Guess who's forecasting higher house prices!

Today brings us a new forecast that house prices in the Toronto region will rise 6.8 percent in 2018, the fastest rate for any major Canadian conurbation.  Here's a link, but before you open it, try and guess what kind of person or company is making the forecast. 

Got it in one, I'm guessing.  The rosy forecast is from Royal LePage, one of Canada's largest realtors.  Now there are good reasons to think that the long-term direction of house prices in Toronto is upward.  The region's population growth is steady, thanks in part to the fact that it is the preferred destination for new immigrants.  As a result, demand for new housing units can be expected to increase.  At the same time, new construction, particularly for detached family homes, remains sluggish.  Developers blame this on zoning and planning restrictions, but it seems more likely that slapping up condo towers hither and yon is more lucrative.

All of that may be true, but there are headwinds that the market is certain to face next year.  One is the introduction of new stress tests for borrowers.  Studies suggest that 20 percent even of existing borrowers would fail to meet these tests, so it seems likely that the percentage of would-be new buyers who fail to meet the new criteria may be even higher.  The Royal Le Page forecast acknowledges this, but expects it to have an impact only at the start of the year.

Then there's the economic environment.  Royal LePage thinks that strong job creation and income growth will support housing demand.  Indeed it would, but most forecasts call for the slowing in growth that was already evident in Q3 GDP figures to persist into next year.  If that doesn't happen, the Bank of Canada will certainly continue its policy of gradual monetary tightening.  Either slower growth or rising borrowing costs could easily invalidate Royal LePage's rosy scenario -- and we could well be looking at both.

But who takes house price forecasts from realtors seriously anyway?*  I believe it was the philosopher Bertrand Russell who used the term "arguing against interest", best defined through an example:  if I tell you there is no God, you can safely ignore me, but if the Pope starts telling you there is no God, that's a different matter altogether.  If realtors predicted a softer housing market once in a while, it would be easier to take them seriously. 

* Aside from me, I guess.