Lessons in mass psychology courtesy of the RBC housing survey….Does it also point to a potential buyer drought later in 2011?

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.

Be warned….

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:

Then, as the 5 year rates began creeping back up again, Flaherty once again announced new mortgage rule changes, spurring yet another short-lived bounce in sales, as we are currently seeing.

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!

Cheers,

Ben

Advertisements
This entry was posted in Real Estate, Social trends and tagged , , , , , , , , , , , . Bookmark the permalink.

17 Responses to Lessons in mass psychology courtesy of the RBC housing survey….Does it also point to a potential buyer drought later in 2011?

  1. Alex says:

    Mass psychology indeed.

    Ben, I’m becoming more and more convinced as I continue my CRTC complaint against Global BC and continuously write the editors of newspapers across the region about their glaringly obvious slanted “coverage” of the housing environment (of course no one ever responds), that:

    1) The mainstream media, virutally all of which is heavily backed by the real estate industry, is on a systematic campaign to spread false messages – not only to drive the mania that benefits of its biggest sponsor, but also for the “good” of the economy (which is, today, propped up mightily by housing).

    and…

    2) That the average Canadian, who turns not to blogs like yours but to the mainstream media for “information,” eats up these messages because they SEE NOTHING ELSE. Realtors are interviewed as “experts.” The massive per capita national debt is consistently downplayed. The option of renting is rarely mentioned. The concept that housing could quite easily DROP in value after new mortgage restrictions and rate hikes are activated is ignored. News anchors flavor upcoming real estate spots with sounds bytes suchas “Hot!” and “On fire!” And either subliminally or not so subliminally, the message that we’d all better buy now or be priced out forever is present and accounted for in the vast majority of what is broadcast/written on the subject.

    What say you? Am I turning into a freaky conspiracy theorist? Damn man, I want everyone who reads/contributes to your blog to do what I’m doing and question in writing the editors, writers, and news directors who foist this upon us. To me, it passed the point of ridiculousness quite some time ago. We’re being fed one-sided garbage every single day. No wonder we “crave” housing. We’re being brainwashed.

    To borrow from Peter Finch, I’m mad as hell and I’m not going to take it anymore.

    • jesse says:

      BC’s media comes from a long and proud history of being tied to financial interests. That said, the Vancouver Sun does have some good reporters working for it. David Baines, for one, is a decent muckraker. I read paper for the reporter, not the brand.

      • Joe Q. says:

        Not just the BC media. Last Friday, the RE section in the Toronto edition of the Globe and Mail had a five-page full-colour ad from LePage. Pictures of all their realtors, etc.

    • backwardsevolution says:

      Alex – your “brainwashing” description is accurate. We’ve been programmed to believe.

      You are not a conspiracy nut. I stopped watching the news a long time ago for the very reason you point out: we are being fed a diet of disinformation and most are swallowing it whole.

      Where are the investigative journalists? Where is the other side of the equation, the dissenting opinion? “Animal Farm” is alive and well.

      Canada and the United States are ruled by corporate interests. The balance of power has shifted too much in their favour now. That situation will only change when others get as mad as you, and unfortunately that’s going to take a severe market correction and much pain for borrowers. Maybe then people will wake up and realize they’ve been had.

      The CRTC is one of the last places you can go where you will actually be taken seriously, but you will have to produce evidence (dates, times, what was said, how it was said, or the biased/one-sided information given). It is really quite criminal what they are getting away with.

      Keep up the good work, Alex.

    • Sams Mango says:

      I believe you have lost your noodle. A newspaper cannot force people to go and make stupid decision. Only the bank can assist you to do that. Blaming media is not the right answer, you need to get beyond on that.

