Canadian real estate is in a “melt up,” says one of the country’s largest banks. BMO senior economist Robert Kavcic sent a brief research note literally titled “Melt Up,” with his take on the latest real estate numbers. The term is typically used to describe rapid, and unsustainable price growth for an asset. It’s also more commonly known as the final stage of a bubble. The economist sees little stopping it, as the market gears up for the busy Spring season.
Canadian Real Estate Is In A “Melt Up”
The bank’s senior economist is calling attention to price growth acceleration going vertical. “The 1-month change is faster than the 3-month; which is faster than the 6-month; which is faster than the 12-month,” he describes the trend. Further adding, “In all cases but the 12-month (and that won’t be long either), price growth has accelerated through the rates seen in 2017, when policy makers were working on multiple fronts to tame the market”
Canadian Real Estate Price Growth
Price growth for CREA’s benchmark home across Canada. The 3 and 1 month trends are expressed as the annualized rate of growth. Source: CREA, Better Dwelling.
Kavcic also doesn’t see any near-term way to stop the mania. During the 2017 foreign buyer “mini-bubble,” governments were openly engaged in cooling measures. This time, there’s little discussion occurring at any level of government.
Since governments need public feedback on measures, there’s usually public discussion. At this point, it would be too late to bring in any cooling measures, going into the Spring. “Spring is in the air and there’s little at the moment to get this momentum in check…” his report finishes.
What The Heck Is A Melt Up?
I know, it sounds delicious — how can it be bad for you? Kavcic’s brief note doesn’t get into the meaning of a melt up, but the choice of words is an interesting one. A melt-up, by definition, is an unexpected and sharp rise in the price of an asset (or whole class).
Melt ups are FOMO driven purchases, with no fundamental basis on price movement. Buyers bid based solely on the fact they think the pain of buying later will be greater than today. The only risk they see is paying more later, and not capturing those sweet, epic gains.
Melt ups are great for trading, but long-term investors are cautious of participation. The stampede of investors means future buyers are squeezing into a smaller window. While this creates bidding wars to drive prices higher, it also pulls forward demand.
Sellers benefit from the demand pulled forward today, but future sellers won’t. Since future demand was borrowed, it tends to leave a smaller pool for those that didn’t sell into the melt up. The lack of liquidity can lead to lower prices, especially if there’s a pent-up supply side. The length of a melt up varies, but it’s almost always the final stage of a bubble.
The current melt up isn’t just confined to Canadian housing, it’s a global phenomenon. Jeremy Grantham, founder of GMO, told the Financial Times, global markets are seeing a melt up that now rivals the two biggest bubbles in history. “There is as much craziness now as there was in late 1999 or 1929,” said the billionaire and legendary investor. The 1929 market was considered the textbook example of a melt up, though we might get a better example soon.
Cheap money doesn’t work the way governments want it to, because households use it the way they know how. It’s hard to convince someone to use cheap credit to start a business, when houses and stocks are making more than they ever could. Are the returns in real estate great right now? Of course, and you’d have a hard time explaining risks to anyone that made $44,000 in a month just by owning a home. Are the returns in everything great right now? Absolutely, and that’s the problem. No one sees the risk of leverage right now, they see the risk of being left behind.
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