Matrix Blog

Posts Tagged ‘Greater Fool Theory’

Canadian Housing Prices Now Pushed Up Same Way as US

May 4, 2014 | 1:28 pm |


I was reading Tara Perkin’s piece in The Globe and Mail about the record price spread between the US and Canadian housing markets and saw one of the most startling housing charts of late (above). To be clear, this chart doesn’t adjust for the exchange rate but the article says the Canadian/US existing home price spread would be large – closer to 50% than 66% – still huge.

The article cites Bank of Montreal’s chief economist Doug Porter as saying:

“The main takeaway is that, contrary to all expectations, the Canadian housing market has just kept on rolling in 2014 even as the U.S. housing market has paused for breath (after a steep climb out of the dungeon),” he writes in a research note. “Put it this way, how many pundits a year ago were calling for Canadian home prices to rise faster than their U.S. counterparts in any single measure?”

Yes, true, but this is probably another good reason not to rely on anything published by a lender’s “chief economist” title due to their inherent bias toward the interests of their employer. What I find fascinating about the Canadian housing market is the proliferation of the false rationale that prices are being used as a measure of housing health. For the US counterpart, think Miami and Las Vegas circa 2005 when prices were skyrocketing and sales were falling.

The Canadian government tightened credit conditions a year ago and sales fell sharply:

This time last year it was far from clear when and if the Canadian housing market would emerge from the sales slump that ensued after former Finance Minister Jim Flaherty tightened the country’s mortgage insurance rules.

Focus on March 2014 v. March 2012 in the following chart:

With Canadian home buyer’s access to credit now reigned in, sales fell sharply yet housing prices continued to rise. But Canadian housing prices are rising now much like they are in the US, based on restricted access to credit that keeps inventory off the market. And we’re not talking about household debt.

New housing inventory entering the market in Canada is now falling which is continuing to goose (sorry, Canadian geese pun) prices higher.


The Greater Fool Theory Applies to the Canadian Housing Market

A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.

Of course from our past experience in the US, it’s not surprising to see every outpouring of Canadian housing market bubble concern met with an equal outpouring of Canadian housing bubble denial.

Please stop using housing prices as a measure of housing health. It was obviously flawed logic when applied in the US during 2003-2006 and now it has become apparent it was flawed during the 2012 to 2013 US run up.

Housing price growth doesn’t reflect good housing market health in Canada either.

Tags: , ,

[Greater Fool Theory v2] Getting Paid $55 For An Appraisal, Paying $4 For The Privilege

February 17, 2010 | 12:48 am |

[click to open form]

The other day I came across a brand new form for use on Wells Fargo mortgage appraisals

On February 13, 2010, the Wells Fargo RVS Desktop Appraisal (RVS Desktop) will be released into production. This is a streamlined desktop appraisal report to be completed by Licensed or Certified appraisers only. The Desktop Appraisal Form will be accessed through AppraisalPort using FNC’s Data Express system.

FNC has long been an innovator in the collateral management business and I recently interviewed its controversial co-founder. Their automation/statistical orientation doesn’t leave much room for human interpretation of property value. They provide a web portal to many national and regional lenders for a variety of mortgage related services including appraisals.

Some of the highlights of their new appraisal product provided for Wells Fargo is designed for SFR, PUD, and Condominium assignments.

  • The fee is $55 to be paid for each completed assignment that meets the reporting requirements.
  • The FNC/AppraisalPort Fee is $4 for each returned assignment with a value.
  • The Service Level Agreement (SLA) for completing the assignment is two (2) days.

So a professional appraiser – a local market expert – has to crank out a thorough analysis on a property for a fee of $55, within 2 days and pay $4 to upload the report through AppraisalPort to Wells Fargo.

Technology sure is cool. Of course common sense clearly says that the least competent appraisers out there will sit at their desks and crank these reports out. No lessons have been learned from the credit crunch.

Needless to say, my firm won’t be performing these types of assignments and it is very clear that the “greater fool theory” also applies to appraisers.


Complexity Theory Makes Housing ‘Quake

March 15, 2006 | 12:05 am |

In the article Housing Bubble Science UCLA geophysicist Didier Sornette has taken the theories developed in earthquake prediction and applied them to the housing market.

Sornette studies what’s known as “complexity theory” to try to predict how a system will behave in the future. He uses physics and statistical analysis to look at the organization of the dynamic parts of a complex system, and how these parts interact to cause something major to happen.

“It emphasizes the whole more than the parts, it emphasizes the interactions and what we call the feedback,” he says.

The interplay of the elements is affected by both positive and negative feedback. Negative feedback is often obvious. For example, when real estate prices are inflated many people decide to sell with the hope of making a nice profit. Eventually more houses are available for sale than there are buyers, so the prices start to drop back to normal. “Positive feedback is exactly the opposite. A high price pushes the price still higher,” explains Sornette. “This is the expectation of people that lead [people] to buy houses at prices that they would never have bought otherwise and taking supposedly big risks first buyers, for example” you’re a young couple relatively at the early stage of your life and you think, ‘Well if I don’t buy now'”

The results
In 2005 he predicted that in the first half of 2006 prices would level out or return to normal rather than crash.

Housing bubble defined
…when house prices climb continually and unexplainably fast — faster than exponential growth — resulting in market prices that are vastly inflated from the fundamental value of the house.

Greater fool theory
The faith that you’ll be able to sell it in the future to a greater fool than yourself for an even higher price. In other words, buyers in an overheated market may understand that they are over paying but have confidence that others will buy the property from them.

However, his theories, as in most scientific theories, especially those relating to economics [have a number of detractors []](

Nevertheless, it would seem that housing market predictions are ripe for fresh academic research. I am surprised there has been so little of it.

Tags: ,

Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007