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April 24, 2021

Calverley responding to your 'housing prices' comments

By John Calverley, guest blogger for Sympatico/MSN Finance

My thanks to all those who commented on my post on Wednesday. Readers seem about evenly divided between those who agree that housing prices will fall further and those who are angry that I am trying to talk the market down. The latter is certainly not my intention and, anyway, I have no illusions about my influence.

I believe it is very important that more people recognize that markets go in cycles. Unfortunately too many simply extrapolate past trends. They are eager to buy when a market is rising and either sell or refuse to buy when it is falling. Of course it is just this tendency that creates cycles. But when cycles become large and turn into bubbles and busts, the whole economy is in trouble, as we are seeing now.

I am not suggesting that we should all treat housing like an investment. In fact, I believe exactly the opposite. A house is a place to live. Owning rather than renting gives us more control and allows us to fix it up the way we want it. The problem in recent years is that almost everybody has been treating housing like an investment. I don’t just mean speculators in new condos but also people buying bigger homes than they really need because they think housing prices never go down and it is bound to be a good investment in the long term. This was a key factor fuelling the bubble, not just in Canada but around the world.

Historically, housing prices do go down. Quite often in fact, and it is even more likely now when there is very little cushion from rising wages. The evidence from past housing busts, in countries around the world, is that it usually takes a long time to reach the low, typically 4-6 years. It took about that long in Calgary in the early 1980s and Toronto in the early 1990s.

According to the Canadian Real Estate Association (CREA), Canadian housing price peaked in December 2007, so this is still early days, with the world recession hitting Canada relatively recently. Low mortgage rates are a big plus but rapidly rising unemployment and the overbuilding in many areas during the boom years are major negatives. The biggest price declines so far are in Vancouver, Victoria, Calgary and Edmonton, but I stick by my forecast of a 30% average decline before this is over. Time will tell.

John Calverley is Head of Research at Standard Chartered Bank, based in Toronto and is the author of When Bubbles Burst: Surviving the Financial Fallout, Nicholas Brealey, 2009.



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