sir

        Kinda struggling to find the point of this “article” .

        No doubt in your previous articles you also included the fact that RE prices over the past hundred years have barely kept pace with inflation. That would be your “historical tendency”.

        Presumably the percentage of take home pay required to make monthly payments in Van is covered? (82%).If you are suggesting that this is the new normal history might have something to say about it..

        While I agree with the premise you cannot time markets (whether Stock or RE) you can pay attention to fundamentals

        You also omit the reason Madani/ Turner et al have been predicting a housing retrenchment, Inflation/ Interest rates . Lowest interest rates in recorded history cannot last and when (in Canada) renewals are higher mortgage holders will be in for a surprise. Canadians cannot keep the rate for 30 yrs like Americans. There are easily found examples of RE downturns in Canada where the recovery took in excess of 20 years to get back to original price.

        The credibility of the Economist, IMF, Robert Schiller, several global banks, Madini, Turner trumps your opinion. It is conjecture with cherry picked “information” What are your sources? links please

        EG: Sold my Burnaby Bungalow almost 2 years ago and it hasn’t increased in value, the funds realized from the aforementioned house sale have.

        I will wait before I repurchase a home thanks, likely around the time you suggest we sell


  5. Not to mention that in the meantime you get to live in your home and build equity by good maintenance and retiring the debt. Yes, sometimes problems arise and things don’t work out as planned, but I still believe in real estate as a sound investment for most people.

  6. This article is a joke and the author should be ashamed of himself. The fact that the real estate market has kept defying fundamentals is NOT something to be bragging about. So what if some people made predictions that turned out to be premature? The premise behind their predictions is still sound: fundamentals are terrible and WILL reassert themselves. The timing isn’t even that important since there is no downside to renting (and saving the difference) until the market comes back down. Being “wrong” that the market will crash a specific amount by a specific time is irrelevant.

    Here are the headwinds facing today’s homebuyers:
    – housing oversupply
    – record low mortgage rates
    – record high prices
    – record high home ownership rate
    – alarming price/rent ratios
    – alarming price/income ratios

    The only tailwind is the government’s ongoing intention of fueling the bubble. Remember, the US government wanted a bubble too, and it worked until it didn’t.

    It’s also incredibly misleading to say “stocks and real estate tend to go up over the long run”. The truth is in the long run, real estate goes up at the rate of inflation while stocks go up WELL BEYOND the rate of inflation. Real returns in stocks is over 6% annually. In other words, when adjusted for inflation (which any legitimate analysis has to account for) real estate DOES NOT go up, while the stock market DOES go up.

    The real reason you shouldn’t time the stock market is not that it’s hard to do (although it is) but because it doesn’t matter all that much to your overall returns. See, people generally contribute money towards their investment portfolio at regular intervals (monthly, quarterly, annually, etc.) which is called dollar cost averaging. Over time you end up paying the rolling average price to increase your portfolio, so you end up with an average return (which beats real estate returns handily). If the stock market tanks 50% then this is good news for long term investors because now your regular contributions buy a lot more than they used to. You have no choice to invest gradually because you cannot get a 95% LTV loan to invest in the stock market at one specific point in time. You have to contribute money as you earn it because you can’t walk into a bank with $50,000 and walk out with a $950,000 loan to spend on stocks.

    The reason you SHOULD care about fundamentals in the real estate market is that you’re only making one huge purchase at a specific point in time. There’s no dollar cost averaging, just one lump sum purchase. If you get it wrong, you’re stuck with the consequences for years and years. You’re stuck with massively higher carrying costs compared to renting. You’re stuck with an asset destined to plunge back to its intrinsic value. You’re stuck with the inability to save for retirement (no, your house is not a retirement plan).

    For all these reasons and more, this article is a joke.

    • XRB
      I shall be dealing with issues like these in futures columns.

  7. I enjoyed this article.
    The most important thing I have learned about economics was never even mentioned in any of my classes. It’s called “confirmation bias”. Everybody has it. Learning to recognize it in ourselves is an important milestone in our personal development. For economists, it is an essential lesson. I suspect that some of the commentators here would benefit from learning about it as well.

    • If you have something to say specifically about the content the I guess I missed it. You had to go to economics class to learn navel gazing? Spare me the BS.

    • Oh look, the mortgage guy enjoyed an article encouraging people to get mortgages.

      At least he admits his confirmation bias.


