Providing Thoughtful Analysis on the Housing Market
Friday, December 14, 2007
Bubble Psychology
I have seen this chart or variations of it posted about the internet and I thought it was fitting for a rainy Friday. Talk about what you want. Post links to interesting financial and real estate stories.
We are in Victoria and I am tired of hearing people say that Victoria will never go down as everyone "in the world" wants to live here. Anyone who is not from Victoria and has lived other places knows that this is garbage. Some people even think the Olympics will bring Victoria property up even higher since people will come to the Island in rainy February and decide this is the place for them?????
I just wonder why is it taking so long for anything to change in Canada?
I think we are at the 'New Paradigm' point on the graph obviously. I hear this point of view more frequently now than ever before. I don't know if I agree with the assertion that the bubble began in the 80s but its an idea worth considering. If that is the case we won't likely revert to the mean as quickly as the graph might suggest - it may take some time and we'd probably want to look at 'real' prices rather than nominal.
My opinion is that during this next part of the cycle we will reach 2004 nominal prices and 2001 real prices within 4-5 years.
To me it has always fit. Ever since I heard Shiller's argument (and saw his graph) for a flat real dollar appreciation for RE.
It works so well with the graph, typically things start a little undervalued (as RE did after the early '80s crash). There is a return to normal pricing which people mistake for a 'normal' appreciation. That 'normal' appreciation continues and as time goes on it becomes accepted that the commodity is a 'sure thing'. Big buy in followed by a small sell-off and the rest just follows the script that everyone in the know (ie. visitors here) accepts.
To me this just fits too perfectly with my world view to set it aside. Which is not to say I'm definitely right, but the curve fits so perfectly that it has to make you think.
Oh and I continued the graph (I didn't post that version), if we follow the plan as closely into the future as we have in the past maximum YOY losses will occur in 2010 and bottom will be end of 2011 beginning of 2012.
Dead cat bounce (DCB) should occur just after the market flattens out from its dive in 2011, in my understanding of DCB. A DCB is usually a negligible affair that doesn't do anything except briefly raise hope after a bubble has completely deflated. It's just a wee little bump, not the false "return to normal" that traps bulls after the peak. It's more like a little overshoot on the uptick that returns the market to the mean. But I could quite easily be wrong... ;)
Yes, 2011 is my prediction as well... I'm just not sure I want to rent that long. I think I shall start seriously looking in '09', knowing full well that I will more than likely be buying on the slide.
I think they have to drop below the mean, it's one of the standard characteristics of a bubble and since this one has followed the script so well thus far...
My crystal ball says under 300k by 2011 for median detached and at SOME point there will be a dip that could mean 20% savings or so.
I just wonder why is it taking so long for anything to change in Canada?
Hey, doesn't your Canada include Alberta? 15% off-peak and still dropping. Those rich Albertans who are supposed to keep up the Island's RE prices can't keep them up at home.
East of the Lakehead there was never a real bubble, Toronto is somewhat overpriced but may get away without nominal declines except for some of the more ridiculously priced condos. It's about 1/3 cheaper than Vancouver with higher incomes. So a 1/3 drop in Vancouver - which is a major crash in anyone's language - would just bring it back within its traditional price band with TO.
Interesting, have a look at the GVRD graph with the one you just pointed out superimposed and stretched to fit.
Good concept, but it has to be compared with a real not nominal graph to be meaningful. The general price level has gone up a lot in those 2 1/2 decades.
No way are we going to see 1980's nominal prices again, but real prices are another story, especially if interest move closer to levels found then (i.e. around 10%).
Take a look at real vs nominal. Note: it's a pdf, but a small one.
You know what is strange ... I know people from Alberta that live here. Had packed up and moved about 5 years ago. A few families at my kids school. .
When I mention that property has dropped in Alberta they say - no it hasn't. It is flat but has not dropped. Coming from Europe I am amazed how many Canadians don't read a paper or watch the news.
It will also be interesting to watch Toronto. I know many people on Bay Street did not get their bonuses which they rely on - base salaries are very small. Friends in Toronto are saying that there is a huge bubble in Vancouver and it will explode but not in Toronto because "it is different here". Everyone wants to live in Toronto.
I bet you they are saying that in Winnipeg too!
I am Canadian but I am starting to think that this is one weird country where we are not connected in any sense or form. Each province is its own "little country". Each "country" is truly untouchable and the place where everyone else in Canada wants to live. Everyone is jealous that YOU live there - whether it is Halifax, Regina or Vancouver. Everyone wants to live in YOUR city and you are such a lucky duck that you get to live there and they don't!
