Canadian Real Estate Bubble Sentiment Is Collapsing Fast: US Federal Reserve Data

Canadian real estate is still in bubble territory but excitement is fading fast. The US Federal Reserve (US Fed) Exuberance Index for Q3 2021 shows Canada is still in bubble territory. At this point, the gap between fundamentals and price have expanded for over a half decade. As higher rates approach, the index is showing a rapid collapse of sentiment, though. Central bank researchers generally believe markets that show persistent exuberance will correct. When is more of a mystery.

Exuberance Index

The US Fed Exuberance Index measures “explosive dynamics” in housing markets. Explosive dynamics is how economists say price growth greater than fundamentals support. It’s a little more discreet so the average person doesn’t get upset. If a buyer isn’t buying on fundamentals, they’re buying based on emotion. The problem with buying on emotions is they can change as fast as the weather. If that happens, there’s not a lot between the fundamental value and the current market price.

The central bank’s research looks for persistent exuberance to identify whether it’s problematic. One or two quarters of growth in excess of fundamentals happens, and isn’t enough to write home about. When it occurs for five or more quarters, the researchers believe the market is now exuberant. An exuberant market is also known as a bubble, and they believe it will result in a correction.

Canada’s Real Estate Bubble Is 26 Quarters Old

Happy quarter birthday! Canadian real estate has been a bubble for over half a decade now. The model shows Q3 2021 is the 26th quarter the market has shown exuberance, working out to 6.5 years. The first sign of exuberance occurs in Q2 2015, and it logged the fifth quarter making it a bubble in mid-2016. This is a very long time for the gap between fundamentals and prices to expand, and it’s still widening. 

Canadian Real Estate Exuberance Index

The US Federal Reserve Exuberance Index for Canada, and critical value threshold. A market that is above the threshold for 5 consecutive quarters is considered to be exuberant.

Source: US Federal Reserve, Better Dwelling.

Exuberance For Canadian Real Estate Is Falling Fast

The exuberance index is making an abrupt break lower, showing slowing sentiment. Canada might have logged 6.5 years in a bubble, but buyers aren’t as enthusiastic as they once were. The last time the index fell this fast preceded a price correction in Toronto and Vancouver. A flood of cheap mortgages, disposable income, and the promise of massive profits reversed that in 2020. The last time the US saw such a rapid collapse of the index was around 2006. Take what you will from that.

Canadian real estate buyers are still showing significant exuberance, but it’s losing a little steam. This isn’t unexpected to see enthusiasm slow as annual price growth hits a new record high and interest rates climb. Even falling sentiment at these levels can still have enough momentum to drive price growth in the short-term.  

More indicators are beginning to reflect a cooling of sentiment, though. Falling new housing starts and slowing new mortgages are more recent data points that might agree buyers are past their peak. It’s hard to see that while they’re still paying tens of thousands more per month. The depth of that market is still unknown, and won’t be apparent until the Spring. 

19 Comments

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  • Rob Turner 2 years ago

    Sentiment cliffs happen. People don’t remember the dozens of people who couldn’t close on their new construction in Toronto during the 2018 cool down, or how prices suddenly collapsed 30% in suburbs like Markham. Survivor bias.

    • LT 2 years ago

      Same s**t. Homes that would have fetched much more in the suburbs last year now closing 40% lower than they would have a few months ago. When it hits it hits.

      https://twitter.com/el_duarteh/status/1496463453824995337?s=20&t=J_0KgR4eU1eVDLUj_1oOiA

    • Roshan 2 years ago

      I’ve been following the Real Estate market for over 30 years. I’ve been reading every article I possibly could. I don’t know why you article writers are either feigning ignorance, or are ignorant.
      THERE IS NO BUBBLE! THERE’S LITTLE ILLEGAL MONEY LAUNDERING FROM ASIA!
      What there is amounts to 440,000 immigrants allowed in from India for the last 5 years. They’re coming here with money, no one in the Federal Government is asking how they earned it. They’re educated, well heeled, and that’s why housing prices will keep going up.
      What you Canadians think is a bubble, is a bargain to them. Try buying a 4 bedroom home in Calcutta, with a backyard!

      • Gupta 2 years ago

        Kolkota 14.85 million people, 24,000/km2. Price to income ratio: 9.52

        Toronto 3 million per4,149.5/km2. Price to income ratio: 10.73

        Your odds of buying a house with a backyard in Kolkota is actually higher.

      • Sean g Gallant 2 years ago

        OMG! A man with a brain. I 100% agree with you sir. I am in the remodeling business for 25 yrs in the GTA and you hit the nail on the head. It seams as though most articles written on the topic these days is like some kind of click bait BS . I appreciate your comment.

