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Recent news has been going in different directions. Some news reports say that markets are booming because sales are increasing. Other news reports says that things are terrible (with the implication that they are about to get worse).

So, how to make sense of the news? First, different stories focus on widely separated cities. Second, the media confuses “sales” (as the number of units bought and sold) with the prices; to a home buyer or home seller the number of other people who bought or sold is much less important than the price. The raw data shows that the difference is relevant.

(As a researcher, I know that the separation between price and the number of units sold is not quite accurate: work on “endogenous liquidity” indicates that markets become more liquid, and prices tend to rise, when there is a lot of traffic flow. My basic point is still valid: to a buyer or seller, the more interesting fact is price.)

Second, Calgary has problems but they should not be a surprise to anybody who follows economic trends. The local economic base drives employment and income trends in all cities and, in turn, they affect housing markets. Oil prices were high and have fallen.

“What goes up can also come down” also applies to house prices. Price spirals 😉 can happen and the adjustment can be scary (for owners, not buyers).

A different thought may spark hundreds of news reports and blog posts: Is a price decline in Calgary proof that a Canadian price bubble has finally burst? Experiences suggests that many news reports (written using big headlines, “interviews with experts” and colourful scary quotes) are likely to miss to ideas critical to any careful analysis of price dynamics.

By definition, a bubble exists when the market price for something is above its fundamental value for a long time. There are many reasons why this divergence might happen, where the simplest one is “psychology”. If true then the implication is that bubbles are inherently unstable; anything, such as bad news or even bad weather even if it is not related to the fundamentals, could cause a collapse.

On the other hand, prices are expected to increase if the news leads to excess supply. In such cases, the change in market conditions also caused the fundamental value to fall. Reporting on a trend in prices is much easier but doing so overlooks the difference between the current price and the fundamental value.

Maybe a big price decline will prompt a serious discussion that housing is a risky asset and, like other risky assets, a consideration of mechanisms and financial institutions which would accept the homeowner’s risk (for the right price).

PA

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