How to Build Your Own Housing Market Outlook

Every day, we’re inundated with headlines about the housing market.

“Home prices are falling.”

“Inventory is surging.”

“Condo investors are selling.”

“The market is crashing.”

The problem is that most headlines focus on a single data point.

Housing markets don’t move because of one statistic. They move because dozens of forces interact with one another at the same time.

Instead of trying to predict the market, I believe we should be trying to understand it.

That’s why I’ve started using a simple framework to build my own housing market outlook.

Housing Is a System

When people ask me where the Toronto housing market is headed, my answer is usually the same:

“It depends.”

I’m not trying to avoiding the question. It’s simply because it’s not that simple. There isn’t one variable that determines where prices go next.

The housing market is a system.

Interest rates affect affordability.

Affordability affects buyer demand.

Demand influences prices.

Prices affect developer confidence.

Developer confidence affects future housing supply. And then years later, that new supply changes the market again.

Everything is connected.

The Seven Levers I Watch

When evaluating the market, I focus on seven major variables.

• Interest rates

• Employment and the economy

• Immigration and population growth

• Housing supply

• Construction feasibility

• Government policy

• Consumer confidence

But none of these tells the whole story on its own. You need to look at them together. That would provide a much clearer picture of where the market may be heading.

Supply and Demand Still Win

Despite all the complexity, every one of these variables eventually flows into two fundamental forces:

Demand

• Who wants housing?

• How many people can afford to buy?

• How many people need to rent?

If demand grows faster than supply over time, prices generally rise.

Supply

• How many homes exist today?

• How many new homes are actually being built?

• How many projects have been cancelled?

If supply grows faster than demand, prices generally soften.

Straightforward, right?

The Story the Headlines May Be Missing

Today’s headlines are focused on slowing sales, rising inventory, and softening rents. Those observations aren’t necessarily wrong. But they may only describe today’s market.

The more interesting question is: What does the market look like three or four years from now?

Construction activity has slowed dramatically.

Many projects have been cancelled or delayed.

Developers are struggling with higher financing costs, rising construction costs, and weaker pre-construction sales.

That alone doesn’t necessarily create a housing shortage today. But it most certainly will reduce the number of homes delivered several years from now.

Today’s weak market will create tomorrow’s tighter market.

So Stop Predicting. Start Building Scenarios.

Rather than asking: Where is the market going?

I think a better question is: What happens if these variables change?

What if interest rates fall?

What if unemployment rises?

What if immigration remains strong?

What if construction continues to decline?

Instead of making one prediction, you can build multiple scenarios and think in probabilities. That’s how good investors make decisions, so let’s come up with a framework.

My Goal

But wait, my goal isn’t to convince you that the market is bullish or bearish. It’s to provide a framework that helps you think more clearly. Housing markets are complex. Anyone who tells you they know exactly what will happen next is probably oversimplifying and will likely be wrong.

If you understand the variables that drive the market, you’ll be in a much better position to make your own decisions. Whether that’s buying your first home, investing, selling, or just simply trying to make sense of the headlines because it’s so confusing.

Anyway, that’s a much more valuable skill than trying to predict the next six months.

My Housing Analyzer

I created a housing market analyzer that pulls recent headlines from all the news sources, and gives a ranking for each of the levers on how bullish and how bearish the news is. At the end of it all, it will give you a reading as to what the news articles are saying. Neat idea eh? I really don’t know how I came up with it, but honestly, try it.

https://www.broadviewavenue.ca/broadview-housing-market-analyzer

And for real, I’d love to hear your thoughts about it, in the comments. Or as always, book a call with me to chat.
https://www.broadviewavenue.ca/appointments