MY OPINION : Wages and or incomes are not tied to housing prices ! The Americans are now seeing this and this may create a problem for Canada . Its looking really grim for policy makers and the this housing Crisis will make the DOT . com bubble look like a walk in the PARK.
Better dwelling article Reads:
US Federal Reserve Indicator Shows Canadian Real Estate Is Way Overpriced
Canadian real estate has another indicator showing prices may have detached from fundamentals. The Federal Reserve Bank of Dallas (a.k.a. the Dallas Fed), publishes a housing index that’s little known outside of the banking world – the Exuberance Indicator. The indicator isn’t often used, because the documentation is highly technical. Today I figured I would break it down into plain English, for all of you Millennials looking to understand the market. This way you’ll have a better read than most people in the real estate industry.
“Exuberance… I Totally Know What That Word Means, But Why Don’t You Explain It”
First off, let’s talk exuberance. Exuberance sounds like a good thing, but bankers say it with caution. They’re always on the lookout for when markets become “overly exuberant.” That’s code for when buyers decide to pay a premium on a commodity, for little other reason than everyone else is doing it.
The term didn’t catch on until then US Federal Reserve Chairman Alan Greenspan said it in 1996. When making a speech, he rhetorically asked “how do we know when irrational exuberance has unduly elevated asset prices?” This was three years before the dot-com bubble. Ever since then, the banking industry doesn’t say “bubble” all that often. However, they frequently say markets are “exuberant.” When it gets really bad, a market has become “over” or “irrationally” exuberant. Way cuter and less panic inducing, right?
Measuring exuberance in the stock market is pretty straight forward. There’s a lot of ways to do it, but the most simple would be a stock price to earnings. For every dollar a company earns, a buyer pays several more. The thought is, the company will start earning that multiple in five or so years. Sometimes that multiple gets really, really high — to the point where it almost becomes impossible to earn that money in a reasonable amount of time. When buyers pay this premium, they’re buying on exuberance, not realistic expectations.
Measuring Exuberance In Housing
In the past, it wasn’t all that important to measure exuberance in real estate, because it never had the same consequences as a stock market crash. Sure, it sucks to lose money – but it never took out an economy. Consequently, not a lot of cutting edge research went into trying to figure this out, until after the US housing bubble. When that blew in 2008, it triggered the Great Recession. Basically, a real estate crash took out the world’s largest economy.
Since then, everyone’s been scrambling to figure out early warning indicators. Efthymios Pavlidis of Lancaster University, and the Dallas Fed teamed up to create a set of Exuberance Indicators.
Pavlidis, The Dallas Fed, and Exuberance Indicators
The exuberance indicators are a set of housing indicators published the the Dallas Fed, and Pavlidis, to measure “explosive dynamics.” Fundamental pricing is established with a few traits like real house prices, price-to-income ratios, and price-to-rent ratios (full working paper here). From there, they look for “explosive episodes” that show prices have deviated from the fundamentals. If they deviate too high, and for too long – markets are vulnerable to correction.
How To Read The Exuberance Indicator
I know, unless you’re in finance that last section was pretty eye-rolly. The most important thing to remember is it shows the detachment of home prices from fundamentals. The indicators include two sets of numbers – home prices and critical values. When home prices go above the critical values, you’re in over exuberant territory. If it stays there for five quarters, the risk for a housing correction becomes very high.
Exuberance For Canadian Real Estate
The Canadian real estate market has been pretty lucky thus far, with only 3 major spikes in exuberance. These phases are in the late 1980s, the 2000s, and today. Let’s break them down.