Canada

Canadian Real Estate In A “Melt Up,” and Little Chance of Stopping It By Spring: BMO

Canadian real estate is in a “melt up,” says one of the country’s largest banks. BMO senior economist Robert Kavcic sent a brief research note literally titled “Melt Up,” with his take on the latest real estate numbers. The term is typically used to describe rapid, and unsustainable price growth for an asset. It’s also more commonly known as the final stage of a bubble. The economist sees little stopping it, as the market gears up for the busy Spring season.

Canadian Real Estate Is In A “Melt Up”

The bank’s senior economist is calling attention to price growth acceleration going vertical. “The 1-month change is faster than the 3-month; which is faster than the 6-month; which is faster than the 12-month,” he describes the trend. Further adding, “In all cases but the 12-month (and that won’t be long either), price growth has accelerated through the rates seen in 2017, when policy makers were working on multiple fronts to tame the market”

Canadian Real Estate Price Growth

Price growth for CREA’s benchmark home across Canada. The 3 and 1 month trends are expressed as the annualized rate of growth.
Source: CREA, Better Dwelling.

Kavcic also doesn’t see any near-term way to stop the mania. During the 2017 foreign buyer “mini-bubble,” governments were openly engaged in cooling measures. This time, there’s little discussion occurring at any level of government.

Since governments need public feedback on measures, there’s usually public discussion. At this point, it would be too late to bring in any cooling measures, going into the Spring. “Spring is in the air and there’s little at the moment to get this momentum in check…” his report finishes. 

What The Heck Is A Melt Up? 

I know, it sounds delicious — how can it be bad for you? Kavcic’s brief note doesn’t get into the meaning of a melt up, but the choice of words is an interesting one. A melt-up, by definition, is an unexpected and sharp rise in the price of an asset (or whole class).

Melt ups are FOMO driven purchases, with no fundamental basis on price movement. Buyers bid based solely on the fact they think the pain of buying later will be greater than today. The only risk they see is paying more later, and not capturing those sweet, epic gains.

Melt ups are great for trading, but long-term investors are cautious of participation. The stampede of investors means future buyers are squeezing into a smaller window. While this creates bidding wars to drive prices higher, it also pulls forward demand.

Sellers benefit from the demand pulled forward today, but future sellers won’t. Since future demand was borrowed, it tends to leave a smaller pool for those that didn’t sell into the melt up. The lack of liquidity can lead to lower prices, especially if there’s a pent-up supply side. The length of a melt up varies, but it’s almost always the final stage of a bubble.

The current melt up isn’t just confined to Canadian housing, it’s a global phenomenon. Jeremy Grantham, founder of GMO, told the Financial Times, global markets are seeing a melt up that now rivals the two biggest bubbles in history. “There is as much craziness now as there was in late 1999 or 1929,” said the billionaire and legendary investor. The 1929 market was considered the textbook example of a melt up, though we might get a better example soon.  

Cheap money doesn’t work the way governments want it to, because households use it the way they know how. It’s hard to convince someone to use cheap credit to start a business, when houses and stocks are making more than they ever could. Are the returns in real estate great right now? Of course, and you’d have a hard time explaining risks to anyone that made $44,000 in a month just by owning a home. Are the returns in everything great right now? Absolutely, and that’s the problem. No one sees the risk of leverage right now, they see the risk of being left behind.

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35 Comments

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  • Ahmed 7 months ago

    People find money when gains are on the table. Borrow from mom and dad, cash out stocks and bonds, and sell nana’s heirlooms. There’s money to be made buying a bungalow in rural New Brunswick.

    • Kate Wright 7 months ago

      A lot of truth to this. Equifax found a spike of 50% more fraud during the 2016 run. Performing loans aren’t scrutinized in a market that’s rising ever though.

  • Jeff Graham 7 months ago

    I think I get it! Reading better dwelling gives my blood pressure a melt up.

  • Sam 7 months ago

    “The risk of being left behind” Wow…..Tulip Mania…..1929……..so true and so sad.

    Hey, how does one position oneself to come out ahead? Or is that like asking how to survive a Tsunami?

