In Parts 1, 2 and 3 of a prior blog post series titled “2024 Real Estate Forecast: factors Affecting Today’s Property Market,” I strived to provide insight and information into the forecast for the year ahead with respect to real estate.  As with anything, opinions vary as to how the real estate market will perform in 2024.  No matter what the topic is, I always try to have an open mind and base my opinions and forecasts on what statistical data is telling us about the housing market and the economy in general.  Further I look to sources such as the Bank of Canada’s economic outlook including interest rates as well as what Canada’s major banks are saying when it comes to housing and in particular, mortgage rates and renewals.

Looking at Canada’s housing market overall and the Southern Georgian Bay area itself, I believe it’s important to take a step back to see where we came from.  The first point of reference is, where we are today compared to prior years and in this case the period of time during the COVID 19 Pandemic is key.  Secondly, a great deal can be learned from history provided we make the effort to look back with a willingness to learn.

One of the most well known and respected authorities on economic issues was the late John Kenneth Galbraith, a Canadian-American economist and a faculty member at Harvard University where he was the professor of economics for over half a century.  Over the years, Galbraith wrote many books dealing with economic related matters one of which is titled: “A Short History of Financial Euphoria.”   Like many, I have lived though several financial downturns.  As such I could not help but come to the conclusion that the robust real estate market we were experiencing in 2020, 2021 and into early 2022 would not last, nor was it realistic or healthy if it did.  Reading Galbraith’s book was both informative and reinforced the position I had taken which I also shared with my valued real estate clients.

During the COVID 19 pandemic, real estate sales and pricing appeared to have no bounds.  We were riding the crest of a wave and many consumers were of the opinion it would never end.

Positive economic growth seemed endless some of which people attributed to the influx of immigrants into Canada.  Many felt that immigration alone would continue to propel our market to ever increasing heights.  In the charts below, I have prepared a summary of total MLS® dollar and unit sales over a 5 year period from 2019 to 2023 covering the pre and post pandemic era in the Southern Georgian Bay area.

From 2019 to 2021 MLS® dollar volume in our market more than doubled while unit sale rose 29%.  These numbers do not include the sale of new homes and condominiums made by builder/developers, most of which are done outside the MLS® System.  At the same time, the inventory of homes listed for sale on the MLS® System particularly in 2020 were at a 10 year low.  Sellers that may have wanted to take advantage of highly inflated sale prices were thwarted in doing so as there was a limited inventory of homes for sale to purchase as a replacement to the residence they owned and were wishing to sell.

5 Year History of MLS® Sales in Dollars 2019 to 2023

5 Year History of MLS® Sales in Units 2019 to 2023

NOTE:  These results are based on total MLS® sales for residential, commercial properties & vacant land in Clearview, Collingwood, Grey Highlands, Municipality of Meaford, the Blue Mountains & Wasaga Beach. 

Real estate is not the only area where “financial euphoria” has been active.  In addition to soaring mortgage debt, many Canadian consumers are carrying a substantial level of financial burden in credit card debt, lines of credit, car loans/leases etc.  As with mortgages, many of these other financial obligations were taken on during the period of low interest rates.  We all saw ads for vehicles touting “zero percent financing.”  Just like inflated home price those days too are gone at least for the foreseeable future.

Economic situations involving financial euphoria is nothing new.  In his book Galbraith makes reference to “tulip mania.”  This was an economic event that took place in the Netherlands back in the 1600’s when prices for of all things tulip bulbs, reached extraordinarily high levels. The tulip bulb price acceleration started in 1634 and ran for three years then dramatically collapsed in February 1637 leaving financial destruction for many who jumped on the bandwagon and invested their life savings in tulip bulb futures.  This event is generally considered to have been the first recorded speculative bubble or asset bubble in history.   The book continues to share many historic events including the Great Depression of 1929 and the recession that followed into the early 1930’s, the stock market crash of October 1987, the global financial crisis of 2007/2008 and others.  Despite these repeated periods of financial hardship, it appears that no lessons were learned.

Throughout history, real estate is known to be a cyclical business.  While it is yet to be known how long or pronounced the current housing market will remain weak, “tulip mania” serves to reminds us how quickly and severely things can change.  Further, Galbraith’s book details how anything can change, driven by a surge in asset prices beyond their intrinsic values, fueled by a blend of optimism, greed, and the herd behavior of investors.  In looking back at the real estate market in 2020, 2021 and the 1st quarter of 2022, for both Canada and in particular the local Southern Georgian Bay market, consumer behavior relative to Galbraith’s observations appears to have played key roles in both real estate sales activity and pricing of which historically low mortgage lending rates also played a role in driving the market upwards.

During the latter part of 2020 and 2021 home sales and pricing went through the roof including here in Southern Georgian Bay.  Thanks to the pandemic, many found themselves working from home and a large number of working Canadians chose to cash-in on their urban homes in places such as the Greater Toronto Area (GTA) thereby allowing them the opportunity to move to quieter communities of which this area was one.  Housing demand everywhere was high and with low levels of inventory,  many homes listed for sale were generating multiple offers and sold quickly, well over their already inflated asking prices.

In his book A Short History of Financial Euphoria, Galbraith delves into the psychology and mechanics behind how consumers get swept up in financial situations offering insights into how and why these cycles of euphoria and collapse occur.  Here are some key points to be learned from the book:

Financial Amnesia: Galbraith argues that one of the recurring themes in financial euphoria is the collective amnesia of investors and the public.  People tend to forget the lessons of past financial disasters, leading them to believe “this time is different” during the buildup to a new crisis.  In the 12 or so years that had elapsed since the global financial crash of 2007/2008, all was forgotten.  In terms of real estate, bidding wars for homes were common place and no price appeared to be too high.

Speculative Bubbles: The book details how speculative bubbles form, driven by a surge in asset prices beyond their intrinsic values, fueled by a blend of optimism, greed, and the herd behavior of investors.  Galbraith outlines various historical examples to illustrate how these bubbles grow and eventually burst.

Leverage: This point is key and speaks to the issue of record lows mortgage interest rate which is what largely fueled the our housing market in 2020 and 2021.  The use of borrowed money to amplify investment returns plays a critical role in financial euphoria.  Galbraith highlights how leverage can magnify gains during good times but can also exacerbate losses, leading to more severe financial crises when the bubble bursts.

Irrational Exuberance: Borrowing a term that would later be popularized by Alan Greenspan, Former Chair of the Federal Reserve of the United States, Galbraith discusses how irrational exuberance, the unwarranted optimism and risk-taking by investors drives asset prices to unsustainable levels before the inevitable correction.

The Inevitability of Collapse: According to Galbraith, the collapse of a speculative bubble is inevitable. The triggering events may vary.  A change in economic indicators, a policy shift, or simply the eventual recognition that prices are unjustifiably high etc. No matter the cause, the outcome is always the same.

The Importance of Memory: A central theme of the book is the importance of remembering the lessons of past financial crises to prevent future ones. Galbraith advocates for a better understanding of financial history as a means to inoculate society including real estate sellers and buyers against the recurring cycle of euphoria and despair.

A Short History of Financial Euphoria” is not just a history of financial crises but a warning about the inherent vulnerabilities that any financial market can have including real estate. Galbraith’s work is a call to be wary of the psychological and structural factors that can lead to economic downturns and I feel this is especially true during a period of inflation and higher interest rates such as we are facing today.

By no means is this post intended to imply that we are in a crash or to inject fear.  Rather, it is meant to first highlight how we got to where we did in 2020 and 2021 when the demand for housing was high and prices had risen to a level unlike we had ever seen before.  Due to inflation, higher mortgage rates and other factors, times have now changed.  The financial euphoria Galbraith refers to which served to drive us to where we were no longer exists.

Several questions remain.  First when will consumer’s economic confidence return wherein buyers get get off the sidelines and the demand for homes increases?   That is not to suggest we should or will go back to unbridled “financial euphoria” a state that will bring back multiple offers with highly inflated real estate sale prices.  The second and perhaps more important question is, have we learned anything from the current downturn in real estate activity affecting both sales and pricing or will “financial amnesia” kick back in leading us to a recurrence of where we are today at some not so distant point down the road.  It’s like standing on a railway track and looking down the line, the tracks always merge.

Some are predicting that we will see a resurgence of real estate sales and pricing in the latter half of 2024, with overall home prices across surging up 5% or more this year.  Mortgage interest rates will begin to decline and buyers who have stood on the real estate sidelines for months or longer will once again jump onto the home buying train before it leaves the station.  While we have proven ourselves to be creatures of habit I for one have my doubts that the rebound in real estate sales and pricing will be as soon or as pronounced as some are predicting and in my next post I will explain why.

What are your thought?  Are current market conditions and mortgage rates holding you back from your real estate selling, buying needs and or objectives?  Please feel free to Contact Me, I would loved to hear from you.