Cooper Says “No” – “The national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” [BMO]

“The Bank of Montreal poured cold water on the idea Canada’s housing market could be headed for a crash, suggesting that prices are only “moderately high across the country.”
“Expect the housing boom to cool rather than crash,” BMO’s chief economist Sherry Cooper and senior economist Sal Guatieri said in a report published Monday.
“While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust.”
The bank says home values are indeed rising at a faster pace than they used to, but the signs are pointing to a soft landing where prices stabilize — not a hard correction where prices drop quickly by 20 per cent or more.
“In our view, the national housing market is more like a balloon than a bubble,” the bank said. “While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” …
Average prices have grown more than twice as fast as family incomes since 2001, but BMO’s report argues there’s no reason to panic yet.
Nationally, home prices are 4.9 times higher than the average household income. A decade ago, that ratio was at 3.2.
Some cities are hotter than others. Vancouver’s ratio currently sits at 10 times higher than average household income, Toronto’s is at 6.7, Montreal’s is at 4.5 while Halifax is at 3.8. Those are all on the high side, but if the market cools, that will allow incomes to catch up and move the price-to-income ratio lower, the bank argues.” …
The bank does note, however, three risks to the outlook. A sudden hike in interest rates, a widespread Canadian recession, or an economic slowdown in Asia reducing the number of foreign buyers would all take the air out of Canada’s housing market.
“But barring one of these triggers, however, a dramatic correction is unlikely,” the bank said.

– from ‘No housing crash coming in Canada, BMO says’, CBC, 30 Jan 2012
[hat-tips to Zerodown, HD, Potato, Don]
BMO report itself here: BMO 30 Jan 2012 pdf

What’s the difference between a balloon and a bubble?
It seems, from this report’s perspective, the only real difference is HOPE.
Hope that the bag of gas with a membranous cover will deflate slowly rather than implode. Otherwise, a balloon pretty much is a bubble. Both are, after all, largely made up of air.
We’d love to see the BMO math on the proposed ‘income catch up’. It simply isn’t going to happen. There is no way of price:income reconciliation other than via a dislocation, and, unlike BMO, we don’t think there is any need for a precipitating factor to start the implosion.


“There’s no reason to panic yet.”
Of course, by the time BMO warns you to panic, it’ll be obvious to everybody that it has indeed been a classic bubble.
This is all rear-view commentary, with a hefty dose of aforementioned hope. Pretty much useless to anybody attempting to make decisions concerning their own financial future.
Has anybody done an analysis of the predictive capacity of BMO Special reports over the last 12 years?
– vreaa

32 responses to “Cooper Says “No” – “The national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” [BMO]

  1. Sherry Cooper will revise her prediction as soon as her 3 mil home is sold.

  2. http://davidlereahwatch.blogspot.com/2006_03_01_archive.html

    “We have had five consecutive record years, and you can’t sustain that forever…”
    “It’s more like a balloon that inflates and deflates… The air is coming out of the balloon, but the bubble is not bursting.”

    Oh Sherry!

  3. “Has anybody done an analysis of the predictive capacity of BMO Special reports over the last 12 years?”
    I have not looked at BMO but I have looked at TD bank over the last half decade in regards to Saskatoon and Canada. Here are a few note worthy quotes from TD bank.

    Bubble Watch from 2005

    “Cooling housing market shows no signs of bubbly behavior”

    This was right before the bidding wars and the lift off of housing prices the market was NOT cooling.

    Housing Bubble Watch Aug 2006

    “However, there is good reason to believe that the market (Saskatoon) may open up in the months ahead, as housing starts are currently running about 34% higher than a year ago. With houses remaining reasonably affordable, the market should become more balanced and price growth should slow before long.”

    Hmmm, Saskatoon experienced 53% house price growth right after this report from Oct 06 to Oct 07, that was not slower price growth. The year after, house price growth was over 30% year over year.