I had one women tell me the other day that Winnipeg is "a Magic City". WTF!
the one you just pointed out superimposed and stretched to fit.
There is no problem with stretching. This phenomenen works over various time periods, and stretching only adjusts relative time. However, don't take this too seriously. There is no chart that will tell the future, so squabbling over real or median is meaningless. The chart really just shows typical rate of information disemination and related impact on asset pricing in a typical situation. Of course no situation is typical, so don't make more out of it than there is. Here is a repost of my recent RETalks post:
This is getting a little overcomplicated.
1.The chart in question is a generalization of investor psychology. In fact, it is also a generalization of rate of information transfer.
2. The fact that it fit quite well with an actual graph is totally coincidental, and I don't think (hope?) that anybody took this as proof of anything. It was just an interesting observation.
3. There really is no "mean". Don't forget, the value of something can change because of changing fundamentals OR changing psychology OR both. The chart obviously can't control for changing fundamentals, so there no "one chart fits all" scenario can exist.
4. The original chart is unclear on this distinction (fundamentals versus psychology). Clearly something fundamental must have changed or be about to change, why else would the "smart money" enter the market? I think the logic is that a fundamental shift has happened so the smart money moves in. Then other groups. By the time it gets to the general public, it overshoots the fundamentals, which is where bubble territory begins. The degree to which this happens (if at all) varies dramatically so no general chart could possibly capture this accurately.
5. Generalizations can be made about information transfer. Academics love to study such things as rate of growth of animal populations, infection rates, spread of rumours/news. In the various categories there are general charts that work very well in many different scenarios. It really is common sense. New events leak to or are deduced by the smart money first. This is a slower process. Each stage picks up a little speed, and once it reaches the general public it explodes. It would probably work equally well for a rumour in the workplace. Some people learn about things a lot quicker than others, and it is not a linear relationship.
6. These generalizations can help us determine where we are in a speculative bubble, which will give us some hints as to timing. However, there are many unique factors. Real estate has historically low turnover, and new supply takes many years to be built. This stretches things out temporally, compared to say stocks. It also requires the cooperation/aquiesence of lenders, and changes in these are not easily predictable. If lenders raised their standards today, Vancouver would crash very quickly. We do know that the Vancouver ownership rate is up to 69%, so we do know that the mount of "fuel" left is dwindling. We don't know how many offshore speculators are playing the game. All I really know is that real prices will come down significantly in the future, barring massive immigration of very rich people.
Looking at the chart again, I don't think the "mean" line belongs there. Why did the smart money move in if there wasn't a fundamental shift which moved up the "mean" line, or are we assuming that the smart money anticipated empty speculatiing and got the one up on a zero sum game?
Lets be honest - the city is not full of ugly 60 and 70s houses. That would be Don Mills.
We could go back tomorrow and find a house - central Toronto - in Leaside (where we lived for 5 years) within our budget. Here we can't find anything. The house in Leaside would be very nice.
Some areas that went crazy - like Leaside, Moore Park and Lawrence Park are slowing down.
I know, that's why I did it, the x and y units are arbitrary. I just wanted to come out with full disclosure of my method.
1) I agree it's a generalization and I really have no idea how it was generated, if I had to guess though I'd say they probably took a dozen or so graphs and averaged them out. Which would imply that so far the Vancouver RE bubble is pretty average.
2) Yes, it's an observation but IMO it is another chip on the mounting stack of evidence and it fits with all of the other evidence.
3) Yes of course, but I don't really think that any of the "fundimental changes" we've heard about in Vancouver are REAL things, their only impact is on the bubble psychology. I have yet to hear a convincing argument why RE prices should be higher than 1987 in real terms. IMO 1987 is the last time that prices reflected actual fundamentals.
4) You're misreading the chart, notice that the smart money buys when the value of the commodity is BELOW the dotted line (the fundamental value line).
6) Of course it's not a roadmap to be taken 100% literally, but I do find the "classic bubble" curve bears a remarkable resemblance to OUR curve. To me that says that we're simply in a very normal bubble cycle and PROBABLY the cycle will continue in a similar fashion to the curve.
It may or may not be predictive of the future but it sure was interesting to me to see how closely the two curves fit.
Yes of course, but I don't really think that any of the "fundimental changes" we've heard about in Vancouver are REAL things, their only impact is on the bubble psychology.
I agree, but this chart was not prepared based on Vancouver real estate. Why should it fit Vancouver to a T, but not say, Seattle or Winnipeg? Hence, coincidence that it fit so nicely.
