Erroneous Theories For Falling Prices #7 – Talk Of Bubbles Caused The Crash

“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.” …
“…some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.
The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the Economist, Barron’s, and Time Magazine.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)?”
– from ‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

Actually, the fundamentals point to a speculative mania and the increasing talk of bubbles is very appropriate. Sometimes a bubble is a bubble.
Besides, a large, broad, healthy RE market would never crash based on unfounded chatter.
For someone to suggest, in 2013, that the US housing collapse was the result of baseless sentiment change is ridiculous, and to use a US parallel to attempt to argue for Canadian housing strength is more ridiculous still.
No surprise, however, to see pleas to ‘Stay Calm and Carry On’.
When all is said and done, some will blame media hysteria for the RE market collapse.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

#7 – Talk Of Bubbles Caused The Crash
“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.”
‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

36 responses to “Erroneous Theories For Falling Prices #7 – Talk Of Bubbles Caused The Crash

  1. Agree, much better to blame lack of bubble talk these past years than the sudden talk of bubbles today.

    • So the inverse should also apply, talk of crash should cause a bubble ?

      Isn’t it funny how everyone, and I mean everyone talk about 2 things in this city: real estate and weather.

      My bus driver, when him and I were alone at the start of his run, blurted out “even my kids cant afford to buy”. It’s over.

      • So true, Loon. In all the other cities I’ve ever visited or lived in, never has real estate been a particularly common topic of conversation.

      • It is an obsession in Vancouver. I have never seen anything like it anywhere either. Maybe it is a mental illness. Is there a treatment when the whole city has it though?

  2. And MacDonald completely misinterpreted Shiller’s statement. What a maroon!

    • Seeking knowledge...

      MacDonald is like the son who asks his father, “where do babies come from?” and the father answers, “the birds and the bees.” The boy wonders why he doesn’t have any wings.

  3. For every bubble article there’s 10 saying no bubble

  4. Visited UBC campus after 10 year absence – the amount of concrete has gone up exponentially!

    Who is making the money?

  5. And then there’s #8… It was DaBoomers Wot Done It.

    [G&M] – Don’t Blame Boomers If Housing Goes Bust

    …”Many people believe that equity and house prices will be dragged down by Baby Boomers as they reduce purchases and sell holdings during their retirement years. But this forecast is based on just one of the many factors that impact equity and house prices, so its predictive power could disappoint. “…

    [NoteToEd: Demographers pigeonholing notwithstanding, if you didn’t get laid in the 60’s, you’re not a boomer…]

  6. #8 – The Cdn economy will crater as a result of the NHL lockout

    #9 – Hot Asian “investors” have had to raise cash to meet increased margin requirements on their AAPL, BIDU and FB shares

    #10 – People feared the world would come to an end on 12-21-12

  7. > Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006.

    I think they have a point insofar as the coverage has been helping people realize that a) a bubble exists, and b) a turning point has arrived. The “bubble talk” in media has not influenced the existence of the bubble at all, but has certainly increased awareness (a good thing).

    • There is no question in my mind that sentiment drove the market up on the back of circumstances conducive to real estate speculation nor that the market will be driven down by a reversal of those positive feelings on the heels of the withdrawal of easy credit conditions.

      The herd functions on emotion and hormones, not statisitics and logic.

      I have no argument with Shillers conclusion that a change in sentiment brought about the end of the US mania. The only issue is that the change did not actually arrive until credit peaked along with debt/income ratios and the market simply ran out of fresh-faced young first-time buyers.

      Just like has happened in Canada (oh oh)

      Is this a chicken and egg conundrum?

    • Or…the bubble was formed by the belief there was no bubble. I think you just blew my mind.

  8. Real Estate Tsunami

    “At the end of the day, nothing, not even RE in Vancouver, can defy gravity”.
    Sir Isaac Newton

    • “What goes up, must come down”
      Sir Isaac Newton………yes he really was the one who penned that phrase.
      “Everything that goes up must come down. But there comes a time when not everything that’s down can come up”.
      George Burns………but I think he was referring to body parts and old age.

  9. As a long-time bear blog reader (an occasional poster) I wonder: why a bunch of (mostly) educated and better-than-average-informed people are still trying to dissect the bs posted by clowns like Cam, Tsur, this Larry guy and other RE pumpers in the mass media? The two former are on a good payroll at least, while those columnists sound just plain pathetic.

    Anyways, I admire the patience of those who take time to read those pieces in full and I thank you guys for delivering the digest. I am serious. Thank you.

  10. So lemme get this straight. When the market is hot and the media is fanning the flames, it’s not due to them. But when the market is crashing, it is due to the media. Realtors sure have good logic. Pretty dumb logic.

  11. Seeking knowledge...

    It’s sad to hear about the Ridge Theater’s impending demolition.
    The last time I was there was for the VIFF. Gonna miss it. Why do you think someone would throw good money after bad to build a bunch of condo’s is beyond me.
    Speaking of throwing away money, whatever happened to those bungalows on Cambie St. near 33rd that were sold for $3.5~$4M to some developers in 2011? They are all still there.

  12. People don’t talk about a bubble when prices are reasonable and within the affordability of most working people.
    More denial from someone caught holding the bag during a crash.

  13. Shiller also thought Vancouver ludicrously bubbly. You can’t quote Shiller without understanding that He Sees Bubbles, and is talking about the overshoot past fundamentals during correction that is the irrational on the downside.
    This guy’s math is insane if he thinks we’re at fundamental value in Canada.

  14. Real Estate Tsunami

    Bubbles are easy to spot.
    I remember the BreX mania.
    The excitement around the water cooler whipped into a manic frenzy.
    Then the news about the fraud broke.
    The following day, no one at the water cooler.

  15. If talk caused the crash, then talk should be able to forestall it. Start talking!

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