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Canadian Real Estate Prints 19th Quarter In Bubble Territory: US Federal Reserve



Canadian real estate buyers are driving prices using irrational exuberance. US Federal Reserve (The Fed) data shows Canada’s homebuyers were “exuberant” in Q3 2020. This is when buyers disregard fundamentals, and paid more because they felt they couldn’t lose. This isn’t new, but it’s not as old as some have assumed. Canadian homebuyers irrationally drove price growth for nearly five years. The length of irrational buying firmly places the market in bubble territory.

Irrational Exuberance

“Irrational exuberance” is a term infamously used by former Federal Reserve chair Alan Greenspan. He used it to describe buyers of the Dot-Com bubble in the 1990s, who bought solely on enthusiasm. Good news received an irrational premium, and bad news was disregarded as temporary. Only one message is heard – buy as much as possible, as fast as you can. The term has since been used to describe bubble participants.

When’s the last time you heard someone say, “it only goes up” to describe an asset? Or even, “there’s no risk.” That’s exuberance. It’s the feeling you can’t lose, regardless of how much you know about an investment. It’s also infectious.

Once people see their friends and neighbors make money, they get FOMO and mimic the behavior. Inevitably, the majority of the market adopts the feeling it “can’t lose,” based on recency bias. It doesn’t matter if we’ve seen this before, it’s different this time. These situations are more commonly known as “bubbles.”

Post-Great Recession, the Fed developed a “smoking gun” indicator to identify real estate exuberance. Efthymios Pavlidis of Lancaster University, and the Dallas Fed teamed up to measure “explosive dynamics” in pricing. This is when home prices escalate faster than any fundamental improvement warrants. The longer explosive dynamics occur, the more likely buyers are exuberant.

The more confident you are in exuberance, the more confident you can be the market is ignoring risk. Investors say, “watch the downside, and the upside takes care of itself.” Exuberant speculators say, “there’s no downside.”

How To Read The Exuberance Indicator

Pavlidis and the Dallas Fed did all of the hard work, it just takes a quick explanation to understand what it means. There’s two values – a critical threshold value and an exuberance index reading. As buyers act less rational, the exuberance indicator rises further.

If the index is above the critical threshold, you’ve got exuberant buyers. If the index stays above the threshold for 5 quarters, you have an exuberant market. Once again, this is more often called a bubble.

Researchers can’t determine when a market will correct, or by how much. An exuberant market will need a correction in order to get back to normal though. Policy makers can delay a correction, however that creates moral hazard.

Moral hazard is when someone is encouraged to feel like they can’t lose. What happens when you get that feeling you can’t lose? You got it! Even more exuberance. It gets even worse.

Canadian Real Estate Has Been Exuberant For 19 Quarters

Canadian real estate hasn’t reached the exuberant level yet, so carry on. Just kidding, the index read 2.3 in Q3 2020, clearing the critical threshold by 67%. The reading is now at the highest level since 2017, when Toronto and Vancouver overheated. It’s also the 19th consecutive quarter the market has been exuberant. For those that don’t measure their kid’s ages by dividend payments, that’s a quarter shy of 5 years.

Canadian Real Estate Exuberance Index

The US Federal Reserve Exuberance Index for Canada, and critical value threshold. A market that is is above the threshold for 5 consecutive quarters is considered to be exuberant. Source: US Federal Reserve, Better Dwelling.

Is Canadian real estate in a bubble? According to the Fed’s research, yes this is a market driven by exuberance. Only 5 consecutive quarters make a market exuberant, and Canada has 19 consecutive quarters. It may be up for debate if it was maybe one or two quarters over the threshold, but at this point – come on.

The Fed data shows the exuberance doesn’t go back nearly as far as some think. Home prices largely moved with incomes and credit growth until 2015. That’s when Vancouver started to get heated, with Toronto joining until 2017.

The market is back to 2017 exuberant levels, but it’s very different this time. Instead of a handful of cities, almost every market is now experiencing huge price growth. Like I said, you can delay a market inefficiency with policy. That inefficiency still persists though, and is joined by even more moral hazard. On the upside, I’ve been told I can’t lose.

Source:- Better Dwelling

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Real eState

What Is the Canada Mortgage and Housing Corporation (CMHC)



The Canada Mortgage and Housing Corporation (CMHC) is a Canadian Crown Corporation that serves as the national housing agency of Canada and provides mortgage loans to prospective buyers, particularly those in need.

Understanding the Canada Mortgage and Housing Corporation (CMHC)

The Canada Mortgage and Housing Corporation (CMHC) serves as the national housing agency of Canada. CMHC is a state-owned enterprise, or a Crown corporation, that provides a range of services for home buyers, the government, and the housing industry.

CMHC’s stated mission is to “promote housing affordability and choice; to facilitate access to, and competition and efficiency in the provision of, housing finance; to protect the availability of adequate funding for housing, and generally to contribute to the well-being of the housing sector.”1

A primary focus of CMHC is to provide federal funding for Canadian housing programs, particularly to buyers with demonstrated needs. CMHC, headquartered in Ottawa, provides many additional services to renters and home buyers, including mortgage insurance and financial assistance programs. CMHC acts as an information hub for consumers, providing information on renting, financial planning, home buying, and mortgage management.

