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When home prices go up, it seems that most people think that they can only continue to rise.  When they stop rising, the critics of the previous view are listened to: maybe, today is the day that the crash starts.   If only market analysis were that simple.

A long time ago, Paul Krugman said that there were three types of economics.  With “airport economics”, things will either go up or down.  The future will either be everlasting happiness or pain and devastation.  These simplistic claims are not taught in a classroom because insight comes from a deeper awareness of nuances. 

It has only been three months since the Ontario government laid out some new policies aimed at house prices.  Most of the specifics were promises to study something or to do something in the future (i.e. not much has really changed).  The more important effect of the announcement seems to have been to get people to stop and to think about recalibrating their expectations.  More recently, the slow rise in various interest rates finally led to Bank of Canada to raise its Bank Rate (which is directly relevant to almost nobody).  Most recently, people who study data are excited about the massive increase in the number of homes listed for sale and the decrease in the number of sales.

In my opinion, the Toronto real estate market is pausing to figure out what it all means.  The increase in the number of listings (relative to last year, even if last year was above average historically) suggests that some potential sellers recalculated their risk-return trade off and decided to cash in.  The decrease in the number of sales indicates that buyers are now waiting.  (The fact that the year-over-year percentage changes are measured in double digits should tell you that none of the usual demand drivers or supply drivers can explain the change.)  In a little while, they will sell, give up or otherwise leave the market.  These moves are wise if the crash starts today but ones which will be regretted if it is only a pause.

Uncertainty is typically greatest in less standardized segments.  So, it is interesting to note that the same source of data indicates that, in June 2017 for condominium apartments, the number of listings is down (both new listings and active listings) and sales down.  I find it interesting that the average days on market (i.e. how many days of selling, if it sells) is down from year earlier.

The news on market fundamentals which used to dominate headlines, such as the supply curve and the demand curve, has been replaced by last month’s numbers.  How more months of evidence are needed before we can tell if the crash has started?  The answer (also missing from headlines) depends on the underlying level of variability, since variability causes misleading signals (both false positives and false negatives) which confuse trend analysis and headline writers.

Many years ago, just after financial markets had locked up and when everybody was afraid to buy or sell real estate because everything seemed to point to a downward spiral to devastation, I attended a meeting of experts.  It was a seriously confusing time.  The best forecast was “The next boom will start on Thursday.  I am not sure which Thursday but it will be a Thursday.”

So, think.  Carefully.  Markets rarely go in a straight line.

PA

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