March 26, 2013

Don’t you just love economists and the authoritative economic pronouncements that are being announced and reported in the media about the future of real estate and equity in the family home?

Before responding to the most recent publication in the Vancouver Sun on March 12th 2013, I thought it might be best to begin with a few quotes I found on the internet. 

Q: How many economists does it take to change a light bulb?
A: None, the market will take care of it.

The use of mathematics has brought rigor to economics. Unfortunately, it has also brought mortis. (Attributed to Robert Heilbroner)

Harry Truman is alleged to have complained that he could never find a one-handed economist. Whenever he would pose a question for an economist, the response would be, "Well, Mr. President, on the one hand ... And then again, on the other hand ..."

The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.

If you laid all the economists in the world end to end, they still wouldn't reach a conclusion.

I found this in the Economist Website:

A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"

Other examples include the inability for anyone to predict the NASDAQ market crash in 2000, the devastating US credit crunch of 2007 or the current global debt crisis. But today Vancouver Sun reports that economists say that, after years of growth, the real estate boom is over and Canadian housing prices will flatline over the next decade.

My question is this. How do they know? I mean, 10 years is a very long period of time. What about population growth, supply and demand and government intervention?

Everybody needs housing. Pressure is on governments to find affordable housing and I believe that something will happen in the near future. However, I don’t believe governments control the economy in a democracy any more than economists can accurately predict the future.

Supply and demand represents the fundamental basis upon which free market economies thrive - as opposed to controlled economies in non-democratic or communist countries. Supply and demand fuelled the years of growth in the Canadian real estate market. Upward and downward fluctuations are part of the supply and demand cycle.

Government intervention may produce positive or negative results. Government intervention is very difficult to predict.

Residential homes and their equity growth are a fundamental part of middle and lower income families’ financial well-being. What happened in the United States was much more grandiose than “a housing bubble and all of a sudden a pin came and pricked it.” The United States housing crisis was primarily driven by fraud, rampant institutional fraud, and not blind market forces or the supply and demand principle.

The market in Canada has cooled partly because of government intervention and partly by the market.

I am not saying good bye to my nest egg. We need to find ways to reduce our dependency upon consumer credit and pay off our consumer debt. This is the best way to protect our future from runaway debt.

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