Why is real estate market news is so contradictory?
A review of this fantastic article on how to read the financial news, from the perspective of a financial analyst looking at stocks and bonds, might bring to mind some key similarities to real estate news.
As a home buyer or seller, most of the information you are getting in the news is not very helpful. Much of the industry news:
Promotes product (i.e., selling existing homes or new developments) or;
Intends to calm the homeowners by assuring people that, in the long-run, prices always rise.
As a buyer or seller seeking to transact in the next six months, the long-term trend is much less helpful. People want to know whether waiting a few months will make a significant difference to their pocketbook. Will acting today versus in a few months make the difference of an extra ten to twenty thousand dollars in their pocket?
The purpose of this article is to help Canadian buyers and sellers scan headlines and content, and quickly assess what is relevant and what is noise.
If you are living in your ‘forever home’ then this analysis is less critical.
Top Tips for Reading Real Estate News
1. Is it a Fact or Opinion?
Newspapers publish opinion articles. An opinion article, as the name suggests, is an article where the author expresses their opinion on an issue. Unlike a research or investigative journalist article, it shares a belief and does not need to be grounded in a balanced analysis. To be briefer and communicate a clear point of view, it often provides less supporting information.
2. Do the facts match the headline?
FOMO (Fear of Missing Out) sells, fact-checking is passé, and misinformation (or choosing the information that supports an agenda) is more common than you think.
Sometimes press releases by special interests are published verbatim in newspapers, and superficial journalism is shortchanging the public.
If the headline causes you to react emotionally, then it is likely intentional. Boring headlines don’t get clicked. Often, because of editing for clicks, the story headline doesn’t match the body of the article.
3. Is it past or future-oriented?
You don’t drive looking in the rear-view mirror. Publishing historical real estate statistics is much easier than attempting to predict the future, and that is why there are a lot of people doing it.
Not only do real estate statistics describe the past, in some cases, they also rely on land title data, and that means they are describing purchase agreements that were signed 2 to 4 months earlier.
It’s almost unheard-of for someone to buy a home and move into it in the same month.
Usually, the purchase agreement has time built into the closing date to allow the buyer to make arrangements with their lender, complete inspections, pack furniture, and schedule movers.
Often people who transact on a home in Spring will arrange to complete in June or July so that the move doesn’t disrupt their kids’ school year.
Knowing that most reports are backward-looking, how do we know which information is helpful? How can we identify hype masquerading as news and selective statistics that are “clickbait”?
Here’s the rub. As a buyer or seller, you want to know the price and market balance trends so that you can negotiate intelligently. As a buyer, should you offer above or below asking? As a seller, should you accept a lower offer or wait for a better one?
4. Look critically at the source
Some real estate investment blogs have become pseudo-news sources. Real Estate Agents are not held to the same standards when describing expected future returns as Investment Advisors.
See the quote below from well known Toronto real estate agent Brad Lamb.
| “My advice is simple. Buy a rental one bedroom condo in Toronto for $450,000. Rent it for $2,000 per month. Keep it for 25 years. You will own 100% of a condo worth $1.5 million in 25 years. It will go a long way to funding your retirement.” |
His advice hinges on home prices rising by 5% annually for 25 years while incomes rise at less than 2%, which is very unlikely, and he can’t guarantee those returns. Granted, condo prices in Toronto rose almost 20% last year, but that is no guarantee of future price increases.
We can use history to show a time in Toronto’s past where this didn’t hold. In the early 1990s, there was a real estate correction in Toronto and prices took 13 years to match their previous peak (if we had adjusted for inflation it took longer).
An Investment Advisor making a similar claim for a mutual fund would be reprimanded by their regulator because it would be considered an illegal representation. Illegal Representation involves making an assurance or guarantee related to the future market price or future cash flow of an investment.
Like real estate, in the long-run, stock market index values always rise, but that doesn’t mean advisors can guarantee they will increase over a specific timeframe.
5. Don’t’ confuse sales with prices
Often headlines talk about sales and not prices. The headline “COVID-19’s Impact on Real Estate: Toronto Home Sales Down 69%” might make some Canadians think prices have dropped but actually it just means fewer homes were purchased. The industry cares about sales because they only make a commission if a purchase-sale occurs.
Lower sales might also make you believe there is downward pressure on prices, however if the number of homes for sale drops in-line with purchases, than may not be true.
6. Understand the Assumptions and Conclusions
A recent headline said, “TD Bank sees home prices rising 6% this year, even amid massive job losses.”
TD, to their credit, listed three key assumptions:
Purchases will fall in tandem with the supply of homes so the market will not shift from a seller’s market to a balanced or buyer’s market.
