The Psychology Behind Vancouver’s Bubble

Back in August I wrote an article called FOMO Drives Vancouver Real Estate Market. This intense psychological behaviour throttled the market to new heights and has never been so obvious as I explained in my most recent post Irrational Exuberance in Vancouver. 

There are many factors which pushed the Vancouver real estate ship into a category 5 storm. But perhaps none more powerful than the psychological forces steering it. Excessive media exposure created a wave of desperate buyers. Vancouver real estate dominated conversations everywhere you went and soon investor speculation morphed into a tidal wave destined to take the ship down.

Just like the stock market crash in 1929, media attention was rampant in the years leading up to it. For example, there were 29 articles about the stock market from 1922-1924. From 1925-1928 there were 67 articles, and 182 articles from 1929-1932. Over the 1920’s the percentage of articles about the stock market almost quadrupled then died off significantly years later.

A similar pattern can be seen in Vancouver where headlines highlighted enormous price growth, record sales, and never ending gains. News spread rapidly and encouraged more investor participation and increased speculation.

Vancouver real estate news
News Headline in July 2015

This is known as the feedback loop theory. Where initial price increases lead to more price increases as the effects of the initial price increases feed back into yet higher prices through increased investor demand. This cycle repeats itself many times over.

Investor enthusiasm and confidence grows. Real Estate becomes the “best investment.”

Vancouver real estate news 2015
News Headline November 2015

Who wouldn’t want to jump on board?

Evidence shows that when home prices are going up, the percentage of people who think real estate is the best investment also goes up. As seen in the chart below, the percentage of recent US homebuyers who said they agreed “real estate is the best investment” fluctuates as prices go up or down.

investor confidence
Investor confidence fluctuates with prices (Source: Irrational Exuberance)

Sure enough prices go up. Headlines in early 2016 continue to spread news of massive price growth, the feedback loop continues and the wave grows.

Vancouver news headline feb 2016
News headline February 2016

Limited Supply

The effects of “playing with the house money” results in a different type of feedback loop as Nobel Prize economist Robert Shiller explains. “Playing with the house money” may reduce investors’ inclination to sell after a price increase, thus amplifying the effects of the precipitating factors on price.

Vancouver sees record low inventory levels. Inventory continues to fall as sales increase.

declining inventory levels Vancouver
Declining inventory levels in Vancouver

It appears the party will never end.

Vancouver price growth
Vancouver price growth continues

But the speculative bubble cannot grow forever. Despite misleading headlines.

foreign buyers tax headline
Headline claims Vancouver shrugs off foreign buyers tax

Vancouver real estate does indeed shrug off foreign buyers tax. Average prices plummet, foreign buyers begin to exit the market. Foreign buyers once accounting for 13% of Metro Vancouver transactions falls to 1.8% in September .

Average prices vancouver
Average prices plummet in Vancouver

But the ship does not immediately capsize.

“There must be some noise in investor demand, some unpredictability of response to past price changes, some lack of synchrony across investors. Moreover, the enticement to enter or exit the market that past price changes creates is not likely to be determined only by the most recent change in price. It is plausible that investors will look back over many days, weeks, or months of price changes in deciding whether they find recent market performance enticing. Thus, the simple feedback theory is consistent with a price pattern that shows many interruptions and jiggles.”
-Robert J. Shiller

There’s a new wave coming, one full of headlines promoting falling sales and prices.

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