The Housing Bubble

CBC News reports from Canada. “Real estate prices in Canada are the most overvalued in the world, according to a new study from Deutsche Bank, which estimates homes in the country are valued 60 per cent too high. Would-be home buyer Alireza Anvari has been looking for a place for years, and is now running out of time as his wife prepares to join him from Kazakhstan. He says he can afford a down payment for a house — but the Toronto market makes him ‘incredibly nervous.’ He has extended his search outside the city to Hamilton. ‘This is the worst time to buy in the history of the last 10 years,’ he said. ‘I can’t wait no longer, I have to buy something.’”

The Montreal Gazette. “Despite fears of overbuilding in Canada’s largest city, 85 per cent more condo units are sitting empty in Montreal than in Toronto, a BMO report says. As of October, there were 1,876 newly built, but unsold condo units in Montreal, said BMO senior economist Sal Guatieri, citing Canada Mortgage and Housing Corp. data. That compares with 1,013 recently completed, but unsold units in Canada’s largest real estate market during that same period.”

“And that’s despite Toronto having four times the number of condos under construction as Montreal — with 60,000 units expected to be delivered over the next few years. Of Canada’s four largest real estate markets, Vancouver has the highest number of vacant condos, with 1,934 units completed and unabsorbed. Like Guatieri’s report, the RE/MAX report pointed to Montreal as the weakest market of Canada’s four largest cities, and the only one where buyers are said have the upper hand, especially in the condo sector.”

“‘We anticipate a softening in Quebec’s condominium segment, until the current oversupply is absorbed,’ said Sylvain Dansereau, executive VP, for RE/MAX Quebec.”

The Vancouver Courier. “My piece last week about the city’s efforts to get developers to build so-called affordable market rental housing in Vancouver touched a nerve with readers. But as a staff report pointed out, it’s much cheaper to rent than buy a home. The example staff provided was paying $390,000 for a two-bedroom East Side condo, with $40,000 down, for a monthly mortgage cost of $2,550. Income required: $102,000. To rent a new two-bedroom East Side apartment, with a deposit of $2,200, the monthly cost would be $1,455. Income required: $65,000.”

From News Talk 650. “Wendell Cox, senior fellow with the Frontier Centre For Public Policy, has released a report on the affordability of housing in Regina. His report found that there’s a fundamental issue with the cost of land in Regina. ‘The problem is when you put houses on land that is the price of gold you can’t sell them at a price people can afford,’ he explained. ‘The City needs to be monitoring the price of land. And if land prices are not where they were ten years ago, adjusted for inflation and so on, then they need to loosen up and allow more land to be developed.’”

“Cox said part of the problem is the extent of regulation the city imposes on new development. He says it’s creating false scarcity. ‘We always get concerned when OPEC decides they’re going to cut back on oil production and everybody rushes to the gas station, you know, to get gasoline while it’s still cheaper,’ said Cox. ‘The point is: when there are supply constraints prices go up and that’s the big problem that I’m concerned about Regina in the long run.’”

The Regina Leader Post. “I was working out at the gym the other day, when I overheard a discussion regarding housing affordability in Regina. The two who were working out beside me said something I have not heard before in the 20-plus years that I have lived in Regina and, I think we need to be concerned.”

“The first man said ‘I am taking a job out of the province for less pay, but I think I will be better off because I can get into a home for much less than what I would pay in Regina.’ The second man responded, ‘That is why I am commuting from down east. I can’t afford to bring my family here.’”

“There has been no shortage of consultants and urban planners, with respect to our city, who claim that we are consuming too much land, or that we are insufficiently dense. But what the Frontier Centre clarifies is that, for starters, Regina is actually one of the most densely populated cities in North America at over 1,600 people per square kilometre. In fact, Regina has 35 per cent more people per square kilometre than the average urban area in Canada and nearly 80 per cent more people per square kilometre than the average U.S. urban area.”

“Even Portland, Oregon, which prides itself as one of the early adopters of urban containment strategies, is 20 per cent less densely populated than Regina. When you also consider that Saskatchewan has 250,000 square kilometres of farm land, which is more land than all of the United Kingdom which houses a population over 60 times the population of Saskatchewan, and Regina takes up all of 120 square kilometres - I don’t think we are consuming too much land.”

From MacCleans. “News coverage can help fuel bubbles, says Yale economist Robert Shiller, by creating a sort of feedback loop where, for instance, the media starts talking about how house prices are going up, which encourages more people to get interested in investing in housing, which causes the media to spend even more time talking about rising house prices. From a paper in 2008: ‘I argued that the feedback that creates bubbles has the primary effect of amplifying stories that justify the bubble; I called them ‘new era stories.’ The stories have to have a certain vividness to them if they are to be contagious and to get people excited about making risky investments. Contagion tends to work through word of mouth and through the news media. It may take a direct price-to-price form, as price increases generate further price increases.’”

“In an admittedly unscientific experiment to test the idea that the media can fuel a bubble in the Canadian context, I’ve taken a look at the way the Canadian media has covered the housing market over the years. It shows what seems to be a pretty strong relationship between changes in house prices and changes in the volume of news coverage on house prices.”

“Cindy Soo, an assistant finance professor at the University of Michigan, published a paper earlier this year exploring the role that news coverage played in fuelling the housing bubble in the U.S. She found news sentiment closely tracked the housing market, so much so that a one per cent rise in news coverage on the housing market corresponded to a 0.6 per cent rise in monthly house prices. The relationship couldn’t be attributed to stories about market fundamentals, such as the strength of the local economy or mortgage rates.”

“Interestingly, as in Canada, news stories about the U.S. housing market also peaked two years before house prices did. Going further, Soo found that her news sentiment index closely tracked surveys of recent homebuyers, who also tended to turn more negative on housing about two years before house prices fell. (Surveys of homebuilders similarly tracked house prices, although they tended to lag both news coverage and homebuyer sentiment by a year.)”

So can this help us forecast what will happen to Canadian house prices in the future? Since 2008, coverage of house prices has been falling for most years, although house prices are still rising, albeit at a slower rate. Admittedly, these are extraordinary economic times, coming in the wake of a global financial crisis that has prompted governments both here and abroad to implement incredibly lax monetary policies. But given a growing body of research that suggests the news media can not only inflate a bubble, but forecast when it might peak several years in advance, our comparative silence in recent years may end up speaking volumes.”