    • Trader Jim 7 months ago

      Depends if you’re referencing a home or just investments in general. Retail is beating professional investors right now, and that’s because they’re looking at more defensive stocks.

      There’s a reason rich people are rich and middle class people pursue short term spikes in assets. It’s not because the rich people don’t know how to make money, but they understand when the ruggest pulled, you don’t want to be stuck trying to liquidate into a crisis.

      • Sam 7 months ago

        Well…let’s say I had a friend…(ok, it’s me) who sold his home 2 years ago with some thought to buying back after the inevitable correction. Not just an investment gamble…other life factors played a part.

        However, my “friend” finds himself at a point where he’s ready and wanting to purchase a house. Only problem is….the darned correction just doesn’t seem to want to come…..

        Anyways…I appreciate why rich people are rich and the rest of us muddle around in middle class. Since I don’t suffer from FOMO and really just don’t like this melting environment, I guess I’ll wait and see…..

    • Vincent 7 months ago

      Good question!

  • Max 7 months ago

    When there is so much “free” money / stimulus but various governments and money printing by central banks, is it really a bubble or a result of devaluation of currencies hence a new normal?

    • Trader Jim 7 months ago

      A devaluation of money includes inflation. Inflation means lower growth. Until you see inflation, the money printed doesn’t matter if you’re in an asset. When the inflation finally lands, the economy shifts.

      • Max 7 months ago

        OK. If there is inflation and everything costs more, why would assets prices go down or housing bubble burst? I could name one reason for that. Since everything costs more but incomes don’t catch up with inflation, then less money left in the pocket, then less affordability. But, in areas such as GTA, housing prices have been disconnected from incomes for a quite while, so what’s new in that?

        • Doomcouver 7 months ago

          Mostly because to inflate away the overvaluations in housing and avoid a correction, you’d need extremely high, sustained inflation for a decade or more. Until that happens there’s a significant overhang on some asset valuations based on historical ratios, as housing and the stock market have appreciated at rates way higher than base inflation for years.

          Ultimately though as you can imagine if there’s high inflation AND a prolonged housing price collapse, it may cushion the total amplitude of said collapse, as buyers at the end of the price-action get to pay in significantly devalued Canadian dollars.

        • Trader Jim 7 months ago

          Inflation = higher cost inputs and a higher cost of borrowing. It lowers consumption and causes lower levels of leverage, killing inflation.

          Almost any investment licensing exam will require that basic bit of knowledge.

          • Jason 7 months ago

            The government refuses to raise interest rates. Rampant inflation would cause the rise of interests rate to try and manage it. People forget the 10 and 12% interest rates on mortgages of the late 80s most people don’t know home prices ever being stagnant or decreasing.

    • Max 7 months ago

      by* various governments

  • MIKE 7 months ago

    It only been 6years and boc and the liberals have completely ruined are country.Local news along the 401 every town has a homeless crises

    from Windsor to Quebec.Looking at 4bdr 3 bath houses with two car garage for 389000 in Orlando that you can rent out as Disney house.
    FLORIDA IS
    CHEAPER

    • Doomcouver 7 months ago

      Tell me again, what party was in power when 40-year zero down payment mortgages were a thing?

      • Crazy governments 7 months ago

        Ah yes, the ol conservatives were at the helm federally. But within BC, that was when Gordon Campbell (liberal party) was elected, followed by Christy Clark (also liberal). And back in 2008 was when Vancouver real estate started to take off due to foreign investments and money laundering, both of which all levels of govt turned a blind eye.

        • Erik 7 months ago

          The BC liberal party were called the Socrats before. They are and were a conservative party. They were never wear a liberal party… They very name was an indication of their corruption… ” The BC liberal party” was totally misleading

      • Paul 7 months ago

        This*

        There are a lot of people quick to blame politics but it’s a world wide bubble at the moment.

        Best thing to do is sit on your hands.

    • brad kozlow 7 months ago

      Because it is run by Republicans.( ie Conservatives)

  • Neo 7 months ago

    Home values haven’t actually increased….Every Canadian dollar you earn is worth less and is reflected in the price of things…Like houses. I wish people understood this. It isn’t a good thing when a house is 30% more YOY for no fundamental reason. All is says is your standard of living is deteriorating.