    From Long Term Outlook for Home Prices Sept 2006

    “Saskatoon will experience below average house price growth (2-3% per year) from 2007-2030.”

    At 2% per year, the average house price would hit 253K by 2030 ( using the average price of 160k from 2006). At 3%, the average house price would hit 318k by 2030. In 2011, the average price has hit over 300k. At first glance, it would appear they have clearly missed the mark with this one. But once the bubble bursts, there will be a long term drag on house prices. So 318k by 2030 is still possible.

    “Saskatchewan will experience negative population growth from 2007-2030.”

    4 years later most reports say that Saskatchewan will be near the top in population growth. But a lot can happen in 20 years, so don’t count them out with this one yet.

    This is from April 2009, Overpriced and Overbuilt about the forecast of 2009.

    “TD economists expect the average Canadian house price to fall to about $246,000 in 2009, down 24% from the peak of $324,000 in 2007.”

    Average house price in 2009 ended up at $320,000

    How well do banks forecast?
    http://saskatoonhousingbubble.blogspot.com/2011/04/how-well-do-banks-forecast.html

  4. New Case-Shiller chart for US housing:
    Your Dreams Of A Housing Rebound Just Got Smashed

    http://www.businessinsider.com/chart-of-the-day-your-dreams-of-a-housing-rebound-just-got-smashed-2012-1

  5. Read the fine print:

    “neither BMO nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user)”

    Not worth the bandwidth it take to download the pdf.

  6. “What’s the difference between a balloon and a bubble”?

    one is audible and one is not.
    By the time you realize there’s been an air leak in the balloon the market will be headed back up again.
    On the other hand, if you hear a bubble pop in the neighbourhood of 20% (see 2008) then chances are pretty good every other potential buyer has also heard it. A clearly audible marker serves as a signal to start buying again.
    Your best hope is that there is a slow leak vreaa – and that you know opportunity when it’s presented

    • A clearly audible marker serves as a signal to start buying again.

      That didn’t happen in the US… The marker there was certainly “audible” (about as audible as a thermonuclear explosion) but people still aren’t really buying. The psychology works both ways.

    • “By the time you realize there’s been an air leak in the balloon the market will be headed back up again.”
      Yes, because that’s what leaky balloons do. 🙄

    • Anybody who thinks…
      – that a speculative mania ends with a 20% pullback; or
      – that a speculative mania could follow a resolved mania in the same sector within a few years; or
      – that buyers eagerly wait to pounce on popped bubbles; or
      – that there is any ‘marker’ as to when to buy,
      …has absolutely no understanding of markets or speculative manias.

      The phenomenon is as much social and psychological as it is economic.
      Speculative manias resolve once all speculation is wrung out, usually at price levels BELOW fundamental support levels.
      20% off the peak of a mania is just a beginning.
      The bear market that follows starts with the ‘bang’, and ends with a whimper, far, far below; many months/years later; with participants disgusted by the sector (not eagerly hopping on-board).

      F1, we know your predictions:
      – SFHs can’t possibly drop more than 15%.
      – Prospective buyers are waiting to buy the dips.

      You know ours:
      – Crescendo selling
      – 50%-66%-off peak to trough; for all sectors

      We’ll get a chance to test them soon enough.

    • By the time you realize there has been an air leak in a balloon, it is time to find a new balloon. WRT to investments, it’s time to find a new one that is ready to inflate.

      It may be a balloon but the leak will be like when you let one go after blowing it up, no pop but plalalalalalalalglgagagaggaga as it flies around the room and ends up slapping some poor sucker with a load of spit to the face.

  7. “Bubble” vs. “balloon” is just semantics. People in positions like Ms. Cooper’s should drop the word-play and instead make a real contribution to the discussion by providing analysis on whether current RE values are sustainable given the fundamentals of demographics, ownership rates, incomes, borrowing patterns, interest rates, etc. I’m talking about numbers, not just hand-waving arguments. Isn’t this what economists are supposed to do?

  8. …in the absence of a pin.