      • The report was created for whom? bias?
        You decide

        • I enjoyed Will Dunning’s report because he knows the housing market like few others. (as one would expect of someone who has been a housing analyst since 1982). Many of the issues he points out, for example, don’t seem to be understood by most people, including the housing bears. .

          • No Bubble here……………all good, move along folks

            Estimated Total GAINED Value in the Entire Canadian Residential Housing Stock
            140 Years (1867-2007)

            6 Years (2008-2013)

            Current Estimated Value of the Canadian Housing Stock

        • learn more great ideas about real estate matenrikg and how you can dominate your local market visit my blog today real estate matenrikg

  8. I am a dentist and my husband is a Psychologist. We rent a 3 bed home in a great area in Markham-on for just 1600 per month! We have 2 kids and we are money savers.
    Houses in GTA are extremely over priced, we are not going to put all our money in realestate, that’s crazy! CREA , CHMC, Banks and the government are not telling us what’s really going on. Prices are already declining in Montreal, Halifax and Victoria. You have to be really stupid to get in the market right now. I feel sorry for so many house poor people. My friend for example bought a home with 5% down with a 35 year amortization in 2008. The house is so old and ugly. They don’t have money to renovate, everything goes to the mortgage. Now he lost his job and his wife is going nuts. She’s a nurse and she has been working so much. They are stressed, we told them to get rid of the big elephant but they look at us and think that we are the losers…We have 1 car (paid) they have 2 ( leased). We travel twice a year for 3 to 4 weeks to places such as Brazil ( last January) and for summer we are going to Japan. They never never do nothing. We’ll guess why? The mortgage is ruining their lives. I buy books for my kids at value village. She laughs at me… We are not against home ownership, but you have to be smart and wait for the right time.

  9. Larry Mcdonald, meet David Lereah. David Lereah, in 2006, was a senior vice president and chief economist for the National Association of Realtors (NAR) in the USA. Quotes in The Wall Street Journal , The New York Times and Business Week? Check. Appearances on CNN and CNBC? Check.
    That year his book was published, titled ” Why the real estate BOOM will not bust-and how you can profit from it.”.
    Some chapter titles:
    “The opportunity of a generation” “Why the real estate boom has wings” “How to navigate the real estate boom”

    He reels off why the housing boom will continue:
    -The US economy expected to appreciate at a healthy pace
    -High growth of immigrants
    -Low mortgage rates
    -Baby boomers in their peak earning years AND baby boomers children entering the market
    -Lean housing supply
    (Gosh, sounds familiar, no?)

    We all know what happened to US real estate soon after this book hit the stands.

    Lereah’s most famous quote was captured in Business Week on Jan 10, 2007.
    “The steady improvement in [home] sales will support price appreciation…[despite] all the wild projections by academics, Wall Street analysts, and others in the media.” This was while house prices were steadily falling. They continued to fall.
    On April 30, 2007, the NAR announced that Lereah would be leaving his job as chief economist.

      • Larry, you completely missed the point: people like you were mocking “gloomy forecasts” about the US market during 2000-2006. And then we know what happened.

        You strike me as someone who doesn’t adjust for inflation, so he only sees rising prices.

        Here’s something I found in a 30 second google search. Apart from the recent mega-bubble, does that look like “real estate always goes up” to you?

        • XHB

          It’s amusing to be accused of not knowing about inflation adjustments (having worked in the past on the price indexes StatsCan uses to deflate the National Accounts into real quantities).

          For the record, I wasn’t writing about the US housing market in 2006. I began writing about the Canadian housing market about 4 years ago.

          There are lots of subtleties that don’t show up in 30-second Google searches. For example the 8% return on stocks overestimates most investors’ returns due to balanced portfolios and the “behavioural gap,” among other things. As I said, I hope to write more about such nuances (including inflation adjustment) in a future column (my past columns have mentioned a number of them).

          By the way, the link to the chart in your post shows a comparison in average house prices over time. Such comparisons are distorted by changes in the composition of the housing “basket” from period to period.

    • RE: One glaring osimsion from that article is any explanation of why the guy doesn’t have insurance.This type of situation is exactly why Obamacare calls for mandatory insurance. To force healthy people to pay so that when they suddenly become unhealthy and need an expensive treatment that they were at least paying into a system that funds payment for the treatment. That is a valid problem, but the Obamacare solution is the wrong solution. Rate this comment: 0 0

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