Bringing rationality to something cannot be termed as manipulation.

Consider this. The primary job of any central bank is to manage the flow of money in the economy. The Bank of Canada meets to decide the quantum of liquidity in the Canadian economy. By tweaking the overnight rate and its bond-purchase program, the central bank infuses or sucks money. This exercise leads to managing inflation in a manner that price rise over a particular span of time is rational.

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There is little doubt that house price growth in Canada over the past year and a half is irrational.

For most, a housing asset is a need, not a want. Like most other goods and services, price in the housing market is determined by supply and demand forces. But is the demand so high that the House Price Index is rising too steeply? Even experts are bewildered at how the market is behaving amid the pandemic. People tend to defer high-ticket purchases during economic downturns and save their money to meet basic needs.

But there is a rush in the housing market. It may be because a low overnight rate resulted in “affordable” mortgage rates. Canadians, reports suggest, are flocking to lenders for pre-approvals ahead of any mortgage rate hikes. Additionally, Canadians have a record-high cash pile right now, thanks to the support programs of the federal government.

Despite acknowledging that house prices in Canada are pinching low-income households looking for a family home and not an investment asset, the federal government and other agencies have been able to do nothing to bring rationality.

Last June, a change was introduced to the mortgage stress test by tweaking the qualifying rate. This was expected to cool down prices as regulators anticipated tough mortgage rules would lead to a few buyers quitting the market. A few may have, but even these would have been low-income households because the high qualifying rate was a deterrent for them alone. Reports suggest that 25 per cent of buyers in Ontario are investors and stress tests mean nothing to their deep pockets.

House prices also made it to the election platforms of both the leading parties. The Liberals proposed an end to blind bidding. Though it is debatable whether such a move can cool the market down, some transparency with respect to other bids may not be a bad thing.

House prices, we know, are usually decided by supply and demand forces. The former, though even the government acknowledges low supply and inventory, is not as tight as one may assume. More houses were sold in 2021 compared to 2020, which means supply is not that bad.

Is it the demand then? Maybe yes. People have cash in their bank accounts, the mortgage rate is under one per cent. What else do you need? But more than demand, impulsive and uninformed bidding is to blame here. The market is so opaque and speculative that a bidder may be quoting an exorbitantly high price, even hundreds of thousands of dollars more, to outbid others, when in fact, they may be the only bidder.

No, buyers aren’t to be squarely blamed here, nor are real estate agents. A sense of urgency prevailing in the housing market is triggering recklessly high bids.

In 2021, users of Reddit convened to manipulate the price of stocks like GameStop, Robinhood, AMC Entertainment and BlackBerry.

Social media put so much power in the hands of these users, who were also retail stock investors using services of online brokers, that their moves caused deep losses to seasoned investors who had bet on the price of these “meme stocks” falling. In a sense, these young investors decided on a stock price and were fairly able to achieve it. Price was less a product of demand and supply, more of what these Reddit users chose.

In the housing market, there is little transparency on what other bidders are offering for the property. This is what may be leading to speculation.

Things might change if a frustrated group of homebuyers decides to borrow a leaf from the book of stock investors that convene on Reddit. The group may call for rational bidding for any housing asset and even determine the upper limit of a bid for a particular type of property in a particular market. Once an upper limit is set, speculation will be reined in.

As stated in the beginning, bringing rationality cannot be termed manipulation. It is justifiable and lawful for homebuyers to collectively end wild speculation in the housing market. Realtors cold join hands and lend their expertise to the group.

Blind bidding for a housing asset isn’t bad per se, but a lack of transparency adds to the speculation. If a Reddit group of homebuyers decides the upper limit of price, blind bidding would still exist, but overly high bids driven by impulse and deep pockets of the bidder can be weeded out. Rationality is a good thing, and if brought to house prices in Canada, it will benefit all the stakeholders in the long run.

5 COMMENTS

  1. “More houses were sold in 2021 compared to 2020, which means supply is not that bad.” Seriously, think again! Supply is lower now than it was a year ago. This is not because more houses were sold in 21 compared to 20 that now the supply is good. If the offer would be balanced with the demand, prices would not skyrocket as they do.

  2. To even think that reddit users had MaNiPuLaTeD the market in early January of 2021 speaks to the authors clear lack of understanding of the US market, the Fed, the SEC and the true culprits of what is currently going down between wall st. and Gamestop, a reenergized company and soon to be online retailing behemoth. It was in fact Wall st. who had attempted to drive Gamestop into the cellar through naked shorting. While there is no button at the Bloomberg terminal for creating synthetic shares there are still plenty of ways to do it through deep out of the money put contracts and failure to deliver (FTD). Since the retail investor is also not in control of their shares either, it allows the custodian of the actual shares to loan them out at a fee (btw did you notice that GME borrow rate was quite high before jan 27-2021 and has since been at around 0.5%? That’s the banks giving their buddies at Citadel a favour so they can attempt to short it even more in the hopes that retail gives up. They won’t. They like the stock too much) which makes up -at least in the case of Goldman Sachs, the rule likely applies for the others- 75% of revenue. A tiny trading desk with low overhead making the majority of the money for the bank. Amazing.

