Fact-Based Predictions

Last summer, at a family wedding, I got into a debate regarding real estate trends in Toronto. I assured my audience that inventories of unsold properties will increase and prices will fall. I received fierce arguments that the market in Toronto was safe from the US economy. This is typical emotional logic usually motivated by an investment people have, so they hope that by staying positive, they would not jinks their investment returns.

Since my Toronto debate, what happened to that market? The Canadian Real Estate Association is validating the slowdown and explaining it through rising unsold inventory, falling new home prices, greater resale competition and reduced credit availability. The average home prices dipped 1% in 2008, a sharp reversal from the 10% annual appreciation from 2002-2007. By January of this year, national average prices were down 11% year-on-year (though by a more modest 5-6% on a regional sales-weighted basis).

Scotia Economics is projecting another 15-20% decline in the volume of resales this year, with a further 10% drop in average prices. In Toronto, the average home price already dropped by 4% from $380K in 2008 to $364K in 2009.

Fact-based predictions are inarguably more sound than gut-feel ones, but human instinct again takes over even though it might not be the right judgment in today’s environment. It feels sometimes as if I am looking at a satellite image and predicting a storm, but it is hard to convince somebody if they look up and all they see is blue sky.

Source: Canadian Real Estate Association (CREA), Scotia Economics calculations.