As many regular readers of this blog and other real estate blogs and for that matter the general media there is much talk of a recovery in the real estate market both in Canada and albeit marginal in the US as well.

This brings the contrarians out in full force to tell everyone that they are “Greater Fools” and are headed for disaster.

My point in this post is to not take that viewpoint head on but rather remind everyone about the basic fundamentals that decide the fate of prices in all markets but especially the real estate market.  That is of course BOTH supply and demand.

The reason that I feel compelled to discuss this is that when contrarians speak of the market today and the unexpected run up in prices in many markets in Canada they have all kinds of prognostications about an utter collapse of the prices in Canada in the future.

As I read all these positions I notice a common theme.  Their forecasts only ever consider the demand side of the equation.  For instance a common concern is that currently the market is being fuelled by pent-up demand, primarily first time home buyers, and that when interest rates return to more normal historical levels that demand will “run for the hills”, and thus they say we will see a massive drop in real estate values, as much as 20% or more.

There is a couple fundamental challenges with this line of thinking.  First the current run-up in prices is being driven up as much by a significantly LOW historical supply level as it is by pent up demand.  Markets ALWAYS self correct.

We will likely see supply start to come back to more normal levels in the coming months, and yes demand will likely level off somewhat.  This will serve to slow the market down to “the speed limit” if you will which will allow for a leveling of the current surge in prices.  In fact in my market in Calgary we are already seeing that.  Absorption in September has come up to level off at 2 1/2 months worth of supply which is a HEALTHY balanced market.

The contrarians and doomsayers may be right that if interest rates rise to high to quickly this will have a non normal reduction in demand which will cause a temporary drop in prices.  But then as in any situation when supply or demand overheats, the other side adjusts to counter balance.

Look at 2008 when we were caught with way to high of supply historically speaking and demand went to hide for cover during the worst financial storm we have seen in over 50 years. Median prices went on a free fall of 15% in Calgary metro, and yet here we are one year later and prices are back up to almost the same level prior to the collapse only a scant 12 months ago.

The final word is that as in any large financial decision do your research, if this is a purchase for your principal residence and you comfortably afford the payments, AND this is the big one, you are not looking for a short term speculative profit, then be confident, move forward and take advantage of some great affordability in prices, but most importantly montly payments due to still record low interest rates.