Record inflation. Surging interest rates. Reduced public service because of staff shortages. Transportation nightmares. Supply chain delays. A housing crisis.
What’s going on with this economy? Are we all in trouble?
Because I’m in the real estate purchasing business, I’m often asked what I expect to happen in the housing market.
I’m no expert economist, but I do follow the trends, the economic indicators, and the analyses put out by financial institutions. And I have written a book on getting ahead financially.
So, I do have some perspective, and here are a few thoughts.
- Prophets of gloom and doom are plenteous. We have them with us all the time, in a good economy and a bad one, and they get (by far) the most press. Fortunately, they are usually wrong or, at least, overstated.
- No one knows what will happen. If they claim to, they are delusional. So, one should not rely on any single prediction.
The economy, particularly the stock market, runs on a balance of optimism and pessimism. An imbalance one way or the other, yields either a downturn or a surge. How much is an “imbalance”? While there’s no clear standard, I think it’s pretty safe to say that even a 40-60 split is pretty extreme. That means that even in a profound movement, 40% still have the opposite opinion, and that opinion softens the movement.
So, no single prognostication is worth much, regardless of where it comes from, because there is almost an equal balance in the opposite direction from another equally reliable source. For example, I recently saw the predictions of the five major Canadian banks—all with equal credibility–for the Canadian dollar. Two of them had it remaining stable at about $1.28 to the US dollar over the next year, two of them had it falling to around $1.33 USD, and the fourth had it gaining strength, to $1.20 USD.
The message? Don’t rely on any one single opinion.
- We are not in a housing “bubble.” If it were primarily the forces of greed or offshore purchases that had pushed our housing market to its record highs during the pandemic, then there would be a lot of room for it to drop.
To be sure, there was a little of that. But the major force pushing housing prices up was shortage of supply in Canada. That will not change substantially any time soon, regardless of the promises of politicians. A housing “crash” in Canada (unlike that of the United States) generally means a slight softening, a little drop.
We’ve already seen that since the interest rates started their upward move in January. It’s my impression (though too early to have seen any stats) that the radical 1% rate increase last month provided a significant jolt to the market.
Even so, it has not dropped radically, only a little. Has it bottomed out? Again, no one knows. I think that it probably hasn’t yet, but that it is near its bottom, will likely remain there for a few months or a year, then return to an upward trajectory, though at a much more modest pace.
Happily, none of my rent 2 own properties are in any trouble, and I don’t foresee any need for concern.
- The hue and cry that the rising interest rates will cause people to lose their homes is misplaced. We are entering the fifth year of the “stress test,” by which consumers are required to qualify for mortgages at the greater of 2% above the rate they actually get, or 4.89% (later adjusted to 5.25%). All mortgage approvals in this period were qualified as though the rate was at least 4.89%. even today, most mortgage rates are still below that.
If the rising rates leave people financially strapped, it’s because of other financial decisions they have made, or the encroachment of other expenses into the mortgage allocation, not because of their mortgage payments themselves, because they always were qualified to afford them at today’s rates.
- The economy is dictated by both external and internal forces. It is true that the pandemic and the Russian invasion of Ukraine are global factors that are affecting everyone. But internal factors also have an influence, and the decisions our politicians make should not be entirely ignored.
It is always a matter of weighing and trading off priorities. Some will appreciate the trade-offs our governments make even if they lead to a tougher economy; others will hate them just because they lead to a tougher economy in favour of other priorities.
Bottom line: This is not the time to panic. And it is not a time to defer economic decisions, waiting for the recovery to hit full stride. Those who take that stance generally “miss the boat.”
It is, in fact, an excellent time to get into a rent-2-own situation if you face circumstances where you do not quite qualify for a mortgage on your own but are “within shouting distance” of doing so.