Beware of Market Predictions

Source: The Globe and Mail

Evan Siddall, the head of CMHC, predicted in May 2020 that Canadian real estate prices will likely correct from -9% to -18%. Unfortunately for Mr. Siddall, his predictions was not even close. Instead, Canadian real estate went on one of the biggest bull runs in its history with prices up 20-30% in many regions year over year. Some areas of BC and Ontario had 50%+ price appreciation for detached homes since his prediction.

Canadian Mortgage and Housing Corporation, or CMHC is a Canadian crown corporation. Their primary mandate is to provide Canadians with accessible and affordable housing. CMHC sets mortgage lending policies and standards for Canadian banks and is also one of the biggest mortgage insurers in Canada (Mortgages with less than 20% down payment require mortgage insurance). 

With access to so many mortgages on their files to analyze and being a crown corporation, CHMC has immense credibility and trust with the general public. Many potential home buyers listened to Evan and decided to wait for a correction that never came, instead many were priced out of the detached housing market.

I believe Evan had good intentions with his predictions, he tried to warn Canadians to not over leverage when the economy was in free fall and there were massive job losses and layoffs. However, he did not appreciate the power of central bank’s printing presses, helicoptering CERB cheques and mortgage deferrals. Quantitative Easing and ultra low interest rates massively inflated asset prices especially real estate. He should not have made a public prediction leveraging the CMHC’s credibility as many people were made financially worse off from relying on his predictions.

Source: Twitter

Another market prediction fanatic is Robert Kiyosaki. He is the author of ‘Rich Dad Poor Dad’, one of the best selling books on personal finance and has a cult like following. Kiyosaki has been predicting a crash in the US stock market almost every year since 2011. If you had listened to his advice and stayed out of the US stock market, you would have missed out on one the biggest and longest US Stock Market bull runs in its history. 

The moral of these stories is to take market predictions with a grain of salt, especially the ones that are short term-based and require precise market timing. The media often encourage these market predictions as fear attracts attention and clicks which the media monetizes on. The manipulative headlines could suggest either an imminent crash or a FOMO inducing opportunity to purchase an asset/stock. 

Many of these people who predict market crashes wants to boost their own personal profile by making provocative predictions. They are betting if they are wrong no one will care, but if they are right, they will be known as the only genius that predicted the correction or a surge in an asset price (E.g. those that predict bitcoin will be worth more than $500,000 a coin by the end of the year etc).

Source: Real Estate Board of Greater Vancouver

No one can predict the market perfectly. Even many multi-billion dollar hedge funds with access to the most advanced trading technology and the smartest traders generally underperform the market index in the long run.

Many of the people who predicted one black swan event generally cannot predict another one with good accuracy or timing. Even though real estate is less volatile than stocks and typically go on extended upwards or downwards trends for sometime, the principle still stands.

Real Estate is a get rich slow scheme and should be held as long as possible as its been a proven store of value and an inflation hedge in the long run. I believe you should only sell real estate when there is a necessity, such as upsizing, downsizing or moving to another city/area etc. Real Estate doesn’t always go up, but generally does in the long run (see above chart for Greater Vancouver real estate average price index since 1985).

I would advise against selling your home and rent for a while just because you’ve read some prediction from a guru or so called ‘expert’ that the market has topped and will soon crash due to some government policy or some economic crisis.

One thing is for sure, 20% year over year increases in prices is not sustainable. However, exactly when and how much real estate prices will moderate is anyone’s guess.