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rob carrick

The people I listen to most on the state of the housing market are in the investment industry.

Not in the housing sector.

Investing people have a better understanding of a few basic facts about houses. One, they're financial assets like any other, and that means there are cycles of both rising and falling prices. Two, today's prices are high in some cities after a long run-up. Investment people believe the housing market is vulnerable to a pullback, and you should consider their arguments.

The latest investment industry forecast for a decline for housing comes from Sadiq Adatia, chief investment officer for Sun Life Global Investments. He thinks housing prices could decline by 10 to 15 per cent over an extended period as interest rates rise. "Over the next year or two, it will be time to look for an exit strategy if you've invested in residential real estate, or if you're a baby boomer who is planning to sell the family home," he said in an interview.

Housing bulls talk about factors like low interest rates and unlimited replenishment of the supply of buyers through immigration and young adults who aspire to buy homes. Mr. Adatia looks at what's actually happening in the economy and in the financial world.

To start with, he sees the economy weakening through the remainder of 2015 and early next year as a result of low oil prices and the resulting spending leading to job cuts in the energy sector. Mr. Adatia believes the Bank of Canada might have to cut rates again in the months ahead, but he doesn't see a big benefit for the housing market.

That's because a cut in the central bank's overnight rate affects mainly variable-rate mortgages, which account for just one-fifth of mortgages these days. Also, when the Bank of Canada cut rates earlier this year, the banks passed along only part of the reduction in rates they charge customers.

Fixed-rate mortgages, the more popular choice among today's home buyers, could actually get more expensive this fall. Mr. Adatia said the U.S. Federal Reserve is widely expected to start nudging rates higher in September, and this could pull rates in the Canadian bond market higher. Rates on the five-year Government of Canada bond have a major influence on five-year mortgage rates.

Once we're into 2016 and 2017, Mr. Adatia sees rates in Canada starting to edge higher in a sustained way. This is where even the Vancouver and Toronto housing markets start feeling some stress. As rates move higher, it gets more expensive for people to buy a first home and for move-up buyers to afford larger houses.

The housing bulls see an endless source of buyers and they seem to believe that interest rates will remain favourably low indefinitely. But investment people know that the only constant in the financial world is change. Interest rates could change in the wake of American moves as soon as this summer, which would come as quite the shock for those who have convinced themselves low rates are permanent.

Here's some good news for homeowners in Mr. Adatia's view on housing. He thinks the market is 30 per cent overvalued, which is more or less in line with analysis from the Bank of Canada (it pegged the valuation as being up to 30 per cent). But he doesn't see house prices falling back to fair value because rates will remain reasonably low, at least in comparison with the highs of previous economic cycles.

There are other investment industry voices besides Mr. Adatia who think now's a good time for some owners to consider an exit strategy from the real estate market. In an article that was well read on our website, Robert Champion of Sprung Investment Management wrote about the concept of reversion to the mean. That's where periods of big returns are followed by weaker results that bring the overall numbers back to the middle. Housing in several cities could be vulnerable, and that's why Mr. Champion made a case for older Canadians selling now to avoid price declines ahead.

Housing bulls typically make a living in some way from home sales, so they're biased. So are investment people in a way – they stand to make more money if people invest in stocks, bonds and funds rather than buying houses. But Mr. Adatia said something that confirmed my thinking about the worth of investment industry comment on housing.

"As investment strategists," he said, "it's our job to protect people on the down side." When did you last hear a housing bull say something like that?