Canada’s Real Estate Bubble Is The Second Longest In The World: US Federal Reserve

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.

Exuberance Index 

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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  • Trader Jim 3 years ago

    I believe it was Oxford Economics that said Canada would correct due to a “duration bias.” As in the longer it persists, the more likely it is to happen out of sheer length of time.

    • Subodh 3 years ago

      Keep wishing for bubble to pop
      It’s never going to happen

      • Trader Jim 3 years ago

        Why would I want it to pop? Because I bought it for $1.6m and the neighbor just sold their home for $4m? It’s a real tragedy.

        Middle class people are the only people who are going to get screwed, since they won’t be able to afford the property taxes. That’s a nice surprise for them in 4 years.

      • Kaliucla 3 years ago

        Yeah it’s not like it happened in the ’80s or anything.

      • Chuck 3 years ago

        That’s exactly what is also said before every stock market crash

      • D 3 years ago

        0.6% nominal annual economic growth since 2011. Adjusted for inflation and we’re looking at negative growth. Explain how people can survive and buy anything when we have negative growth?

      • John Grant 3 years ago

        How old are you? When interest rates rise with inflation, where are people going to get the money from for million dollar mortgages and high property taxes . This is the worst time in history to buy a first time home. In the end homes will only be worth what people can afford to pay for them.

  • Nassim 3 years ago

    Vancouver’s bubble goes back to the 1990s though. It’s the bubble that never ends, yes it goes on and on my friends.

    • David Chan 3 years ago

      Other than single-markets aren’t the same as national markets, pre-Great Recession doesn’t matter. They took the opportunity to cut interest rates beyond a reasonable cut, and pretend all previous issues were resolved.

      They’re trying to do it again with COVID (flooded mortgage markets before a single thing happened), but you can only stack so many market inefficiencies.

    • Ahmed 3 years ago

      Bubble is a little more complicated. Stephen actually did an interesting talk about this, and I think they should start posting these on their YouTube.

      There are 3 kinds of bubbles.

      There was a bubble of growth in 2008. Prices increased in places across Canada fast, but they had only just passed 1990 real values. Prices barely moved until 2015, as it became more common to just pay more. This didn’t need a correction, but it means Canada’s economy can’t grow as fast anymore.

      There was a region bubble, 2015 to 2017. This is when foreign buyers and China’s Great Capital Flight began, inflating Toronto and Vancouver. This is a bubble where prices were no longer affordable, and you can’t just increase debt servicing capacity. This was correcting until 2019, when Morneau got the Bank of Canada to start buying mortgage bonds, and drive the cost of mortgages lower, which is why prices began rising again at the end of 2019.

      Now there is the national credit bubble in 2020. It doesn’t matter where your home is, there is no cheap property in Canada that’s reasonably well connected to infrastructure. If there’s no cheap land, it means entrepreneurship is dead. Entrepreneurs need to be near 1) capital, 2) markets and 3) space. Since Canada doesn’t have incumbents just giving space away with an investment like San Francisco, or the millionaires 20-somethings, they’re killing their position as a global leader before it happens.

  • Mo 3 years ago

    Canada’s only method of keeping young people is making sure they don’t have the ability to move to the US. You have no idea how many international students I went to school with that thought having Canadian citizenship would mean it would be easier to move to the US.

    • alex 3 years ago

      Your best chance to work and live in the US as a Canadian is to have an extensive tech background, as that is where the demand is. Have a few acquaintances with business backgrounds who did MBA’s at American Ivy leagues who came back and are working in Canada because the demand just isn’t there, and US citizens get first priority.

    • D 3 years ago

      It’s what Elon Musk did. Only way up is being a grifter; being honest, kind, reliable, wont cut it.

    • This Will End Badly 3 years ago

      Yea they are pretty mistaken….

  • Christopher Barclay 3 years ago

    27 Years Without An Accident*

    * People still think every year prices can’t roll a little back, even if it damages the whole damn economy.

  • Sam 3 years ago

    Its an unburstable bubble because the supply of homes is artificially restricted by the zoning by-laws. The supply is nowhere near where it should be.

    • Jason 3 years ago

      Not even close to true. Existing zoning is planned for the population until 2035! They don’t just make it up as they go along, there just isn’t demand to build it all at the same time.

      I’m guessing you don’t also understand you need to:
      – a) raise property taxes to accommodate higher zoning since cities need more cash, which lowers home values more than any supply overage possible
      – b) taller buildings require more advanced construction, with much higher costs. It’s almost 2x as much to build a new high rise on a PER SQFT basis.

  • Brian 3 years ago

    With the help of capable hands there are million ways to keep it further inflated. We can see more “environment protection” to limit where houses could be built or “short of staff” to approve “building permit” so no houses could be built or “sustainable urban planning” so no “bad” houses could be built.

    All these “good measures” will ensure no house is available on the market.

    Do not worry. This bubble is nothing, bigger is coming.

    • Sam 3 years ago

      Very true. Home prices are artificially inflated in the name of “environment protection” by severely restricting supply. This “bubble” will never burst.

  • Roumen 3 years ago

    Small cities in Alberta , Saskatchewan and Manitoba are still affordable , but it’s to cold and not much work.

  • questions guy 3 years ago

    I thought I read it was the longest bubble ever… what changed?

  • D 3 years ago

    All is well
    ~ Bank of Canada

  • Opo 3 years ago

    Can anyone explain to me how we are going to take back that 30% increase in money supply? If not that housing price will just keep increasing, basic economics. Reading Steven’s articles are like reading excuses from a 16th century alchemist explaining why his method will turn lead into gold. LOL

  • Smug Canadians 3 years ago

    Just get out while you can!!!! The market is still a seller’s one for another few months; so sell!!! This is the last gasp!!
    As for the next generation, and as I tell my 20 year old daughter who is just finishing her last year of university…..move south of the border!! You can afford a home there and it’s a great economy. There is a future there! Unless you’re a multi-millionaire here in Canaduh, or have been given a home from M&D, you’re screwed!!!

    • Van boy 3 years ago

      Very True.

      No place for young working men and women !

    • This Will End Badly 3 years ago

      What’s funny is that Canadians think you just can move to South of the border….lol foolish thinking.

      • why 3 years ago

        Why is that foolish?

      • Tired 3 years ago

        You can relatively easily if u have a soft eng background or post education in relevant field.

        Or you can work for an American company, cut your teeth and network to try to get a transfer somehow.

        I’m going to try it. I don’t have a technical background but I will be working in an American tech co so this will be my goal.

  • Ken 3 years ago

    Derek so true.
    Its central bank monetary policy of continually low interest rates that has created the housing and trillions debt bubble.
    They know what the solution is but they are trapped . Going to end badly . Gold !

  • Iann Me 3 years ago

    There cannot be a “bubble” Canadian banking does not function the same as their neighbors. Mass default is not the same threat threshold. In Canada it just means expensive houses. End of story.

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