Back in 2009 and 2010, I was quite worried about Canadian house prices sliding down a slippery slope. But the more I looked into the specifics of the Canadian situation, the more it appeared I had a case of “recency bias.” I believe the same can be said of the housing bears who are still voicing their worries.
The collapse in U.S. house prices was traumatic and it gets a lot of weight when people reflect on the Canadian market. Too much, it would seem: busts of such magnitude are exceedingly rare historically, especially in reflationary environments where printing presses are going into overdrive.
Recency bias occurs when recent events dominate people’s expectations for the future. As Larry Swedroe and Jared Lizer write in in their book, The Only Guide to Alternative Investments You’ll Ever Need (2010): “Recency bias is the tendency to give too much weight to recent experience,”
True, house prices in Canada have gone up a lot relative to incomes and rents. But the bears’ focus on these trends demonstrates how recency bias can lead to selective perceptions. As noted in an earlier column, there are better indicators of current stresses in the market – and they convey a less dire picture at the national level.
Another case of selective perception is the bears’ use of five-year charts comparing U.S. and Canadian house prices, showing much higher levels in Canada and supposedly unsustainable overvaluation. Why were severely depressed U.S. prices used as a benchmark? What about their capacity to climb back and close the gap? Indeed, this is what appears to be happening now: In January, the S&P/Case-Shiller home price indexes jumped 8.1 per cent, the biggest 12-month increase since 2006.
Lastly, bear in mind that the U.S. housing crash has also made Canadian policymakers more attuned to the possibility of a catastrophic outcome in the Canadian context. It’s a good bet they’ll respond promptly and vigorously with accommodative changes to regulatory and monetary frameworks if there are signs the housing market is cooling off too much.
READERS: How far back should you examine the numbers when considering housing data?
Follow us on Twitter: