Mostly economists’ forecasts are wrong.

As an economist, I sometimes think it is a good thing no one except other economists remembers or keeps track from year to year. So, why bother you ask?

Well, clearly, economic forecasts are important for businesses and individuals to help them make decisions for their economic future and are therefore serious business. A useful way to view forecasts is as guide posts rather than pin point accuracy. When making important financial decisions that will impact our collective and individual financial well being we can look to these guide posts to reduce our risk.

This applies to the housing market. Purchasing a new home is one of the most important personal financial decisions most of us will make. What’s in store for 2004? Should you buy now? Should you wait? The housing market in Calgary has been red
hot the past two years. Fueled by the lowest interest rates we have seen in fifty years, job growth and migration, the Calgary region recorded record years in 2002 and 2003. There was talk of a bubble, which never materialized. OK that’s history.

What about 2004?  Underpinned by oil and gas activity, Calgary is forecast by TD Economics to lead all major Canadian metropolitan areas with 4.4% growth. The unemployment rate is expected to remain low at 4.7%.  Nevertheless, the pace of homebuilding activity is expected to moderate by mid 2004.  Weaker demand from first time buyers, eroding affordability due to rising construction prices, and a weakening of population growth contribute to the Canada Mortgage and Housing Corporation (CMHC) forecast for 2004 of a 9% reduction in new single family home starts and a 10% reduction in new multi family home starts.  But lets put that into context – these numbers still represent well above the ten-year average.

Now this was before the recent reduction in interest rates. On January 20, 2004, the Bank of Canada cut the overnight interest rate by 25 basis points to 2.50 per cent. Banks finance mortgages through the bond market and bond yields have been pushed lower as the Bank of Canada cuts interest rates. Almost immediately, mortgage rates responded - A 5-year posted rate is now available for as little as 4.9%. A further 25 basis point reduction is expected onthe March 2nd announcement date. Since housing purchases are highly interest rate sensitive particularly for first time purchasers, I believe that the reductions forecast by CMHC will be moderated.

Inventory levels in all market segments have been increasing. According to CMHC single family inventory has increased by 27% since July of 2003, single family resale active listings are the highest since 1996 with a 49% increase over July 2002, and multifamily inventory has increased by a whopping 60%. The laws of supply and demand apply.

What’s the bottom line for home purchasing? Lots of choice due to larger inventories, moderating price increases due to less demand and record low cost of borrowing for mortgages until at least the third quarter of 2004 will balance rising construction costs.

For what it’s worth, I believe this would be a good time to buy.

Elsie Sawatzky, Research Director and an economist with Consumer Strategies Group (Alberta) Inc. spends her days studying the Alberta housing market. She can be reached with your comments at .(JavaScript must be enabled to view this email address)