As many have pointed out already, those "average home price" figures are dubious at best. The CREB is constantly changing their 'average home' definition, making the usefulness of the data as a short term forecasting tool ineffective.
I thought Oracles were supposed to espouse on the future, and not be concerned with short term trends?
Quote:
Originally Posted by MoneyGuy
Fact is, RE isn't as volatile as are stocks. I don't know their standard deviation, but I'd guess it's about half to two-thirds of that of stocks. If the 40% market decline I mentioned is about as big as it gets, then a RE freefall might be 20-28% of so.
Even if he market fell by 30% of more, why is that a bad thing? It wouldn't be.
Right now we have a whole generation of young people who are going to really stuggle to own a house. I'm older than most of the people here. This is my children's generation. Unless they're innovative and buy a house with parents or a friend, no way my kids and others of their generation can own a house. At least not without taking on huge, (maybe) lifelong, crippling debt. A RE freefall, which I define as a long, difficult decline of at least two to three years from start to finish, would enable many young people to get into the market. I want my kids to be able to own a house without relying heavily on the Bank of Dad, and right now it's verfy difficult.
What else would this accomplish? This would bring some sanity to rents. Right now owners are able to charge almost anything they want and renters don't have a lot of choice. A big correction would create enable many of these renters to get into their own homes.
This is a selfish reason, but I have clients who believe that RE is easily their best investment, despite the fact that stocks have historically blown RE away over the long term. They've witnessed a serious stock correction and highly volatile markets, but they've never seen a big RE correction.
I kinow a young fellow who is 26 and owns five houses. It matters not to me if he ever buys stocks, but I wouldn't mind if these guys learn how the markets really work. I've told him that there is risk in RE, that he's not diversified and long term stocks do better. He doesn't see the risk. I remember a person on this very site once writing something like, "Risk, what risk? How is it risky to buy RE when it only goes up?"
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This was an interesting post for sure. My responses are to the parts in
bold.
1. I'd say that you should qualify your desire to see a large RE correction by first asking yourself the question "What are the fundamentals of the correction?". If the market drops out because oil goes to $30, or the government puts a big carbon tax on CO2 emissions, or something catastrophic along those lines, your kids and their friends will still not be able to get a house because they will be out of work. As crazy as mortgage practices have seem to have become, I am pretty sure that the bank requires that you are gainfully employed before they write up your loan, especially if it is their practice to sell it to another institution (which it very likely is). I am with Photon in the sense that, while precarious, the economics of real estate in Alberta are still favourable for investors. But I see what you are saying - you want the market to correct to the point that it is also favourable for the average homebuyer to get in. This is also a good thing for the investor because it makes things even more predictable.
2. Of course this is true - rent will always be a reflection of what it costs to purchase in an area. A landlord, unless subsidized to do otherwise, will always put their rent cost in the area of 75 - 90% of the monthly payment required to finance purchasing the property using the lending vehicles that are presently available. Owning property is a business like any other, why would they not charge what they can? Again, your point is reflecting your desire to see your kid out of your door and onto their feet.
3. This is where things get blurry. What stocks are you comparing to what real estate markets? Real estate as a sound
investment is much less risky than real estate as
speculation. The same is true with stocks - are you buying blue chips like Coca-Cola, or are you acting on a tip that you got from a commerical or a friend of a friend and are now deciding to buy a penny stock or a "5 star" mutual fund. The difference between the two (investment vs speculation) is like comparing buying a government bond to taking your bankroll down to the Casino. The bottom line is that it is much easier for an investor to become well versed in the fundamentals of real estate than it is to know how the market is going to value a publically traded company.