It’s Wednesday and I have a weekly meeting with my mentor as usual. Today’s luncheon was about the Canadian real estate market. About a year ago, a number of economists were defending Canada, saying it could be immune from the credit crunch. If we look at just Western Canada, the average home price has only dropped about 10% to 15%, but they are definitely myopic if they believe the price would stall at this point. If you are wondering whether the value of your home would drop overnight - my answer to that is, I don’t know, but I am certain that it will not climb back up to the 2008 level until the wounds are healed. The Canadian housing market will continue to fall - perhaps slowly - until the economy picks up the slack, with a rebound not likely until at least 2012.

About 2 years ago, there were a lot of speculators hosting conferences with the objective of emphasizing how lucrative the real estate market was. I’m personally a brick lover, I love properties as much as business investments, and I completely agree - long-term investors should not be concerned about the real estate market, the longest period, historically, to recover from a bust has been 18 years.

For the speakers, their intention is clear - being paid your tuition or getting their commission - and the next thing they would teach you would be about flipping houses and involve in real estate speculation. Flipping houses usually involves high leverage and risky scenarios dependent on market booms lasting forever - if the market trend switches from boom to bust, you are out of luck. So what happened with their prediction about Canada’s hyperinflation? I have to admit, these guys are wonderful speakers, just as charismatically powerful as President Obama, and you will agree with me when you see them surrounded by thousands of audience after presenting their random thoughts as if it were Alan Greenspan talking about dumping free money on the street. However, they do this for living, so they have to be good with their speeches or they are out of the game.

2 years later, we can see the housing market is on a decline, it is more serious in Eastern Canada, but low sales volume in Western Canada is an excellent indicator of future housing values. So what really happened to the theories on hyperinflation again? I hope nobody fell for their speeches, the housing market at that time was bubbled; when home prices exceeds that of the general consumers’ disposable income (or, at least, their budget for housing), it clearly indicates that the housing market was overvalued.

It seems these speakers were never granted sufficient time to finish their speeches: their finishing line should be “the housing values will continue to increase until… the bubble bursts.”

A final word on Canada’s inflation rate; if December 2008’s CPI was at 1.2%, unemployment rate was at 6.6%, and November’s GDP was at -0.7%, how could there be hyperinflation? Don’t even mention stagflation, it’s not happening unless the oil price equilibrates at $147 / barrel.

This Market Watch article is part of Benny Wong’s weekly financial advice and thoughts column. Keep up on updates from Benny in the Market Watch section or via RSS.

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