        • Christopher Barclay 2 years ago

          If all you know is real estate, then yes it’s the best return for the past 30 years.

          Rich people aren’t walking around discussing how they’ve made all their wealth buying a bungalow in West Vancouver. haha.

          This is Canadian exceptionalism. Over the past 30 years almost any indexed market fund would have outperformed a house, but no one knows that — they’d rather believe paying for their shelter costs are the number one priority.

    • Ash 2 years ago

      From Toronto, demand, demand and demand, did any factors include rental as the housing shortage is alarming and immigration is peaked with demand for employment , better benefits than the USA and more secure, I believe we are still not in a bubble as demand is more then availability..

  • C.Rose 2 years ago

    The last move in the bubble is called the parabolic move… when it turns it can happen very fast – like someone yelling fire in the theatre- the exit door is not very big. Great examples of this is some pandemic stocks recently.

  • Brian Slack 2 years ago

    Grammar. What on earth are you trying to say here? I have had many excellent English teachers and I never cease to be amazed that writers don’t know how to use grammar. Sentiment for the bubble is such an awkward and ambiguous set of words. Perhaps in a future article you might talk about your perspective on what is really going on here.

  • You want to Bumba 2 years ago

    To suggest that all people who are buying right now are full of exuberance is unfair. Many people simply want to move their families from 2 bdrm apartments to 3 or 4 bdrms homes.
    Further, to suggest the real estate market will collapse like some meme stock or pandemic tech unicorn with no profit is also absurd.
    Those stocks can and are sold in seconds by clicking 3 buttons.
    There are millions of elderly people living in Ontario in un-mortgaged properties that will never sell until their estate steps in.
    There is no crash coming. People wont be running around with their hair on fire because the prices dip.
    The fools living way above their means will need to face reality in their lifestyles, but this notion that we’re about to see some black swan event or collapse is hysteria.

    • Trader Jim 2 years ago

      That’s an incorrect and emotional response. If you’re buying now it’s because you expect it to be a worse deal in the future despite the primary reason being that prices have always increased and never corrected.

      You can be exuberant and still make money.

      • You want to Bumba 2 years ago

        If i buy a car today, I know that it will be worth almost 50% less within 3 years and that there will be nicer vehicles available within the same timeframe.
        But i need the car today, I want it today as I cant drive kids in a two door coupe.
        So my point was simply there are buyers who dont care about the near term price change as they require larger space for their standard of living.

    • Josh 2 years ago

      Looks like your one of the suckers who bought recently. Just watch whatsa commin…

  • Canadian 2 years ago

    The truth is being a former real estate agent in the Toronto area is that Justin Trudeau has created this inflation of high prices. He has been allowing rich Hong kong investors to flood our market and purchase everything driving up the demand. In addition of the millions of new immigrants he lets into Canada. Furthermore, he has not created any infrastructure in the Toronto area but he as sure doesnt delegate where newcomers are to live and they all come to Toronto. This puts pressure on the housing market rises the demand over supply driving up the rates. In addition, the taxes too. Which is exactly what the government wants. #BLAMETRUDEAU

    • Disillusioned 2 years ago

      You are partially correct, however, you suffer from the Toronto is the centre of the earth syndrome.

      Real estate prices in the Vancouver area have been insane for years, in areas like Richmond, regular middle-class housing has been displaced by one mansion after the next with a Mercedes or Tela in the drive, but because the breadwinner is offshore, most often Mainland China, not only do these very wealthy people not pay any taxes, they are a drain on the system, Collecting GST rebates, child tax benefits etc.
      So despite there being a severe shortage of affordable housing, our not too clever PM has decided to increase immigration to over 430,000 this year to ensure that this housing bubble continues to grow.
      But only now that the housing crisis has hit Toronto are the rest of Canada waking up to what has been happening here for years.

  • Walt 2 years ago

    All signs point toward a large bump in house prices in Alberta, a sweeping reference to Canada as if it is a city, serves no one.

  • Stephan Larose 2 years ago

    One can only hope housing prices go down. The vast majority of jobs in Canada pay $20/hr or less, in essence, median wages haven’t gone up since the 70s. Meanwhile, the price of everything has skyrocketed, and homes under 500K are virtually impossible to find. Housing has been treated like a casino, simply a way for people to increase equity, but only the rich can play this game. It’s just concentration of wealth by another means. Homelessness, crime and the wealth gap will increase inexorably until housing is treated like a social necessity and human right rather than an opportunity for rich people to double their money in a few short years. Our dependence on rich immigrants who don’t care about Canadian culture or values is creating ever greater divisions. Diversity is good, but groups that do not integrate or whose religion or ideology is opposed to ours (democracy, women’s rights etc…) don’t bring diversity, they bring conflict.

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