    Um, does the good economist not recall a time when she was blowing up a balloon and it just popped right in her face because she blew too much air into it? In the absence of a pin, 2.99% rates and cashback mortgages represent those last few forced breaths.

  9. 4SlicesofCheese

    “BMO Nesbitt Burns chief economist Sherry Cooper said the loonie’s slide is inexorable and she urged Canada to adopt a common currency with the United States.

    “What makes us think we can buck this tide? Let’s dollarize and get it over with while we still have something to bargain with,” she wrote in an e-mail sent to clients Thursday.

    “The loonie is a symbol of our independence. But Germany, France and 10 other European countries have managed to form a monetary union without losing their national identities or cultural distinctions. Better now at 62 cents than later at 50 cents,” she wrote.

    She said if things carry on like they have, she could see the loonie at 50 cents US within 7 years. ”

    Sherry Cooper circa 2001
    nuff said

    • Former CIBC chief economist Jeff “50-Cent” Rubin made a similar prediction about the loonie. Thus the nickname. He also called for $200 oil, right at the $154 peak. If a guy could construct an index based on senior bank economist predictions, then use it as a conrtrarian indicator to play the market, he could make a pretty good living.

  10. Dr. Housing Bubble: When the global housing bubbles collapse like a row of dominoes – Canadian housing bubble at apex. Real estate markets from Australia, UK, Italy, and Ireland now into correction phases.
    Good quote:

    The proliferation of boiler plate media and the ubiquitous spreading of banking debt made the real estate religion spread quicker than any time in the past. The way real estate was being played up in the media was like some sort of spiritual revival. I remember a colleague showing me a clip of a real estate seminar in California at the peak of the bubble where people looked as if they were in some sort of glorified peyote induced trance.

    • That’s really what it is at essence, isn’t it? A great-big, gigantic and very dangerous confidence game.

    • ,,,where people looked as if they were in some sort of glorified peyote induced trance.

      Did you see the post yesterday about the Kickstart 2012 convention? Same thing. A few commenters said it had the appearance more of some sort of Scientology cult gathering than a meeting of professionals.

  11. “We’d love to see the BMO math on the proposed ‘income catch up’. It simply isn’t going to happen. There is no way of price:income reconciliation other than via a dislocation”

    Oh come on, all it takes is about 30 years of totally flat housing prices while incomes play catch up. That’s easy to accomplish! I’m sure once the speccers see the 4th or 5th year of no gains while gently letting the air out they’ll get the idea and continue to hold on for another 25. And interest rates are bound to not come along with an increase and prick the gently deflating balloon in that time…

    [For the sarcasm impaired, I’m agreeing with our host]

  12. “balloon” vs “bubble” – that kind of spin might be charming coming from a small child (but they would still get a stern look), but pathetic coming from a professional.

    Perhaps she is better suited to politics than to economics?

  13. According to a realtor who caters to the mainland buyers, the CNY spectacular sale did not pan out. Same for China.

    Spring Festival Housing Sales at their \”Worst\” in Years
    http://en.21cbh.com/HTML/2012-1-31/5NMjUxXzIxMTU5NA.html

  14. I agree, it’s all just wishful thinking of a slow deflation. The idea of incomes catching up is absurd. If incomes catch up in Vancouver we’re all in big, big trouble because a coffee barrista would be making $70 an hour. “I’d like a caramel machiatto.” “Yes, sir. Your order will be available in six months. Please move to the financing department to your right.”

  15. For those who like the ‘letting air out of the balloon’ analogy better than ‘popping a balloon’ here’s some food for thought. We all remember letting air out of an untied balloon as a kid. You release your fingers and it flies off unpredictably making that telltale farting sound until it crashes limp. Maybe letting air out of a balloon is a good analogy to the housing market after all. The Sherry Cooper’s of this world just do not get it. I don’t know why anyone even listens to her. She’s made a career about being wrong. If I could short her and Jeff Rubin, I would.

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