Yesterday I highlighted the latest CAAMP report which despite the best efforts of the authors to put a positive spin on the data, nevertheless contained some particularly troubling information. It was not all doom and gloom, but in the name of providing a balance to the biased spin, I will highlight some of the points that caught my attention.
Home price appreciation: Consumer predictions
If you’ve been reading this lowly blog for any length of time, you’ll know that I view mass psychology as one of the great contrarian indicators. It is the topic of one of my primers, which was widely republished on a number of other websites.
To borrow from that primer:
“Any time people overwhelmingly believe that an asset is a ‘sure thing’ it inevitably has to be otherwise. It was John Kenneth Galbraith who astutely noted that, “In economics, the majority is always wrong”. This is the great paradox in the world of finance and it is exactly why the contrarians always prosper.”
“As it relates to all markets, including real estate, anytime that the majority is convinced that the market is a sure thing, it will invariably do the opposite, as the majority of the money has already positioned itself accordingly. In this case, if everyone has sold, no one is left to sell. That means that buying will dominate, and prices will move higher by necessity. The opposite is also true, and now is the time to make the connection with real estate. If everyone has bought expecting a higher price, then the majority of the money is already in play on the buy side, leaving the sell side to dominate the foreseeable future, with lower prices being the result of the immutable law of supply and demand.”
With that in mind, consider consumer responses to the question, “To What Extent Do You
Think Housing Prices in Your Community Will Go Up or Down in the Next Year?”
I’ve colour-coded them into three groups: Those who indicated 1,2, 3 or 4 are bearish on real estate. That group was coloured red. Those who indicated 5 or 6 are fairly neutral on the prospects of real estate and were coloured yellow. Those indicating scores of 7,8,9,10 are bullish on real estate.
Bears: 13% Strong bears (1 or 2): 2%
Bulls: 40% Strong bulls (9 or 10): 7%
Interestingly, only 13% of people surveyed believed that real estate was set to decline over the next year, while 40% believed it would rise, and 47 believed it would basically be flat. I would consider this a fairly strong majority, though the shift in consumer perceptions may be underway given that back in March, 92% of people in an RBC survey believed homes were a good investment.
On page 17 of the report, respondents were asked to rate the accuracy of the statement, “Real Estate in Canada is a Good Long-Term Investment”. The results? Average response was over 7, indicating strong support for that statement.
Sentiment is like a tide. The tail end of any bull market finds the population overwhelmingly willing to believe that the ride will continue indefinitely. At the peak of the US housing boom, well over 90% of Americans considered homes a great investment. How times have changed! Today 50% of Americans view real estate as a wealth trap and now see the wisdom in renting.
Alas, the great contrarian indicator of public sentiment will soon shift back towards an equilibrium and likely overshoot. You’ll know real estate is nearing a bottom when the majority has firmly soured on its long term growth prospects.
Saintly banks….devilish debt!
I found this comical. On page 16, respondents were asked to rate the accuracy of this statement: “Canada’s Superior Banking System Will Shelter Us from Significant Downturns Like the One Experienced by the United States”
The result? Average response of almost 6, indicating above average support for that statement.
Next respondents were asked to comment on the following statement: “As a Whole, Canadians Have Too Much Debt”
The result? Very strong support for this statement, with the average being almost 8.
How do we reconcile these two? I wonder where the respondents think the money for debt CAME FROM? We have ‘superior banks’, but they are willing to lend us ‘too much debt’. Go figure. It once again illustrates Canada’s love affair with our ‘sound’ banking system.
Amortization data…just how conservative are we?
On page 23 of the report, it discusses amortization periods on mortgages. Of note, 42% of new mortgages were for amortization lengths longer than 25 years. I find it amusing that the author makes the following statement on page 12:
“Very favourable housing affordability has largely offset the lingering consequences of the recession, and has supported balanced housing markets in much of the country.”
That is utter BS! Housing maintains the illusion of affordability for two reasons: record low interest rates and new government initiatives to insure mortgages for longer than 25 years. It’s comical that measures of affordability typically use 30 or 35 year ams to make the case that housing is still affordable. That is bunk! Sure the average house price in Canada could hit a million dollars and wages stay stagnant…..IF governments brought in 200 year amortizations! But all you’re doing is ensuring that more interest payments are made at the banks and less money is available for consumer spending over the longer term. For more insight into how the government has been complicit in forming the current bubble, please read “CMHC: The enabler to Canada’s housing addiction”.
Back to the report. I don’t find this data particularly comforting. It reinforces in my mind that this is a housing market running on the fumes of government intervention and misguided consumer perceptions.
Interest rates…planning only for the best scenario!
I found this section to be the one most laced with spin. You can find it starting on page 25 of the report.
The survey asked mortgage holders to indicate “the amount at which, if your monthly mortgage payment increased this much, you would be concerned with your ability to make your payments”. The responses indicate that the average amount of room is $1,056 per month on top of their current costs.
I think this is bull. First of all, the survey asks people to estimate their own ability to absorb that higher payment. It is an estimate which is likely quite high. With the median take-home salary per household in Canada sitting at $63,900, a $1,056 per month increase equals additional annual payments of $12,700, or 20% of the average after-tax pay!
Given that our savings rate is around 2%, I find it absurd that the average household can trim back on 20% of their consumption. That number is clearly ridiculous.
16% of respondents also indicate that they could not manage an extra $300 increase in mortgage payments. Yet every one percent increase in interest rates equals a jump of 9 to 11% on mortgage payments, meaning that 16% of respondents are basically banking on historically low interest rates to remain for an indefinite period of time.
The report confirms this, noting that 11% of households would run into financial trouble if mortgage rates rose only 1.5%. Yikes.
Ask yourself if that is sustainable. Ask yourself if this report is all sunshine and lollipops as the authors suggest. Be critical of this stuff….Lord knows our mainstream media certainly isn’t.
I have one more post about the CAAMP report planned. Stay tuned!