    • Jason 7 months ago

      That is not true. Home prices are inflated. Home prices will deflate when the debt burden gets worse that is how the system works.

      • Doomcouver 7 months ago

        Exactly, blaming home price acceleration on dollar inflation is a completely false narrative. Home prices are growing absent any real inflation, that’s why housing in Canada is a massive bubble. If it was truly inflation driving house prices higher then there would be no bubble, because the inflation-adjusted cost of a house in Canada would be static, as is usually the case in a “normal” housing market.

      • Neo 7 months ago

        Neither of you have a clue. Buyers with more fiat debt dollars derived from no productive contribution to society just a ledger on a bank balance sheet. Chasing an asset. With the risk not to the bank but insured by the taxpayer so it isn’t isn’t even real risk.

        Imagine thinking there isn’t any real inflation out there. That level of ignorance is astounding. Yes, only 1% inflation out there fellas.

        • Ahmed 7 months ago

          Inflation lowers leverage. Inflation means higher inputs. You can say there’s inflation driving home prices higher, but that would imply no investor knows what they’re doing lending people money to buy homes, and are willing to lose money for kicks.

    • Interesting Times 7 months ago

      You’re correct in that home values haven’t actually increased – at least not at the rates currently stated. That’s about all you’re correct on (so far).

      Prices have not risen nearly to the same extent as real estate, and the only reason the economy is doing ok is because RE now represents a larger portion of GDP.

      RE is inflated. More and more markers are indicating this too, especially considering it appears all across Canada there’s a measurable frenzy happening. Higher chance of a bubble popping… wouldn’t be the first time in history for something deemed “too big to fail” failing.

      The flip side of the bubble pop is true inflation, potentially MUCH higher then what we’ve seen so far. But they may very well raise rates if inflation starts to go up too much to keep it under control.

      Will be interesting to see how this all plays out as the economy starts its true recovery

      • Neo 7 months ago

        All this money printing since 2009. The QE….The low interest rates…Operation Twist. The $20 trillion printed by CB’s worldwide has all been to postpone the deflationary blackhole we allowed to happen in the first place. Sure, all that’s left to print and print and print until there isn’t a real productive economy or true fundamental price discovery left. At best we end up with a zombie economy like Japan for decades. At worse there is a currency crisis and reset and a new system with limited private property rights.

        • Jeff 7 months ago

          Difference is the japanese economy produce goods that are valuable…. Canada not so much, except food and natural resources.

          • michael 7 months ago

            That’s right. Also, a high rate of personal savings. And low income inequality. Stable housing prices. High employment. Etc.

            There’s another danger to the zombie approach. I believe the effect spreads from the economy to the culture. Here in Japan it’s wait-and-see, put off decisions, keep doing the same thing we were doing when the clocked stopped in the early nineties. It’s the land of fax machines and sun-faded store-fronts and POTS phone jacks. My wife is Japanese and commented after watching “Crash Land on Me” that she could see that the Koreans are now producing better, more innovative entertainment than the Japanese. From watches to cars to cameras people wonder what the Japanese manufacturers are up to.

  • Ping Duong 7 months ago

    “The best way to get people off of welfare is to provide Universal Basic Income” – Trudeau

  • Rene Albert 7 months ago

    When something looks too good to be true…it usually is! And in my humble opinion, plus looking at recent statistics, the Canadian housing market has now reached a ridiculously high level and the bubble will likely burst in the not too distant future. Feel sorry for all those naive buyers, especially first-timers, who couldn’t resist getting on the wave but now stand to lose a lot of money…

  • John 7 months ago

    Canada, the next Greece..

  • John Douglas 7 months ago

    More and more people(300-400 thousand) are coming to Canada every year. Most of them end up in Toronto. Then there is a natural increase of population in the city as well. So the demand for new housing is massive but the supply is limited. Thus the price increase. There is no new buildable land added to the city. So there the supply is fixed. Scarcity of buildable land is driving the land value to extreme levels. As long as there is this GREEN BELT around Toronto, house prices will keep on sky rocketing forever. And there is no way to stop it.

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