You're misreading the chart, notice that the smart money buys when the value of the commodity is BELOW the dotted line (the fundamental value line).
Well it was a smidgeon below, but I'd expect the smart money to reallly buy during the despair phase. I find it implausible that a market is so efficient to the downside but so inefficient to the upside. Also, we need to be clear as to what the smart money is acting on when they make their buy/sell decisions. Is it fundamentals, psychology or both. If it was the latter and this chart was an accurate reflection how assets inflate, then you'd expect the smart money to hang on AFTER prices detach from fundamentals, all the way to new paradigm. Perhaps they do, as per Kennedy shoe shine tale.
Also, in this day of index and trend chasing mutual funds, I expect huge overlap between institutional investors and the general public.
Of course it's not a roadmap to be taken 100% literally, but I do find the "classic bubble" curve bears a remarkable resemblance to OUR curve.
I agree that it does, but as pointed out earlier, there are many random variables, such as changes in the credit market that can lengthen or shorten the manic phase.
And nothing says that Vancouver fair value has to be appreciate at some smooth pace based on a "mean". Population growth varies, and our industries have cycles that need not follow a nice repeating pattern.
"I agree, but this chart was not prepared based on Vancouver real estate. Why should it fit Vancouver to a T, but not say, Seattle or Winnipeg? Hence, coincidence that it fit so nicely."
I couldn't find any graphs of US prices with a long enough timeline. Here are some guesses as to how they might line up:
I need better graphs for a real comparison but things do seem to line up elsewhere. Perhaps the only reason Vancouver fits so well is because we have the right length of time in our graph for it to fit. I'd really like some US graphs going back to the '70s, I'm beginning to think that the so called 'stealth phase' may have started that far back.
The US wide graphs don't work but I think that's because in RE bubbles the timing is local.
22 comments:
Why is is taking to long in Canada?
We are in Victoria and I am tired of hearing people say that Victoria will never go down as everyone "in the world" wants to live here. Anyone who is not from Victoria and has lived other places knows that this is garbage. Some people even think the Olympics will bring Victoria property up even higher since people will come to the Island in rainy February and decide this is the place for them?????
I just wonder why is it taking so long for anything to change in Canada?
Thanks for input.
Interesting, have a look at the GVRD graph with the one you just pointed out superimposed and stretched to fit.
The Bubble began in the '80s
nice chart drachen - interesting take on things
I think we are at the 'New Paradigm' point on the graph obviously. I hear this point of view more frequently now than ever before. I don't know if I agree with the assertion that the bubble began in the 80s but its an idea worth considering. If that is the case we won't likely revert to the mean as quickly as the graph might suggest - it may take some time and we'd probably want to look at 'real' prices rather than nominal.
My opinion is that during this next part of the cycle we will reach 2004 nominal prices and 2001 real prices within 4-5 years.
I think we are at the 'New Paradigm' point
And as Adam Smith so rightly said:
"When we are in the middle of the paradigm, it is hard to imagine any other paradigm" (Adam Smith).
To me it has always fit. Ever since I heard Shiller's argument (and saw his graph) for a flat real dollar appreciation for RE.
It works so well with the graph, typically things start a little undervalued (as RE did after the early '80s crash). There is a return to normal pricing which people mistake for a 'normal' appreciation. That 'normal' appreciation continues and as time goes on it becomes accepted that the commodity is a 'sure thing'. Big buy in followed by a small sell-off and the rest just follows the script that everyone in the know (ie. visitors here) accepts.
To me this just fits too perfectly with my world view to set it aside. Which is not to say I'm definitely right, but the curve fits so perfectly that it has to make you think.
Oh and I continued the graph (I didn't post that version), if we follow the plan as closely into the future as we have in the past maximum YOY losses will occur in 2010 and bottom will be end of 2011 beginning of 2012.
Should be a fun Olympic year!
Watch out for that dead cat bounce in '09!
Dead cat bounce (DCB) should occur just after the market flattens out from its dive in 2011, in my understanding of DCB. A DCB is usually a negligible affair that doesn't do anything except briefly raise hope after a bubble has completely deflated. It's just a wee little bump, not the false "return to normal" that traps bulls after the peak. It's more like a little overshoot on the uptick that returns the market to the mean. But I could quite easily be wrong... ;)
Yes, 2011 is my prediction as well... I'm just not sure I want to rent that long. I think I shall start seriously looking in '09', knowing full well that I will more than likely be buying on the slide.