      Have you gone to a bank and complianed about your CDIC deposit insurance?
      Only looking at one side of the story and blaming media is not the right answer

      • I wouldn’t be too quick to dismiss the notion that the MSM caters to its advertising base. I’ve written about this before:

        https://financialinsights.wordpress.com/2010/09/18/the-media-spin-machine/

        Media advertising is a $1.2 billion dollar business. As was noted in an article in the McMaster Journal of Communication,

        “Building relationships with advertisers limits what news a medium will include. Anything that can be viewed as contrary to business priorities or will interrupt the “buying mood” of consumers often dissuades the advertisers that fund newspapers.”

        “Since publishers like CanWest Global are more dependent on advertising revenues than they are on subscription payments, selling advertising space becomes the top priority of the company”

        Can you also clarify how CDIC deposit insurance is analogous to media advertising?

      • jesse says:

        Have to agree with Sam/Mango on this one. Media bias is a symptom of a deeper issue. Listen to any sports talk radio callin show for how free people are to have disagreements of opinion in an open forum.

      • Alex says:

        Sams Mango: Wow. Lost my noodle, huh? I don’t know where in Canada you’re located, but the diet of rosy real estate news out here in the Vancouver area is criminally non-stop. The media even poses NON-news stories (a single helicopter tour arranged specifically for media, a single condo line-up that may have been at least partially faked, etc) as news, strategically places them in the first fifteen minutes of the evening news hour, and opens each spot with drooling anchors making claims such as, “If you need any more proof the Vancouver market is HOT!” Such total bullsh*t. And then in the next commercial break, we’re hit with “This segment brought to you by Re/Max.” Damn.

        I’ve long asked myself why people look at me like I really *have* lost my noodle when I tell them that maybe local real estate prices won’t continue rising forever. I hit them with a ton of facts (per capita debt, income to household debt servicing ratios, the fact that all around us – Fraser Valley, the Okanagan, most of Vancouver Island – values are dropping and listings rising, the end of 35-year mortgages, crazily climbing gas, grocery, and electricity costs, the US disaster, etc. But it doesn’t matter to most of them. All they see on the nightly newscasts and in the papers is one side of the story. I tell them to look at blogs such as this and they ask me, “Why don’t I see this on TV or in the paper?”

        You say “a newspaper cannot force people to go and make a stupid decision.” And you’re right. It can’t FORCE them. But it sure as hell can severely taint reality, and it sure as hell fosters and contributes to the mania. And at the top of a bubble, mania is the prime dirving force. “Look at these lineups!! Look at these Asian hordes! Listen to our “expert,” a real live realtor! Vancouver is special!”

        They stop just short of saying “BUY NOW.” But they focus only on one side of the equation, they deliver a constant stream of visual “proof,” and they trump up even the most questionnable non-event (an arranged for media helicopter-based marketing scheme) into, to quote a Global anchor, “a sign of the times.”

        Indeed, Sams Mango, as a reader of this blog, how can you not see this?

      • Sams Mango says:

        Listen, I believe your rant has more to do with affordability. Everyone is making large money, media, RE agents, sellers, flippers, etc. You are clearly not in the cross currents of this money exchange.

        I can say what you are saying about Gold stock adverts, late night ad’s telling me that I can have bigger boobs for my hubby, the list goes on and on…Every industry has a selling method, the media is the tool.

        Everyone gets credit card adverts, does everyone go and buy till the cows come home? No. The human must have the brain capacity to know what makes sense and doesn’t.

        Who cares if global story is not “news” What manadate do you see that says they have to provide that? They can do what they want, private company. They are not telling people to drink posion.

        Take a deep breath, enjoy your lovely city and let these things happen and they will sort themselves out. Canadians have this sick sense of entitlement where they must let everyone know how they feel or force views. Chill out before you give yourself a heart attack.

  2. Ahsan Zaman says:

    There is one thing I would love to see some analysis on. It is clear that last year sales were pulled forward for reasons we are all aware of. The question I have is was supply pulled forward as well. Clearly not enough supply was pulled forward as prices still increased. However Toronto figures show that at the time supply was through the roof as well as sales.

    My question is whether the so called seller strike is real or have most of those who would have sold in the near term already cashed their chips in. If that is the case could a soft landing for the market be in the cards?