CMHC also provides mortgage loan insurance for public and private housing organizations and facilitates affordable, accessible, and adaptable housing in Canada.2 Additionally, CMHC provides financial assistance and housing programs to First Nations and Indigenous communities in Canada.3

Professionals and Consumers

CMHC provides services to both professionals and consumers. For professionals, CMHC aims to work in collaboration with different groups to provide affordable housing. Services include project funding and mortgage financing, providing information to understand Canada’s housing market, innovation and leadership networks to access funding and talent to spur housing innovation and increase supply, and providing speakers and hosting events for the industry.4

For consumers, CMHC seeks to provide all the tools an individual would need to either buy a home or rent a home and a variety of information and assistance for current homeowners, such as managing a mortgage, services for seniors to age in place, and financial hardship assistance.56

For financial hardship and mortgage assistance, CMHC provides tools that include payment deferrals, extending the repayment period, adding missed payments to the mortgage balance, moving from a variable-rate to a fixed-rate mortgage, and other special payment arrangements.7

Canada Mortgage and Housing Corporation (CMHC) and the National Housing Strategy

In November 2017, the Canadian government announced the National Housing Strategy.8 Rooted in the idea that housing is a human right, this 10-year, $70 billion project will largely be administered by CMHC, although some services and deliverables will be provided by third-party contractors and other Canadian federal agencies.9

Strategic initiatives of the National Housing Strategy include:

  • Building new affordable housing and renewing existing affordable housing stock
  • Providing technical assistance, tools, and resources to build capacity in the community housing sector and funds to support local organizations
  • Supporting research, capacity-building, excellence, and innovation in housing research10

History of the Canada Mortgage and Housing Corporation (CMHC)

CMHC was established in 1946 as the Central Mortgage and Housing Corporation by the federal government in Canada with the primary mission of administering the National Housing Act and the Home Improvement Loans Guarantee Act and facilitating discounts to mortgage companies. Initially, CMHC began by providing housing to returning Canadian war veterans, and toward the end of the 1940s, CMHC began to administer a program providing low-income housing across Canada.11

In 1947, CMHC was responsible for opening Regent Park, a large low-income housing project, and Toronto’s first urban renewal project. By the 1960s, CMHC introduced co-op housing and multi-unit apartment buildings throughout Canada.11

In 1979, the Central Mortgage and Housing Corporation changed its name to the Canada Mortgage and Housing Corporation

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Real eState

Canadian home price gains accelerate again in May



Canadian home prices accelerated again in May from the previous month, posting the largest monthly rise in the history of the Teranet-National Bank Composite House Price Index, data showed on Thursday.

The index, which tracks repeat sales of single-family homes in 11 major Canadian markets, rose 2.8% on the month in May, led by strong month-over-month gains in the Ottawa-Gatineau capital region, in Halifax, Nova Scotia, and in Hamilton, Ontario.

“It was a third consecutive month in which all 11 markets of the composite index were up from the month before,” said Daren King, an economist at National Bank of Canada, in a note.

On an annual basis, the Teranet index was up 13.7% from a year earlier, the 10th consecutive acceleration and the strongest 12-month gain since July 2017.

Halifax led the year-over-year gains, up 29.9%, followed by Hamilton at 25.5% and Ottawa-Gatineau at 22.8%.

Housing price gains in smaller cities outside Toronto and its immediate suburbs again outpaced the major urban centers, with Barrie, Ontario leading the pack, up 31.4%.

On a month-over-month basis, prices rose 4.9% in Ottawa-Gatineau, 4.3% in Halifax and 3.7% in Hamilton.

The Teranet index measures price gains based on the change between the two most recent sales of properties that have been sold at least twice.

Canada‘s average home selling price, meanwhile, fell 1.1% in May from April, Canadian Real Estate Association data showed on Tuesday, but jumped 38.4% from May 2020.


(Reporting by Julie Gordon in Ottawa; Editing by Christopher Cushing)

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Bank of Canada seeing signs of cooling in hot housing market



The Bank of Canada is starting to see signs that the country’s red hot housing market is cooling down, although a return to a normality will take time, Governor Tiff Macklem said on Wednesday.

The sector surged in late 2020 and early 2021, with home prices escalating sharply amid investor activity and fear of missing out. The national average selling price fell 1.1% in May from April but was still up 38.4% from May 2020.

“You are starting to see some early signs of some slowing in the housing market. We are expecting supply to improve and demand to slow down, so we are expecting the housing market to come into better balance,” Macklem said.

“But we do think it is going to take some time and it is something that we are watching closely,” he told the Canadian Senate’s banking committee.

Macklem reiterated that the central bank saw evidence people were buying houses with a view to selling them for a profit and said recent price jumps were not sustainable.

“Interest rates are unusually low, which means eventually there’s more scope for them to go up,” he said.

Last year, the central bank slashed its key interest rate to a record-low 0.25% and Macklem reiterated it would stay there at least until economic slack had been fully absorbed, which should be some time in the second half of 2022.

“The economic recovery is making good progress … (but) a complete recovery will still take some time. The third wave of the virus has been a setback,” he said.

The bank has seen some choppiness in growth in the second quarter of 2021 following a sharp economic recovery from the COVID-19 pandemic at the start of the year, he added.

(Reporting by David Ljunggren and Julie Gordon; Editing by Peter Cooney and Richard Pullin)

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