I’m just compiling the real estate data from the various boards for the monthly ‘Tour through the board stats’ feature. Should be done later today.
In the meantime, I enjoyed this interesting read courtesy of The Economist:
It is part of a series by the economist exploring the lessons to be learned from the global property bubble. Yes…..it was not just the US housing market that burst. While the article is not dealing specifically with the Canadian property market, some lessons nevertheless jump off the pages.
Some key quotes that jumped out at me, though the entire article is worth reading.
“Property is widely seen as a safe asset. It is arguably the most dangerous of all…”
“(The property market) is so big that when credit conditions loosen it is likely to absorb a lot of the extra liquidity; and when something goes wrong the effects will be serious.”
…Like when CMHC loosens lending requirements drastically over the course of several years…..or when new credit products like mortgage-backed securities provide tons of liquidity to the Canadian lending environment (so prevalent in fact is securitization via MBS issuances that it consumes over 100% of new mortgages). Rampant securitization in the US, which removed risk from the bank sheets (as it does in Canada) is one factor nearly universally accepted to have played a part in blowing their bubble. Despite the fact that some in the mainstream media assert that this process is not active here in Canada, this could not be further from the truth.
An even bigger reason to beware of property is the amount of debt it involves. Most people do not borrow to buy shares and bonds, and if they do, the degree of leverage usually hovers around half the value of the investment. Moreover, when stock prices fall, borrowers can usually get their loan-to-value ratios back into balance by selling some of the shares. By contrast, in many pre-crisis housing markets buyers routinely took on loans worth 90% or more of the value of the property. Most had no way of bringing down their debt short of selling the whole house.
Property bubbles almost always start because fundamentals such as population growth, interest rates and economic expansion are benign….These fundamentals explain why many market participants are able to persuade themselves that huge price rises are justified and sustainable.
On bubble psychology
…If housing were simply a financial investment, buyers might be clearer-eyed in their decision-making. People generally do not fall in love with government bonds, and Treasuries have no other use to compensate for a fall in value. Housing is different. Greg Davies, a behavioural-finance expert at Barclays Wealth, says the experience of buying a home is a largely emotional one, similar to that of buying art. That makes it likelier that people will pay over the odds.
Once house prices start to rise, the momentum can build up quickly….The price of residential property is set locally by the latest transactions….One absurd bid can push up prices for lots of people.
As prices rise, property is arguably more likely than many other asset classes to encourage speculation. One reason is that property is so much part of everyday life. People do not gossip about the value of copper and tin, but they like to talk about how much the neighbour’s house went for. They watch endless TV shows about houses and fancy themselves as interior designers, able to raise the price of their home with a new sofa and artful lighting.
This last quote is bang on. As expansions in house prices beyond their fundamentals continues for some time, the justification for rising house prices becomes rising house prices. Greed over the outsized gains made by friends and family and the fear caused by the ‘buy now or be priced out forever’ mantra encourage more people to jump in. Home ownership rates soar.
…Homeowners overestimate the value of their homes by an average of 5-10%. Those who had bought during good times tended to be more optimistic in their valuations, whereas those who had bought during a downturn were more realistic. Expectations of higher prices explain why bubble-era buyers were more willing to buy risky mortgage products and take on ever greater quantities of debt.
Indeed our made-in-Canada credit bubble has overwhelmingly been fueled by real estate (70% of all outstanding debt) and the home equity line of credit (up to 12% of outstanding debt). Without an expansion in credit availability and new “innovations” in the mortgage market, property prices would be far lower than they are currently. People (wisely) would not have embraced zero down and then 5% down mortgages ammortized over 35 or 40 years. Alas, all good things come to an end. The credit binge is arguably set to cool with consumer debt at all-time highs and new moves by the government to tighten mortgage rules. Without this availability of abundant credit and a never-ending supply of buyers in the buyer pool, the property market looks far different from the one of the past decade….as we will soon see.