What are the economic indicators that can predict home price movement?
An economic indicator is anything that can be used to predict future financial or economic trends. Popular indicators include unemployment rates, housing starts, inflationary indexes and consumer confidence.
Will home prices continue to rapidly rise?
Every week, and with most every home buyer I’ve been working with for the past year, an idea quickly emerges. They say, “I have to buy now because if I wait three months, prices will have gone up.” Note*
They are right, of course, prices rose sharply in 2016 and the trend is continuing this year.
Predicting the future is part guess work and part science. Let’s talk about the science. Let’s talk about economic indicators (pseudoscience). Housing is considered to be what is called a “lagging indicator,” meaning that real estate markets only respond long after the economy has started going in a certain direction. I like to say that the real estate market is like a big boat. It takes time and a lot of ocean to turn it around.
Leading indicators
A leading indicator signals future events. Housing starts and building permits (new construction) are leading indicators. They signal confidence among investors and growth in the economy.
Another indicator for us in Kitchener-Waterloo is Toronto. We used to say whatever is happening with the GTA real estate market will happen here two years later. I think that expression is a little out of date. Now, what is happening there will happen here a lot sooner.
Lagging indicator
As mentioned above, real estate is a lagging indicator. Lagging indicators follow the event. In Alberta, it took more than a year after the oil price shock and the unemployment that followed before house prices started seeing any substantial drop.
I’m a little worried about what Donald Trump’s presidency might mean to Canada’s economy. We have benefitted greatly from NAFTA. If he starts taking it apart, our economy will suffer.
Coincident indicators
For completion, I should mention that there is a third type of indicator — a coincident indictor. These indicators occur at approximately the same time as the conditions they signify. Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy.When you see that new car sales are up or that people are taking nice vacations, you know that the economy is doing well.
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*Clients also say that prices go up in the spring and although that is statistically correct, it should concern buyers a lot less. Prices are reported to rise in the spring because bigger and more expensive homes sell in the springtime —> the rising tide (statistics) does not, in this case rise all boats by the same amount.
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