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Part of me thought that I would make some videos. Makes some pro bubble arguments, and the real estate bulls would swoop in and save me. They would give me great arguments as to why real estate prices are going to hold fast or even continue to rise. Then I could go and buy a house with a clear conscience and I could stop thinking about real estate everyday :) But this hasn’t happened.
Now, the real estate bulls have some good arguments. Don’t get me wrong. They do have legitimate bullish arguments. The thing is that where real estate prices go is like a war. And in this war there are “forces” on either side. The bears have things like rising interest rates, stagnating wages, retreating foreign money, etc. The bulls have steady demand, low inventory, immigration, Chinese money, etc. The point is that there are forces on both side of the bubble argument.
The question is who will win the war? First off, I don’t see a truce. Or basically an equilibrium of the forces where prices flatten. This doesn’t happen in war very often. What happens in war is that the forces kill each other off until there is a victor. Even if a war of thousands end up with a couple hundred survivors on one side, that side is the victor. And to the victor go the spoils. So when I think of real estate, I think it is similar. If the forces pushing prices down are stronger than the forces pushing prices up, then you get the downward momentum. This can be seen in history, and I’m not talking about war now. I am talking about real estate prices.
In any of the many previous real estate bubbles around the world, there have always been forces on either side. The one that jump out so often as a bullish argument is the idea that once prices start to fall people will start to buy and that will prop house prices back up. The thing is that this does happen, but it is not enough to counteract the downward force. Don’t take my word for it. Look at history. Look at a graph of a real estate bubble. Do you think people were buying on the way down thinking they were getting a deal? You bet they were. But it wasn’t enough to stop the downward momentum.
This plays out on the way up as well. You could read it in the headlines. I will give an example. As prices were rising like they were filled with helium, there were downward forces. But those forces weren’t strong enough to overcome the forces pushing prices up. The forces pushing prices up were obvious. Low interest rates, foreign money, and I would argue one of the most important was fear of missing out (or the idea that prices would always go up). One of the biggest downward forces was the fact that real estate prices were so far removed from Canadian incomes. But the upward forces were stronger. Things like low borrowing costs and FOMO were stronger.
So in closing I would just like to say what I think. 1) There won’t be a soft landing, or a flattening of the market. One of the forces will win out. The forces pushing prices up will be stronger, or the forces pushing prices down will be stronger. And that winning force will have momentum. 2) No “force” stays in control forever. Winning a war is not a permanent state of being. You can most likely think of places or countries that have been in the past, or are currently fighting, that show the give and take that I am talking about. Same thing in markets. When you have opposing forces, and you add momentum to the mix, you have the perfect scenario for volatility.
What makes the real estate battle so complicated is that there are so many different forces on either side. So what do you guys think? Is there momentum in real estate? Do you see one main factor in deciding real estate prices, or is it many factors working together?