    It is just very strange that despite the lure of changing mortgage rules and potential profits to be reaped by sellers supply is still tight.

    • rp1 says:

      Supply will remain tight until the market clearly turns, then everybody will try to sell at once. Everyone knows houses are overvalued. The question is what the turning point will be. Any single gradual change is not likely to make much of a difference, but the combined weight of multiple factors can weigh on the market. Watch for the listing surge.

      1) interest rates
      2) first time buyer interest
      3) what acquaintances are doing
      4) overall economic picture

      It is also possible for the market to grind up or down on a dearth of listings and sales. When buyers accept market prices and choose to buy something regardless (as I believe many do for houses), temporary conditions can have a drastic effect on where the market goes. Hence all the manipulation.

  3. backwardsevolution says:

    From Garth Turner:

    “For example, one would think the country’s largest bank would know better than to circumvent, even unwittingly, the federal ban on 35-year mortgages, which takes effect next Friday. F murdered the little sucker because over the last year the overwhelming majority of all new loans had an amortization so long horses were envious. This, of course, encouraged over-borrowing and exaggerated the threat posed by a housing downturn (which 90% of people dismiss).

    How does this ban work to change things? By forcing people to make higher monthly payments for an equal amount of debt, with the goal of disqualifying those who should never have borrowed in the first place.

    But here comes the “Skip-a-Payment” option at RBC. Read about it here. Essentially the bank will allow people with 30-year amortizations to make only 11 monthly payments a year, with the 12th simply being added on to the mortgage principal. This (you can work it out) has about the same effect as turning a 30-year loan into one with a 35-year amortization, lowering average monthlies and goosing the interest the bank collects.

    Example: $300,000 loan at 2.8% with a five-year term. Monthly payment with 35-year am is $1,121, or $13,452 a year. Monthly with a 30-year am is $1,232. But skip a payment and this costs $13,552 annually – virtually identical to a 35-year payment.

    I am sure this is a coincidence.”

    What next?

    • Sams Mango says:

      “But here comes the “Skip-a-Payment” option at RBC.”

      Where is the link to this?

    • jesse says:

      Skip a payment is nothing new. The difference, as househuntvictoria has argued, is that it’s being more actively marketed now than it was before.

      http://househuntvictoria.blogspot.com/2011/02/fighting-losing-battle-skip-payment.html

      The other common tactic is, for low ratio mortgages, to “kick the can down the road” by renegotiating perpetual long amortizations: take out a 35 year term, and after 5 years of payments, renegotiate for 35 years again instead of continuing with 30. That option is much more difficult once you’re into CMHC territory. I wouldn’t discount how much of an effect this is having and, if prices start falling, carrying large debt balances in perpetuity will become much more difficult since more and more people will be pushed into insured mortgages where payment schedules are more fixed. Maybe someone else can comment on this effect.

  4. Sams Mango says:

    http://www.realtor.ca/propertyDetails.aspx?propertyId=10389161&PidKey=1107809464

    This is best I have seen – spend 9M, you get just space and 5k a month in fee’s
    Toronto running out of space????

  5. Joe Q. says:

    We were out looking at a house here in Toronto with our RE agent last night. (Not buying now, but “chance favours the prepared mind”, etc.) She is not a “pumper”, but has been in the business since the 1980s and has never tried to feed us the Kool-Aid.

    She told us more than a few stories about clients on a tear looking to buy before March 18th. Some going so far as to ask her to prepare offers before the first viewing of a house. Of those that are first-timers, the majority are going “to the max” (5-35). At the same time, inventory is highly constrained in Toronto at the moment, but she feels that late March (i.e. after March break) will be a real turning point and inventory will start to shoot up, releasing pent-up supply from a slow fall / winter.

    Time will tell but it was interesting hearing this perspective from a RE broker.

  6. Pingback: B of A / Merril Lynch on Canadian housing…part 2 | Financial Insights

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s