An Economic Forecast

I know nothing of economics, and have never presumed to make any such forecasts before. But then again, why not? The experts are always wrong anyway.

Let's see how well I do...

The price of housing in Canada, and no doubt also in the US, must go down. If things cannot go on forever, they won’t. If housing costs so much that people cannot afford it, they stop buying houses, and the price must go down. Currently, the ratio of housing cost to average income is at a historic high.

A mere fall in housing prices response to higher interest rates is not going to change this by itself, because the mortgage costs remain the same, and so the housing is no more affordable. But pushing housing prices down will have a snowball effect.

That costs have gone so much higher in proportion to income suggests that there is a lot of speculation in the market. Why not mortgage to the max, if mortgages are cheap, while housing prices keep climbing? The instant it becomes clear that housing prices will not inevitably rise, and mortgages are not such a great deal, there should be an exodus of much speculative money from the market, forcing prices further down. And each drop has a snowballing effect on speculation.

A lesser and sadder factor is that some people will no longer be able to afford the houses they are in. The rise in mortgage rates is liable to hurt here. In Canada, even fixed rate mortgages last only five years. Some proportion will find they can no longer cover it. Granted that they still will need a place to live, and will still be in the market for some kind of housing, there will be a lot of distress sales, when people cannot afford to hold out for the best price. 

Canadian, and American, demographics is tilting older. That means proportionately fewer new buyers, and more retirees looking to downsize, or dying and leaving their houses empty and up for sale.

Perhaps we are not building enough new houses; CMHC says so. But this is an odd problem, and can only be due to government overregulation. Canada obviously has no shortage of land on which to build. It of all countries has no shortage of building materials. The actions of government are sadly unpredictable, but there is a 50/50 chance things will get better here instead of worse.

So I say home prices in Canada generally should go down for the next few years. And the fall should be rather dramatic.

In other economic news, Kevin O’Leary notes that the figures were are seeing are unprecedented: inflation coupled with recession, coupled with low unemployment figures. These are three things that are not supposed to happen together.

The obvious explanation is that we are in a highly artificial situation, caused by the pandemic and the lockdowns. There seems a good chance things will snap back once these distortions are removed.

Albeit governments, notably the Canadian government, actually seem to be doing their best to prevent a return to normal.