Friday, June 15, 2012

About that 15% Drop TD warned about

The TD prediction that prices will fall 15% (or more) has really made the rounds. It's like they found the right price decline point to get attention. Telling people it's overvalued by 35% is too scary to pass along in the media. Vancouver home prices to drop 15 per cent in two to three years: TD Bank
"Some observers might point to the recent data in Vancouver as evidence that housing activity is going through a long-awaited correction. But the jury remains out. As we've pointed out, despite the recent pull-back in sales, the market remains in balanced territory and underlying prices are continuing to expand," wrote TD economists Derek Burleton and Leslie Preston.
I don't know what an "underlying price" is. But I'm just tossing this up here as an example. Funny thing about housing declines. The general masses don't notice/acknowledge/believe in the decline for 12 to 18 months. That shift in mentality, once in place, really makes the correction take hold.

Let's look back at the U.S. correction. That was a burst bubble, right? Everyone agrees with that, I expect.

Case Shiller Peak to Current Prices
The graph above shows the peak index (April 2006) to present (plus a little before the peak). Bottom line shows percent decline from peak. Let's zoom in on the 2 years after the peak.

Case Shiller Peak to 2 years from peak  
The percent decline lines begin at the start of the bubble bursting. You might notice something interesting. The bursting bubble doesn't hit 5% decline until July 2007, a full 15 months after the bubble "burst". It didn't hit the dreaded 15% TD is warning about until January 2008, 21 months after the bubble "burst".

While I think it is disingenuous to claim one can't see bubbles before they burst (as if reversion to the mean isn't something that always happens with asset prices and one can certainly, especially in the modern age, pull of a long-term chart to see what the long-term mean is supposed to be, and without too much effort figure out what kind of correction is required to get there) I do agree that one can't tell that it was a burst until it happens, rather than a slow decline. The difference between the two is where the feedback loops come in (rising unemployment in the FIRE economy, buyer attitudes growing grimmer, possible credit crunches).

Sure, you can't say when and for certain that the decline will set in with a vengeance, but on the other hand if you were a new homeowner in the U.S. and it was February 2007 would you be feeling great about that non-existent bubble? If you were Kristin Annable, you probably would be feeling pretty good.
A Most people won’t be affected at all because they are living in their homes with no intention to sell, so they don’t care. It’ll alarm people, but unless you have to sell your house in the next six months it won’t matter. Also, it is self-correcting. People … who have been waiting five years to buy their first home and couldn’t afford to are now thinking, this is the time to jump in. Then that drives the prices back up.
Ah, I needed a good laugh. It's called the "bull trap". It even has a name. And, by the way, everyone in the U.S. who said this didn't think that after the fact. People hate being trapped. Being trapped in your own house, unable to take that better job across the country, not the greatest way to live.
Q This report says Toronto will not see a bubble, just a correction – what does that mean to you? A I hate the word bubble. Other than in retrospect, you won’t know there was a bubble until it already popped. Some people say that Vancouver was a bubble. But, what does that even mean? It has no definition, it is like diagnosing a disease with no treatment. Really all that matters is what happens in the next year.
If you hate the word bubble now, you are one sad camper. And who is this young lady? And I say young because she clearly wasn't around for the crash in 1990. "KRISTIN ANNABLE I am currently an intern at the National Post from Centennial College. I have an educational background in journalism, history and global studies." Eh, I was going to note this one, but it isn't even worth it.

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