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” 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
PGIM Real Estate, Revera Affiliate Target UK Market in Newly Formed JV
PGIM Real Estate has been active in recent months providing capital to facilitate blockbuster senior housing acquisitions. Now the firm is looking to capitalize on demand for senior housing in the United Kingdom.
The Madison, New Jersey-based real estate investor and lender announced this week it is entering into a joint venture with Signature Senior Lifestyle, an affiliate of Revera, to develop and operate senior housing communities around greater London
Mississauga, Ontario-based Revera serves 20,000 older adults in long-term care homes and retirement residences in Canada. It is also the majority shareholder of Sunrise Senior Living, one of the largest senior housing providers in the U.S. The company operates a portfolio of 12 communities in the U.K. under the Signature Senior Lifestyle brand, with one community in development that is slated to open in autumn 2021.
The JV has one development underway — a senior housing community, or “prime care” home, in southwest London. PGIM worked with Elevation Partners, a London-based investor and asset manager in U.K. health care real estate, in sourcing, structuring and executing the venture. Additionally, PGIM will retain the firm to leverage its expertise.
PGIM and Revera did not respond to requests for comment from Senior Housing News regarding details about its development pipeline.
London is emerging as a future hotbed of senior housing development, spurred by favorable demographic growth trends and a lack of available supply, and the PGIM-Revera venture will find competition.
Maplewood Senior Living CEO Gregory Smith told SHN last month that demand for U.K. senior housing is comparable to major U.S. markets such as New York and San Francisco, where supply has historically been constrained.
Maplewood and its investment partner, Omega Healthcare Investors (NYSE: OHI) are looking to expand its luxury Inspir brand to the U.K., and identified five suburban markets around London with high barriers to entry that are favorable for the brand’s growth.
Revera CEO Tom Wellner sees similar untapped upside potential for senior housing in the U.K.
Source: – Senior Housing News
Where in Canada are house prices increasing the most? Maybe not where you think – CTV News
Canada saw a surge in housing prices over the past year due to COVID-19, a market trend experts say is caused by people working from home more often and moving to rural and suburban areas.
Data released by the Canadian Real Estate Association (CREA) shows that when comparing the average market prices from February 2020 to February 2021, Canada had a 25 per cent year-over-year increase. The average price rose from $542,484 to $678,091.
“One factor is that with work-from-home even more generalized, many people don’t have to live within commuting distance from their jobs,” Shaun Cathcart, senior economist at CREA, told CTVNews.ca. “That means that folks who own condos and smaller homes can take out built-up equity and move to a property that better meets their needs – as over the past year, home is not only where you eat a few meals and sleep, but also the office, your kids’ school, playground, gym, etc.”
The largest year-over-year percentage changes came from the Northwest Territories (48.1%), Nova Scotia (30.4%), Ontario (24.5%), Quebec (22.5%), and New Brunswick (20.9%).
Cathcart noted that the higher percentage change in Northwest Territories is likely due to the fact that in both February 2020 and February 2021, six homes were sold throughout the entire territory and the ones that were sold in 2021 were marked at a higher price.
When looking at the provinces and territories that had the largest upsurge in terms of price difference, Ontario sits at the top of the list with an increase of over $170,000. Northwest Territories came next, followed by British Columbia, Nova Scotia, and Quebec.
The data also shows that prices in suburban and rural areas were impacted the most and saw the biggest changes, with regions like Rideau-St. Lawrence and Sarnia-Lambton in Ontario averaging about a 50 per cent increase from the previous year.
“With people no longer having to live within commuting distance to their jobs, as long as suburban and rural areas have decent internet, they become even more attractive to families looking for more space,” said Cathcart.
Find your region and the year-over-year price and percentage change below.
Cathcart says that Canadians can expect to see sales and prices increase this year, but forecasts sales to slow down in 2022 while prices remain high.
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