The bubble in phony bubble calls, by Scott Sumner
Bubbles don’t exist. But that doesn’t stop people from seeing them. In 2015, I predicted that the 21st century would see an unprecedented number of bubble claims, due to the fact that people have trouble accepting the fact that low real interest rates imply high P/E ratios.
A few years ago, many people claimed the Canadian housing “bubble” was bursting. This Business Insider headline discussing Canadian housing is from June 2016:
And Bloomberg in June 2017:
And the Financial Post in September 2015:
Here’s TheMotleyFool in January 2016:
It’s a major embarrassment that the media prints these sorts of stories. It’s no different that claiming stocks will go down because Saturn is aligning with Mars in the constellation Aquarius.
In fact, the Canadian housing “bubble” never did burst:
Instead, local markets occasionally dropped slightly, reflecting local conditions. Might the national market plunge at some point? Yes, that happened in America after 2006. But that has nothing to do with mythical “bubbles”. It simply reflects the fact that efficient markets go up and down. For a bubble theory to be useful it would have to be able to predict asset price movements. Since they cannot do so, the theories are not useful.
PS. The Financial Times article that I took this graph from points out that Canada’s real estate market is booming:
Signs of exuberance in Toronto’s housing market abound. The city’s skyline is a forest of cranes. There were 120 at the last count in July, according to the Rider Levett Bucknall crane index, more than America’s three-largest cities – New York, Los Angeles and Chicago – combined.
They suggest that rapid population growth (driven by increasing rates of immigration) plays a role:
Canada is also experiencing its fastest population growth since 1990, while jobs and wages are on the rise. In September the employment rate for those aged 25 to 54 – prime working age – hit 83.6 per cent, the highest level since Statistics Canada began tracking the measure in 1976.
PPS. Ever since the early 2000s, people have been predicting that the Australian housing bubble would burst. I’m still waiting:
PPPS. Some commenters tell me that just because they think something’s a bubble doesn’t mean they predict it will burst. Oh really? Then why choose this metaphor: