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.
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.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.