The provinces will take tentative steps towards re-opening their economies in May 2020.
Even though many people have lost income, mortgage deferral programs will prevent them from being forced to sell their homes.
There are some other assumptions that they haven’t listed explicitly.
Airbnb operators will not sell their homes or convert them to long-term rentals.
Very few Canadians have private mortgages that do not benefit from payment deferral programs or automatic renewal privileges.
Employment levels and pay-packages will return to pre-crisis levels once provinces emerge from lockdown.
Putting these Lessons into Practice
To illustrate, let’s apply these guidelines to this February 2018 press release from the British Columbia Real Estate Association (BCREA).
|
BC Home Sales Dip After Strong December Vancouver, BC – February 15, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 5,306 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in January, an increase of 18.3 percent from the same period last year. The average MLS® residential price in BC was $721,477, up 16.2 percent from the previous year. Total sales dollar volume was $3.83 billion, a 37.4 percent increase from January 2017. "BC home sales dipped 10 per cent from December to January, on a seasonally adjusted basis," said Cameron Muir, BCREA Chief Economist. "New mortgage rules requiring conventional borrowers to qualify at a higher interest rate likely contributed to the decline in home sales last month. The impact was magnified by a strong December as many households advanced their purchase decisions ahead of the policy's implementation." Despite the decline in January transactions, the seasonally adjusted annual rate of home sales was 101,800 units.Compared to January 2017, market conditions tightened in all BC board areas except Victoria, where the sales-to-active listings ratio declined from 46.3 percent to 40.5 percent. Despite this decline, Victoria remains in strong sellers' market territory. Total active listings in the province were down 8.6 per cent to 20,901 units, compared to the same period last year. |
1. Is it a Fact or Opinion? Fact.
This is most definitely a fact, but why did they report sales dipping? Is it misdirection? Let’s break it down:
UP: 5,306 residential unit sales in January, an increase of 18% from January last year
UP: Average MLS® residential price was $721,477, up 16% from the previous year
DOWN: BC home sales dipped 10% between December and January
DOWN: Total listings across the province dropped 8%
2. Do the facts support the headline? Not really.
Headline: “BC Home Sales Dip After Strong December”
An analysis of the facts:
People bought 18% more homes in January 2018 than in January 2017 (year-over-year).
Home prices rose 16% year-over-year
10% more people bought in December 2017 than in January 2018 (month-over-month drop).
The headline is misleading. Prices are still rising, the market is still hot, people would rather hold onto their homes than sell them. Why would BCREA highlight the month-over-month dip in sales rather than the larger year-over-year rise?
3. Is it describing the past or predicting the future? The Past.
The information provided sounds like it is describing activity in January, but it is actually describing purchase agreements likely signed between November and Mid-January.
4. Is it a reliable source? Yes, better than most.
A provincial real estate board is a reliable source with a reputation to protect.
However, they do lobby government on behalf of their membership (B.C. Real Estate Agents), and they also sometimes behave more like a marketing association than a regulator. A real estate board or real estate association may choose headlines that are intended to sway public opinion in favour of government policy they support.
As a result, you need to put this lens on their economic analysis.
5. Is the author talking about sales or prices?
Sales dipped, but prices continued to rise. After that press release, home prices in Metro Vancouver kept rising until May/June 2018.
6. What about Assumptions and Conclusions? Rather weak.
| "BC home sales dipped 10 per cent from December to January, on a seasonally adjusted basis," said Cameron Muir, BCREA Chief Economist. "New mortgage rules requiring conventional borrowers to qualify at a higher interest rate likely contributed to the decline in home sales last month. The impact was magnified by a strong December as many households advanced their purchase decisions ahead of the policy's implementation." |
Conclusion 1: “New mortgage rules requiring conventional borrowers to qualify at a higher interest rate likely contributed to the decline in home sales last month.”
This is tricky because the mortgage stress test rules came into effect at the beginning of January, and the sales reported involve contracts signed between November and mid-January. Most people buying in January would have a mortgage pre-approval in advance of the new rules so they would not be subject to the stress test.
On balance, this conclusion is weak.
Conclusion 2: “many households advanced their purchase decisions ahead of the policy's implementation.”
In a historical context, December 2017 does not look like a tremendously busy month. If anything, the BCREA should have argued that the market overbought in the Spring of 2017 (before the provincial election and an increase in the foreign buyer taxes).
Don’t get distracted by headlines
If you are looking for balanced information on real estate prices and interest rates Mortgage Sandbox is tracking the various sources of information and providing summaries.
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