I don't think prices will dip below the mean though... Just my prediction.
I think they have to drop below the mean, it's one of the standard characteristics of a bubble and since this one has followed the script so well thus far...
My crystal ball says under 300k by 2011 for median detached and at SOME point there will be a dip that could mean 20% savings or so.
I just wonder why is it taking so long for anything to change in Canada?
Hey, doesn't your Canada include Alberta? 15% off-peak and still dropping. Those rich Albertans who are supposed to keep up the Island's RE prices can't keep them up at home.
East of the Lakehead there was never a real bubble, Toronto is somewhat overpriced but may get away without nominal declines except for some of the more ridiculously priced condos. It's about 1/3 cheaper than Vancouver with higher incomes. So a 1/3 drop in Vancouver - which is a major crash in anyone's language - would just bring it back within its traditional price band with TO.
Interesting, have a look at the GVRD graph with the one you just pointed out superimposed and stretched to fit.
Good concept, but it has to be compared with a real not nominal graph to be meaningful. The general price level has gone up a lot in those 2 1/2 decades.
No way are we going to see 1980's nominal prices again, but real prices are another story, especially if interest move closer to levels found then (i.e. around 10%).
Take a look at real vs nominal. Note: it's a pdf, but a small one.
Patriotz,
You know what is strange ... I know people from Alberta that live here. Had packed up and moved about 5 years ago. A few families at my kids school. .
When I mention that property has dropped in Alberta they say - no it hasn't. It is flat but has not dropped. Coming from Europe I am amazed how many Canadians don't read a paper or watch the news.
It will also be interesting to watch Toronto. I know many people on Bay Street did not get their bonuses which they rely on - base salaries are very small. Friends in Toronto are saying that there is a huge bubble in Vancouver and it will explode but not in Toronto because "it is different here". Everyone wants to live in Toronto.
I bet you they are saying that in Winnipeg too!
I am Canadian but I am starting to think that this is one weird country where we are not connected in any sense or form. Each province is its own "little country". Each "country" is truly untouchable and the place where everyone else in Canada wants to live. Everyone is jealous that YOU live there - whether it is Halifax, Regina or Vancouver. Everyone wants to live in YOUR city and you are such a lucky duck that you get to live there and they don't!
I had one women tell me the other day that Winnipeg is "a Magic City". WTF!
the one you just pointed out superimposed and stretched to fit.
There is no problem with stretching. This phenomenen works over various time periods, and stretching only adjusts relative time. However, don't take this too seriously. There is no chart that will tell the future, so squabbling over real or median is meaningless. The chart really just shows typical rate of information disemination and related impact on asset pricing in a typical situation. Of course no situation is typical, so don't make more out of it than there is. Here is a repost of my recent RETalks post:
This is getting a little overcomplicated.
1.The chart in question is a generalization of investor psychology. In fact, it is also a generalization of rate of information transfer.
2. The fact that it fit quite well with an actual graph is totally coincidental, and I don't think (hope?) that anybody took this as proof of anything. It was just an interesting observation.
3. There really is no "mean". Don't forget, the value of something can change because of changing fundamentals OR changing psychology OR both. The chart obviously can't control for changing fundamentals, so there no "one chart fits all" scenario can exist.
4. The original chart is unclear on this distinction (fundamentals versus psychology). Clearly something fundamental must have changed or be about to change, why else would the "smart money" enter the market? I think the logic is that a fundamental shift has happened so the smart money moves in. Then other groups. By the time it gets to the general public, it overshoots the fundamentals, which is where bubble territory begins. The degree to which this happens (if at all) varies dramatically so no general chart could possibly capture this accurately.
5. Generalizations can be made about information transfer. Academics love to study such things as rate of growth of animal populations, infection rates, spread of rumours/news. In the various categories there are general charts that work very well in many different scenarios. It really is common sense. New events leak to or are deduced by the smart money first. This is a slower process. Each stage picks up a little speed, and once it reaches the general public it explodes. It would probably work equally well for a rumour in the workplace. Some people learn about things a lot quicker than others, and it is not a linear relationship.
6. These generalizations can help us determine where we are in a speculative bubble, which will give us some hints as to timing. However, there are many unique factors. Real estate has historically low turnover, and new supply takes many years to be built. This stretches things out temporally, compared to say stocks. It also requires the cooperation/aquiesence of lenders, and changes in these are not easily predictable. If lenders raised their standards today, Vancouver would crash very quickly. We do know that the Vancouver ownership rate is up to 69%, so we do know that the mount of "fuel" left is dwindling. We don't know how many offshore speculators are playing the game. All I really know is that real prices will come down significantly in the future, barring massive immigration of very rich people.
