Canadian real estate prices have been on a tear, with a typical home now making more than the people inside of it. Still, a new model from the Bank of Canada (BoC) thinks that’s not bubbly, and is within their policy. The central bank’s Q1 2021 numbers show only three real estate markets are exuberant. As you may have guessed, Toronto is one of those markets.
Bank of Canada House Price Exuberance Indicator
The Bank of Canada (BoC) recently created a model to detect exuberance in housing markets. It detects explosive movements in home price growth, compared to fundamentals. They then put it into a neat, color-coded chart.
When home prices grow faster than fundamentals, buyers are said to be exuberant. If it becomes common for the whole market, the market is said to be exuberant. An exuberant market is better known as a bubble. The concept is similar to the US Fed’s groundbreaking work on exuberance detection.
The exuberance indicator uses fundamentals based on disposable income, population, and mortgage rates. Disposable income is measured on a per capita basis, and the mortgage rate is the real effective rate. Really wanting a cottage and paying extra for it, isn’t a fundamental. Even if the BoC governor keeps repeating that sentiment, it’s not based on their own research.
The BoC has made it stupid easy to read these indicators. Each rectangle is a quarter, and they’re shaded in one of three colors, which show intensity. Green means the market is rational for the fundamentals. Orange means it’s heating up, with signs of exuberance showing, also known as “froth.” Red means full-on exuberance, a.k.a. a bubble. In the BoC’s own words, this raises “the likelihood of a costly adjustment in the future.”
Toronto and Hamilton Real Estate Get Bubbly Label
Only three markets were exuberant in the most recent quarter, and one of them is Greater Toronto. The region logged a second consecutive quarter of exuberance in Q1 2021. From 2016 to Q1 2021, the market has only seen 7 quarters without exuberance. Two-thirds of the past 5 years of price growth have not been based on fundamentals. With little time between exuberant periods, the market hasn’t had time to correct.
Canadian House Price Exuberance Index
Source: Bank of Canada.
Hamilton real estate has been getting a lot of attention these days, for all of the wrong reasons. The region, located an hour from Toronto, showed exuberance in the most recent quarter. The market has seen the same number of exuberant quarters as Toronto, over the past 5 years. Hamilton’s sudden price growth even got the small city on the radar of the IMF, whose models indicate home prices are about 40% overvalued.
Montreal Real Estate Gets Hit With An Exuberant Label
Montreal real estate is still relatively affordable, but may not be that way for long. In Q1 2021, it finally moved past fundamentals to print its first exuberant quarter. It hasn’t seen this kind of price acceleration detached from fundamentals since 2012. One quarter almost makes it seem like a stable market, doesn’t it?
Greater Vancouver Real Estate Hasn’t Seen Exuberance Since 2018
It may surprise many, but Greater Vancouver real estate hasn’t been exuberant since the 2018 rush. The BoC model shows Q3 2018 was the last quarter where the market was last in this territory. Now that doesn’t mean it’s affordable or priced right for local incomes.
Not showing signs of exuberance just means price growth isn’t unusually strong. In this case, prices are just above where they were 3 years ago, despite recent acceleration. That does bring up a separate question though. How long can a market be detached from local incomes, before it suffers? That’s a different topic for another day.
The BoC sharing data points that show there’s more than just “froth” is a big change. Earlier this year, the central bank was blamed for boosting price growth expectations. Along with the Federal government, this boosted moral hazard. Now they are releasing a steady stream of messages to temper those expectations.
Hawkish policy, tapering QE, and housing exuberance data are three big market messages. The BoC has yet to publicly state the sudden change in attitude towards housing. However, they are certainly leaving a breadcrumb trail for people to conclude that.
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okay, Tiff. Vancouver is one of the least affordable places in the world, and prices are rising by multiples of income per year. The threshold to be considered exuberant must be absurdly high.
They only use exuberance when defining the growth, not the actual price level. The assumption is if prices can maintain a certain level for a while, they can stay at that level. That said, there’s been cases where home prices are just not a priority, but that involves booming or failing economies.
I’m not entirely sure how they calculated HPEI but feels like .95 is 95% of household income. Everything is fine.
Hahahaha. Because 3-season cottages going for double the value in a year, because it’s the only thing available is normal.
Right(!?!).
Big issue I have with these models are they assume all home prices are reasonable as long as people can pay it. That means if you’re in Toronto or in rural Ontario, if your wages are the same — it’s not irrational.
To me, the gap in price closing between similar homes in two very different regions has been the most bubbly sign of all.
This information is being to modest. We are in a full blown bubble like Canada has never seen. We are being lied to. Information is being withheld. When shit hits the fan it will be the worst thing this generation ever experienced. It’s business not being truthful to Canadians. Profits come before humanity.
BoC is clearly a moronic bunch of bumbling idiots. Let’s all follow the US Fed Bank to get real intelligence. Our bunch of brainless Turdeau ass kissers have to follow them anyway, so we may as well listen to their logic.
Corrected: BoC is clearly a moronic bunch of bumbling idiots. Let’s all follow the US Fed Bank to get real intelligence. Our bunch of brainless Turdeau butt kissers have to follow them anyway, so we may as well listen to their logic.
All this exuberance shows me one thing! We are the stupidest bunch of people on the planet and we deserve what is coming! It laughable, but unfortunately people will be hurt financially. I mean HURT.
Hasn’t the Vancouver and Toronto Markets been exuberant for the last 20 years?
Hasn’t Hamilton been exuberant for the last 10 years? I mean, it’s been the new “Brooklyn” for at least that long.
Mississauga, Milton, Ajax, Pickering…..now Oshawa, Barrie, Kitchener, Guelph…..heck….London, Strathmore….Orangeville…..haven’t all these been exuberant over the last 5 years or so?
Shouldn’t those red boxes show when families are forced to pay over 50% of their household income just to own a humble home?
Enough of the pathetic descriptors. Please do something. Pull the rates lever and knock down the house of cards.
There’s part of me that believes that this is a bubble, but then there’s part of me that’s like, “Maybe this is just how it is now?” Maybe we’re just not a place where normal people can expect to buy a home anymore, and you rent for life if you don’t inherit property?
Wow. That’s exactly what they are priming the public for. The Great reset is real. “You will own nothing and be happy”. In other words you will rent and never own.
When you’re late for the party but want to contribute. Love the metrics…
Canada is not an affordable country anymore. Normal people take home around 3k every month and the rent or mortgage is around 3k as well. People hide the fact that normal people live in poverty.
You will one day think, how could we have been taken down this path by government, speculators and Realtors. To see how cray it is read this post: https://cme4pif-thoughts.blogspot.com/2021/05/just-condo.html