Uncertainty arises in markets when their future direction is unknown. Families across Canada, for example, are wondering whether the housing markets will continue to lose steam or reverse their course.
We know many Haider-Moranis Bulletin readers are wondering the same thing, because the concern informs one of the most common questions they ask us: Should I buy now, or wait until later?
Before we address that question, we will start with a caveat from George Box, a renowned British statistician. Box warned that “all models (forecasts) are wrong; the practical question is how wrong do they have to be to not be useful.”
While we will try to share what we see in our “crystal ball,” we are always mindful not to confuse a forecast — which is just one possible manifestation of the future out of many — with what will actually come to pass.
First, let’s address the question of uncertainty in housing markets. When housing prices and sales steadily rise, buyers and sellers feel confident about their decisions because they believe market outcomes are in line with their expectations.
But the confidence in markets is shaken when prices or sales fall or rise rapidly. In Canada’s most populous cities, especially Toronto and Vancouver, housing prices started to accelerate in 2014-15. When the provincial and federal governments reacted with measures to instil market discipline, sales and prices declined, starting first with British Columbia in 2016, Ontario in 2017, and across the country in 2018.
Buyers and sellers want to know if the market has hit bottom or if it will decline further, with prospective buyers being particularly interested in the question of when they should jump in.
While it is tempting to “time” the market by buying low and selling high, it is increasingly difficult to do it with housing.
That’s because search and transaction costs, logistics, and other considerations make housing transactions much more complex to structure than those involving other asset classes.
Also, buyers can have different motivations: they may be transitioning from renting, switching homes, or looking for an investment property. Diversity of family structure in terms of size and composition also plays a factor. Some families will have school-age children, others may have pets or both. The same applies to sellers, complicating further the potential to make a match.
The right decision for a buyer or a seller depends upon their circumstances. Families with children buy earlier in the year so that when the actual move takes place later in summer, they are settled at the new location in time for the start of the school year. This is partially the reason why sales are higher in the spring than in other seasons.
A buyer may want to hold on to see whether prices will drop further over the summer. For those whose decisions are not constrained by time, that can be an effective strategy. For others, especially parents of young children, a move during the school year could have additional logistical constraints.
At the same time, prospective sellers in general want to wait for prices to rise, or at least stop falling, before they list their properties. This implies that the choice of housing available during downturns might not be as diverse when markets are stable. Thus, buyers might want to wait for the dust to settle.
Housing markets are inherently local in nature. Whereas housing sales and prices declined considerably in Toronto and Vancouver, housing in Montreal presented quite a different picture. Buyers and sellers in Alberta, Quebec and elsewhere must base their decisions on local market conditions rather than on what is transpiring in Toronto or Vancouver.
Those interested in buying investment properties will have additional considerations. If the purchase involves a mortgage, the OSFI-mandated stress test will impact the maximum amount one can borrow.
Recent research showed that some investors who bought under-construction condominiums in Toronto wound up underwater because rent did not cover mortgage payments, maintenance fees and property taxes. This was true even though rental vacancy rates were as low as one per cent and rents have been steadily climbing in the city.
The recent resurgence in purpose-built rental construction, as is evidenced by the spike in the residential building permits, suggests that the increase in the supply of rental housing in the future will relieve pressure on ultra-low vacancy rates and rents might also moderate as a result.
Thus, making long-term investment decisions based solely on current market conditions might not be wise. A prudent approach might be to base one’s decision on a variety of scenarios, in order to ensure you are prepared for a variety of potential future market outcomes.
The future will never be known with certainty. Yet choices must be made now, which makes risks and uncertainty the channels for wealth creation. Thus, our readers will be well-served if their decisions are informed by facts, reflective of their circumstances, and are influenced by their understanding of what the future may hold.
Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached atwww.hmbulletin.com.