Even when you look at the quality of the underlying data itself, the Teranet numbers come out ahead of what the economists are working with. The National Bank’s Côté says he originally didn’t want to produce a housing index at all. If there had been a reliable source for Canadian housing data already, he says he would have likely just used that. But it turned out that the only comprehensive data for resale home prices in Canada came from CREA, the national organization supporting the real estate industry.
Unfortunately, the CREA numbers had problems. “There was a lot of cleaning on their data to be done,” he says. “Their data is actually physically inputted by real estate agents as they sell the houses. And obviously, as a real estate agent, it’s in your best interest to show that prices are not falling too much because that’s how you make your living.” He was also nervous about the fact that CREA depends on the co-operation of real estate boards across the country to gather the data, and some weren’t thrilled about taking part.
So, he went with the Teranet data instead, and then he one-upped CREA, which did not respond to interview requests from Maclean’s, by adopting a more rigorous number-crunching methodology too. Like the Case Shiller index, the Teranet data tracks the resale prices of individual single-family houses in selected metropolitan areas, while CREA uses Canada’s Multiple Listing Service (MLS) to add up all the money spent on houses in a given area, then divides it by the number of houses sold. Côté says the real estate industry’s data can be misleading because cities that have a higher level of sales activity have a disproportionately large influence on the national average. In other words, if there’s more sales activity in Calgary than there is in Ottawa one month, then the higher prices in Calgary will tilt the numbers up, even though there are roughly the same number of homes in each city.
Beyond the quality of the data, Shiller says there’s another, more common-sense reason why you should trust the futures market over what the real estate economists tell you: the Teranet investors aren’t trying to sell you houses, and the real estate agents are. “The predictions from those guys are very biased,” he says. “They know that in a declining market, the volume of sales falls dramatically and real estate agents lose their jobs. So they don’t want to say anything that could be seen as contributing to a falling market. If their economist predicted a decline in the market—and then it happens—that’s deadly. The guy would have to watch out for his life.”
That’s part of the reason why David Lereah, the chief economist for the U.S. National Association of Realtors (NAR), kept pumping out the optimistic outlooks. He has since complained publicly about the pressure he was put under by his bosses at the NAR to toe the line. Now the U.S. is mired in the worst housing crash the country has ever seen, and Lereah has been discredited. He’s left his job at the NAR, lost millions in his own real estate portfolio, and he has been largely ostracized by his former colleagues.
We shouldn’t smugly assume that the same couldn’t happen here. One of Canada’s top economists, who spoke on condition of anonymity, says that he questions a lot of the numbers coming out of the real estate sector in Canada. “There’s clearly a lot of spin,” he says. Even the CMHC, which promotes home ownership and depends on home sales to sell mortgage insurance, has an interest in seeing the market prosper. “There is quite a lot of uncertainty regarding the market in general right now, and there are too few uninterested parties who are giving any sort of reasonable analysis on that outlook.”
That leaves just one question: if the Teranet futures market is right, and house prices are about to embark upon a long, slow decline followed by an anemic recovery, what will that mean for Canada? On the positive side, it will mean thousands of families who can’t currently afford houses may gradually see them fall within reach. But the negative fallout will be painful, long-lasting and will touch us all. It will mean more lawsuits against people like Riaz Kassam, who get trapped by tumbling prices. It will mean a huge drop in the wealth of millions of Canadians, as their biggest investment slowly sinks in value. It will mean consumers clamping down on their spending because they feel poorer, contributing to the general economic decline.
Shiller says it’s the inevitable end to a truly wild ride. “We’ve never before had this all-pervading belief that I can buy a house in any city and prices will just keep going up,” he says. “This cultural change helped to bring on the world’s largest housing bubble, and that outlook has invaded Canada, just as it has other countries.” It’s time to brace yourself, he says, because that bubble has popped. Over the coming years, houses will cease to be speculative investments, and will simply become places to live again. Shiller says it’s a necessary correction, but that doesn’t mean the process will be a pleasant one. “We may be in for a bad recession,” he says, “and we may not see the markets perform well for a long time.”
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