    Now lets look at the other crimes committed back in January of 2021. The buy button at trading platforms was turned off for retail. Sounds like something China might do, not the free market though. The reason why is simple if you look at those loaned shares. APEX, which is the clearing house for various online platforms was most likely making huge profits from loaning out these shares to banks while simultaneously allowing retail to buy them. However as hedge funds started needing to try to cover their shorts as they get margin called, while at the same time retail is buying, APEX had a hard time (or never did) locating real shares to cover their shorts, and turned off the buy button so as to keep retail from driving the price higher and from gobbling up real shares that they needed for the hedge funds.

    Direct Registration (DRS)through Computershare is the only weapon retail has. As Computershare removes shares from the DTCC and places them in your name, you have control over those shares. They are real too, not synthetic. As the float gets locked up through DRSing, the real # of shares dwindles and eventually there will be no more shares to short. There is only one way to go from there. Up.

    The only thing retail has is Buy, Hold, DRS. Shorts never covered. They just can kicked.

    You cannot apply what is happening on Wall st. and the canadian housing situation. Did you even bother to do some real research or did you just go off what Jim Cramer told you? There are so many things going on right now that you need to look at further before writing about. Put that economics degree to good use.

  3. Its a bit ironic that every “expert” will give the dictionary or text book meaning of demand and supply etc, but yet still does not apply it to the housing situation in Canada. Your reference to supply was mentioned like an after thought.. “House prices, we know, are usually decided by supply and demand forces. The former, though even the government acknowledges low supply and inventory, is not as tight as one may assume” . .. Even the government acknowledges low supply…. and guess what, they decide to try every thing else other than increasing the housing supply beyond what is normal housing starts.. All the various unorthodox strategies they have employed have all failed, and again they continue to ignore the obvious. Supply.
    Their logic and rational is frightening. Leaves you wondering if these so called experts cant fix the issue. Not even sure why they bother to speak on it. There is no way you can continue to have the arrival of thousand of immigrants coming to Canada and you dont have a plan (a real plan) to increase the social fabric of a country. Its unsustainable. Something will have to give. .. So far it’s the cost of Housing. Soon enough it would also be health care, roads, etc.
    It is time the gurus try something different – increase the housing supply – that would mean they would have to tackle the other issues that make the cost of housing so high.. government red tape etc – to the point where you dont have to wait 2,3, 4 or 5 years for your home to be built… and stop the rubber talk.

  4. “In 2021, users of Reddit convened to manipulate the price of stocks like GameStop, Robinhood, AMC Entertainment and BlackBerry.”
    “A sense of urgency prevailing in the housing market is triggering recklessly high bids.”

    a) Which Canadian (or USA) jurisdiction were you Registered/licensed, Mr Sawhney?

    b) If YOUR prosomal residence or investment property were maxxed-out/ limited / governed by some Internet Do-gooders would you feel the same?

    c) Since Everyone has to Live Somewhere and if, as you say, supply is “not bad”, and as you also mention, that there is over-demand for every property — then why not address the top-2 Quintiles overwhelming lack of faith in the currency as the reason for buyers’ flocking to Real Property Tangible Assets? after all it generates an income and/or you can live in it.

    a la prochaine (trs till your next content-deadline)

    rce

  5. The housing market is not the stock market.. there is way more emotion in this industry as this is where people live and if they want something bad enough, they will pay above the limits just so they can own this asset. Just look to Australia which has open auctions.

    The housing crisis stems from a lack of housing options for home buyers. Every Canadian should have the right to own a home (not rent but own).. we do not need a country full of people akin to serfs of old paying rich landowners. That being said we need to make more homes and make them affordable.. I am not typically a fan of government stepping in but considering this is a crisis across Canada, I believe it is time that the government stepped things up and intervened for the little people.

    eg: 1. Consider having the government create suburbs of high-rise buildings utilizing public funds as they do for making highways… similar to China creating cities but ensure people have a convenient environmentally friendly means to get into the cities where the jobs are…
    2. put more restrictions on investors so that personal home buyers have to compete less with investors.
    3. allow personal first-time homebuyers to buy homes with $0 down like the old days.. right now they can’t even save up enough to keep up with inflation… and in the meantime, their limited funds are going to landlords.
    4. municipalities need to mandate that apartments have to have eg: 70% 3 bedroom units. land developers are maximizing their profits by making 1 and 2 bedrooms units which are not helping families.. in Europe the people live in 3 or 4 bedroom apartments. There needs to be more checks and balances on the profiteering of the ultra-rich conglomerates that build the high rises.. if need be the government needs to build them and sell them at cost.
    – the cost to build has not increased in line with home prices.. albeit the land value has.. but most of these developers bought these lands long before 2020.. hence pure profiteering.

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