Saturday, February 11, 2012
Thursday, February 09, 2012
Bank of Canada - Working Paper on Housing Prices, Turnover and Bubbles
Thought this was an interesting read: http://www.bankofcanada.ca/wp-content/uploads/2012/02/wp2012-03.pdf
This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’
Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010.
This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’
Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010.
Monday, February 06, 2012
Greater Vancouver Market Snapshot January 2012
Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to January 2012. (The blue dots on the left of the graphs represent January 2012.)
And the detached benchmark price:
Commentary: January 2012 saw rather weak sales volumes. Months of inventory (MOI, the number of months it would take to clear month-end inventory at current monthly sales levels), a key indicator of market liquidity and impending price strength, is at about 8, a level concomitant with falling prices.
Total inventory went on a tear, recording the largest monthly gain in recent memory, most listings predated Chinese New Year, one assumes many listings were advanced to hit the real estate press in time for the two-week-long holiday, now nearly complete.
Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation, and below that the scatter plot showing the raw actual data:
What this shows is the change in prices in a month from 6 months ago based on actual data and “predicting” the price based on months of inventory from that month based on linear regression of half-over-half price change to months of inventory (with 3 month moving average).
January 2012 was weaker than most past years (2009 being the glaring exception) in terms of sales and growing inventory. Due to several factors -- higher prices, relatively subdued population growth, tightened credit conditions, and a predicted increase in dwelling completions -- I expect the next several months of 2012 to see lower sales volumes and higher listings than 2011. I do think benchmark prices will increase from current levels through the first half of 2012 but prices are a lagging indicator of market distress. If inventory continues to increase and sales remain subdued, however, I anticipate the price increases will be transitory.
Thursday, February 02, 2012
CMHC Tightening
I have been calling for further loan tightening being ordained by the federal government. CBC seems to be able to easily quote Mr. Flaherty while he's on tour:
As I have mentioned in the past, further tightening amounting to reduced access to loans or faster amortizations seemed to be a shoo-in, now we are getting hints that the government is very concerned about debt levels and systematic financial risks, and will ensure they do not become worse than they already are.
This is akin to the previous explicit announcements on CMHC mortgage insurance qualifications announced in previous years. This year, it appears, guidance from OSFI and implementation of Basel 3 accounting practices -- not to mention higher prices -- are going to act as a brake on housing activity in 2012.
Finance Minister Jim Flaherty said he shares the concern of Canada's top banking regulator that lenders are loosening their mortgage standards too much, but said any problems in the system are being corrected...
"OSFI's concern arises out of some work that OSFI has done as part of the ordinary course of its business to look at some of the loans being made by financial institutions," he said. "I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern."
"That is being corrected," Flaherty said.
As I have mentioned in the past, further tightening amounting to reduced access to loans or faster amortizations seemed to be a shoo-in, now we are getting hints that the government is very concerned about debt levels and systematic financial risks, and will ensure they do not become worse than they already are.
This is akin to the previous explicit announcements on CMHC mortgage insurance qualifications announced in previous years. This year, it appears, guidance from OSFI and implementation of Basel 3 accounting practices -- not to mention higher prices -- are going to act as a brake on housing activity in 2012.
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