Looking at the chart again, I don't think the "mean" line belongs there. Why did the smart money move in if there wasn't a fundamental shift which moved up the "mean" line, or are we assuming that the smart money anticipated empty speculatiing and got the one up on a zero sum game?
Friends in Toronto are saying that there is a huge bubble in Vancouver and it will explode but not in Toronto because "it is different here".
It is different there. It's much better value. Look at this place in the hip Beaches hood.
Total rent $2165/month, asking price $289,900 - that's a price/rent of 134 and that's no bubble.
So true! God I love the Beach!
Lets be honest - the city is not full of ugly 60 and 70s houses. That would be Don Mills.
We could go back tomorrow and find a house - central Toronto - in Leaside (where we lived for 5 years) within our budget. Here we can't find anything. The house in Leaside would be very nice.
Some areas that went crazy - like Leaside, Moore Park and Lawrence Park are slowing down.
Freako:
"There is no problem with stretching."
I know, that's why I did it, the x and y units are arbitrary. I just wanted to come out with full disclosure of my method.
1) I agree it's a generalization and I really have no idea how it was generated, if I had to guess though I'd say they probably took a dozen or so graphs and averaged them out. Which would imply that so far the Vancouver RE bubble is pretty average.
2) Yes, it's an observation but IMO it is another chip on the mounting stack of evidence and it fits with all of the other evidence.
3) Yes of course, but I don't really think that any of the "fundimental changes" we've heard about in Vancouver are REAL things, their only impact is on the bubble psychology. I have yet to hear a convincing argument why RE prices should be higher than 1987 in real terms. IMO 1987 is the last time that prices reflected actual fundamentals.
4) You're misreading the chart, notice that the smart money buys when the value of the commodity is BELOW the dotted line (the fundamental value line).
6) Of course it's not a roadmap to be taken 100% literally, but I do find the "classic bubble" curve bears a remarkable resemblance to OUR curve. To me that says that we're simply in a very normal bubble cycle and PROBABLY the cycle will continue in a similar fashion to the curve.
It may or may not be predictive of the future but it sure was interesting to me to see how closely the two curves fit.
Yes of course, but I don't really think that any of the "fundimental changes" we've heard about in Vancouver are REAL things, their only impact is on the bubble psychology.
I agree, but this chart was not prepared based on Vancouver real estate. Why should it fit Vancouver to a T, but not say, Seattle or Winnipeg? Hence, coincidence that it fit so nicely.
You're misreading the chart, notice that the smart money buys when the value of the commodity is BELOW the dotted line (the fundamental value line).
Well it was a smidgeon below, but I'd expect the smart money to reallly buy during the despair phase. I find it implausible that a market is so efficient to the downside but so inefficient to the upside. Also, we need to be clear as to what the smart money is acting on when they make their buy/sell decisions. Is it fundamentals, psychology or both. If it was the latter and this chart was an accurate reflection how assets inflate, then you'd expect the smart money to hang on AFTER prices detach from fundamentals, all the way to new paradigm. Perhaps they do, as per Kennedy shoe shine tale.
Also, in this day of index and trend chasing mutual funds, I expect huge overlap between institutional investors and the general public.
Of course it's not a roadmap to be taken 100% literally, but I do find the "classic bubble" curve bears a remarkable resemblance to OUR curve.
I agree that it does, but as pointed out earlier, there are many random variables, such as changes in the credit market that can lengthen or shorten the manic phase.
And nothing says that Vancouver fair value has to be appreciate at some smooth pace based on a "mean". Population growth varies, and our industries have cycles that need not follow a nice repeating pattern.
Freako:
"I agree, but this chart was not prepared based on Vancouver real estate. Why should it fit Vancouver to a T, but not say, Seattle or Winnipeg? Hence, coincidence that it fit so nicely."
I couldn't find any graphs of US prices with a long enough timeline. Here are some guesses as to how they might line up:
North Eastern US
Riverside California
Phoenix
I need better graphs for a real comparison but things do seem to line up elsewhere. Perhaps the only reason Vancouver fits so well is because we have the right length of time in our graph for it to fit. I'd really like some US graphs going back to the '70s, I'm beginning to think that the so called 'stealth phase' may have started that far back.
The US wide graphs don't work but I think that's because in RE bubbles the timing is local.
This is from Slate.
"The cockeyed optimists of the NAR"
http://www.slate.com/id/2179605/fr/flyout
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