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Don’t follow the herd

The sky is not falling, don't panicLast week Rob Carrick sparked another interesting discussion in the Globe and Mail and on Facebook – suggesting first time home buyers consider renting now and buying later.

Some economists and real estate experts are saying the sky is falling. Last year, some even predicted an upcoming 25% decline in real estate values.

Anybody in the financial business for any length of time knows that market timing is a mug’s game – whatever the underlying asset. Sure you can “buy on weakness” if you have a crystal ball, but if you plan to be a homeowner for at least twenty years, why not jump in while the going is good.

Yet, if you followed some pundits last year, you would have already sold your home and live now in a rental, waiting to jump in when (IF) the market collapses. For example, TD Bank also warned of an imminent real estate crash. Here is a Huffington Post article from June 11, 2012 where the bank was quoted as expecting a 15% decrease in the medium term. The first paragraph from the article was as follows:

“Home prices in Toronto and Vancouver are going to drop by around 15 per cent over the next two to three years, says a report from TD Bank which also warns that “a severe shock from abroad” could send prices spinning even further.”

But today, nine months later, TD Bank released a report which laments they can “only” foresee an average annual increase of 2% in prices for the next ten years. Here is the lead paragraph from a report in the Globe and Mail:

“Toronto-Dominion Bank economists expect what amounts to a lost decade in house price appreciation.Over the next 10 years, Craig Alexander, Derek Burleton and Sonya Gulati project, price gains in residential real estate will average a “measly” 2 per cent a year.”

No one seems to notice the significant change in their forecasts.

I learned an expression in the financial sector many years ago – “Don’t stand in front of an onrushing locomotive”. In my experience, what matters most is the trend line.

So if real estate values are going up rapidly, don’t try to guess the top. And when real estate values are plummeting, don’t try to guess the bottom. The trend never stops on a dime.

Of course, it’s much harder to make accurate predictions when there is no clear direction. That’s where we are today. I understand why people are making these predictions, as in, I get their logic. But my experience tells me these kinds of predictions are much harder to nail.

So in today’s climate, you have to do what you feel is right for the long term. NO ONE knows for sure.

 

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Ross Taylor is a full-time mortgage agent and credit specialist who blogs frequently at ASKROSS

If you have any questions about anything financial, please contact Ross, he answers everyone personally.