Canadian real estate has long been frothy, but how does it look compared to other countries? According to the US Federal Reserve (the Fed) exuberance index in Q1 2021, pretty bad. Only two G7 countries are considered exuberant markets (a.k.a. bubbles) — Canada and Germany. Those two countries are also the longest-running bubbles of any advanced economy. The longer a market remains exuberant, the greater the drag on quality of life and the economy. They also tend to require much larger corrections, with greater economic fallout.
We just took a dive into the exuberance index last week, so we’re only going over what you need to know. The Fed tracks global housing markets for exuberance, looking to identify bubbles. In this case, exuberance means explosive price growth beyond market fundamentals. When this happens, people are buying based on the excitement of paying more, or fear of being locked out. Whatever the reason, it’s an emotional one. By tracking this, they hope to prevent a 2006-like event from happening again.
One or two quarters isn’t a trend — it happens. The problem is when exuberance becomes persistent, without any correction. Fed researchers say five quarters of exuberance is when the market is exuberant. An exuberant market is better known as a bubble, and bigger corrections are needed to fix them.
When the correction will happen is a little more difficult to pin down, due to policymakers. Governments will often extend credit bubbles, despite increasing economic risk. No one wants to be the guy on watch when a bubble pops, so it turns into a game of hot potato. The last one holding is the person that ruins a generation!
Canada Has The Second Longest Running Bubble In The G7
Only two countries in the G7 are exuberant markets — Canada and Germany. Canada first became exuberant 24 quarters ago without a correction. Two quarters showed low signs of exuberance, by just a hair. However, they weren’t long enough for prices to correct, or establish a new trend. This makes Canada the second-longest lasting bubble in the G7, next to Germany.
How does Germany compare? It only beats Canada by a quarter and saw much lower price growth prior. The country logged its 25th quarter with zero breaks, just straight dedication to creating a bigger bubble. It’s worth noting the Fed estimates prices in Canada increased 173% from 2005, and 74% in Germany. Germany’s price growth seems tiny in contrast, but rest assured — it’s astronomical.
Canada’s Real Estate Bubble Has Run Significantly Longer Than Other Advanced Economies
The narrative is buyers are exuberant around the world, but that’s not the case according to the Fed. They track 25 advanced economies for exuberance, and only six are exuberant. Other than Canada and Germany, there is Luxembourg (19 quarters), Croatia (8), Belgium (7), and the Netherlands (6). More markets are showing recent signs of exuberance due to programs like quantitative ease (QE). They haven’t been doing this long enough for these markets to be exuberant though.
Global Housing Market Exuberance
The number of quarters since the current streak of buyer exuberance began in advanced economies, without a correction. Five consecutive quarters of exuberance means the market has become exuberant.
Source: US Federal Reserve; Better Dwelling.
Longer running bubbles tend to create a bigger problem — a larger fundamental disconnect. As countries like Canada and Germany prop up their bubbles longer, they pass the issue on. The longer this happens, the bigger the correction needs to be to get back to fundamentals.
Eventually, these countries face two deaths — a sharp correction, or an economic slowdown. A sharp correction hits like a sack of bricks, and shocks people out of investing for a while. A slow one diverts disposable income into housing, slowly killing other industries… before it hits like a sack of bricks.
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