Glimpses into mass psychology
RBC released a housing survey yesterday. It is full of mostly useless information, but there were a few tidbits that jumped out at me.
First of all, the survey notes that 90% of Canadians still feel that real estate is an excellent investment. This is a very high and stands in stark contrast to our neighbours to the south where more than 50% of the population view real estate as a wealth trap. Yet their real estate market is approaching its long-term average when measured in price/rent or price/income ratio. Consumer mentality being what it is, it should be all but assured that the bust there will pull real estate values well below their fundamental value. Nevertheless, isn’t it interesting that people will extrapolate trends into the indefinite future. Markets that in some cases are a screaming bargain in the US can’t find a bid while the most overpriced markets in Canada experience a feeding frenzy.
Contrast the current US valuations and associated consumer mentality with what we see in Canada. Our price/rent ratio is at historical highs, some 3 standard deviations from its long-term norms. Meanwhile the price/income ratio has skyrocketed to in recent years to sit between 4.5 and 5.5 depending on the calculations used. In other words, by all measures real estate is exceptionally pricey when considered on aggregate. And yet we crave it!
What can we learn from this?
1) Mass psychology is powerful. Yet it is what ultimately leads lemmings to try synchronized diving. Taken to the extremes, overwhelming majorities in any market, be it stock, bond, or real estate, always warrant extreme caution.
2) Legendary Wall Street guru Bob Farrel reminds us, and these examples of polar opposite perceptions may confirm, that the public overwhelmingly buys most at the top and least at the bottom in any market.
A potential buyer drought?
If we think back to last year, we had some similarities between the current dynamics at work in the housing market then and what we see currently at work. We may recall that Flaherty made the first attempts at cooling the housing market with new mortgage legislation that was set to take effect last April. Furthermore, we had the looming HST in Ontario and BC which was set to take effect last July.
These two factors helped spur a surge in sales activity which promptly died off in the summer and led to some of the worst housing sales of the decade. Even with the dramatic seller strike, sales-to-new listings sank substantially while months of inventory rose….both pushing the ridiculous levels of the panic-induced market of 2008-2009 in which house prices shed some 13%.
‘Thankfully’ buyers were able to hold the line until mortgage rates could hit new post-recession lows as the 5 year bond soared and yields sank. The 5 year bond is what determines fixed mortgage rate. You’ll note that sales began picking up once again towards the late summer as the mortgage rates tanked:
Yet something interesting jumped out in the RBC report. Check it out:
Note the difference in the number of people who think it makes more sense to buy this year…especially in the ‘first time’ age groups of 18-34. What a massive difference between this year and last. So despite an orchestrated ‘flurry’ of buying activity which has still sales in many markets lower than last year, it appears that there is little by way of buying intention following behind, meaning that it will be even more difficult to stimulate new demand.
And as for the notion that these same people will be buying next year, if we can learn anything from mass psychology it’s that the masses have a strange way of abandoning those buying intentions right when the market needs it most.
Indeed it will be an interesting year!