Canada

Canadian Real Estate Is Becoming More Bubbly According To The US Federal Reserve

The world’s largest central bank is seeing the warning signals for Canadian real estate get brighter. US Federal Reserve (US Fed) updated their exuberance indicators for Q2 2020. Their measures for Canada show recent acceleration over the past two quarters. There was a brief period in the data where it appears Canada almost came back to reality. In the first quarter of this year though, buyer’s became more exuberant. 

Exuberance Is Not A Fundamental

First, let’s quickly run through the concept of exuberance. Exuberance is the state of being excited. When used in economics, it means emotion and excitement is the driving mechanism. If a buyer is said to exuberant, they are buying not based on any fundamental reason – but rather their emotional reasoning. In other words, they’re paying more based strictly on the fact they think they should be paying more. Not because any fundamental basis is driving the valuation higher. 

Exuberance doesn’t mean markets can’t or won’t go higher. Markets driven by an emotional state are more vulnerable to correction though. If buyers aren’t using fundamentals, then a sudden change in emotion means they need to discover the actual price floor. That’s sometimes a ways down.  

Canadian Real Estate Becomes More Exuberant

Canada is seeing exuberance accelerate over the past few quarters. The indicator reached 1.89 in Q2 2020, up from 1.56 during the same quarter last year. The market has seen two consecutive quarters of acceleration. 

Canadian Real Estate Buyer Exuberance

An index of exuberance Canadian real estate buyers are demonstrating, in relation to pricing fundamentals.

Source: Federal Reserve Bank of Dallas, Better Dwelling.

Canadian real estate has been consistently in this level for years, but not as many as some people want you to think. It first breached the critical threshold in Q1 2015, and hasn’t fallen below that level since. There’s been a few periods where it almost has, which have been followed by policy moves to prop up the market. Technically the market has only been exuberant for half a decade. Although that may feel like forever, it’s not really that long. 

The Federal Reserve warns this indicator doesn’t tell us when we’ll see a correction, just the likelihood of one. After 5 quarters above the critical threshold, the Reserve believes markets will require a correction. The longer this trend persists, the further detached the market is from fundamentals. This means a larger correction will be required, whether in terms of falling prices or inflation that kills the real value. 

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15 Comments

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  • Marc 1 month ago

    Correct: According to everyone, not just the US Federal Reserve.

  • Mike 1 month ago

    I’d be curious to read the actual Fed analysis. (not that I doubt it). Can you link please?

  • Fred 1 month ago

    Good job, Bank of Canada.

  • fred 1 month ago

    In order to prevent the burst of housing bubble bank of Canada prompt housing market even more.

  • fred 1 month ago

    Gdp per capita in Texas is $59,674
    Gdp per capita in Ontario is 49,604 Canadian dollar
    Average house price in Texas is $336,575 and the average price per square foot is $134.
    Average house price in Ontario is 648,100 Canadian dollars.
    Why?

    • SH 1 month ago

      Texas has high property taxes but ZERO state income tax.
      Ontario has crushingly high income tax and ultra-low property taxes.

      Texas rewards hard work.
      Ontario rewards gambling and speculation.

      Canada’s enforcement of money laundering is on par with that of a 3rd world banana republic. Read Diane Francis’ recent article in the National Post on this.

      People got what they voted for. Congrats Millennials for putting in power a PM that puts foreign globalist interests ahead of Canadians.

      • Erik 1 month ago

        It all started with Harper…

        • SH 1 month ago

          Did Harper increase immigration a whopping 40% (from 250,000 in 2015 to an estimated 350,000 in 2021) to crush middle class wages the way Trudeau has done?

  • fred 1 month ago

    TEXAS , 695,662 km² Population 29 mil
    Ontario , 1,000,000 km², Population , 14.6 mil

    • Mtl_matt 1 month ago

      True but let’s be honest, not a lot of people want to live north of Parry Sound. I drew a quick polygon in Google Earth pro and that’s about 115k square kilometers (cutoff approximately highway 60).

      Point still stands though, people in Texas make more money and pay less taxes. Also, a lot of Texas is desert where you couldn’t really live.

      • John San 1 month ago

        There is no such think as a bubble in the Canadian Housing Markets.

        It’s called Inflation and Hypreinflation.

        The costs of commodities across all board have gone throught the roof and people still have not realized it, the more money is printed and the more stimulus packages rolled out the more Inflation of prices.

        Just look at new cars and used cars, New Cars Prices are up at least 30 percent in the last 2 years.

        The prices will continue to rise especially canadian real estate. intrest rate are historically low and therefore will continue to boost the real estate prices.

        Buy your home now before the price double again in the next 5 years.

        The title of the article only scares people. They have been predicting a housing bubble in Canada for the last 20 years and no bubble has popped.

        Hyperinflation will Continue 100 Percent

  • george 1 month ago

    blah blah, exuberance…blah it will fail/fall, whatever….in hongcouver RE is up – especially detached – and nothing seems to stop it…somehow money is pouring into RE here like there is no covid, business shutdown, recession…

    • RainCityRyan 1 month ago

      I can show you multiple examples where RE is down in YVR.
      Specifically downtown condos are WAY down from their peak and the real blood letting hasn’t even started yet.

      Buckle up buttercup it’s going to be one heck of a ride!

  • Fight Back 1 month ago

    Let see, Canada have lower income + higher taxes than U.S. + horrible weather + way lower population density.

    If not for this government propped up bubble our house prices should be 50% of the U.S.

    The Canadian government have committed a horrible crime against all Canadians. That is using all Canadian tax payer money to fatten pockets of real estate speculators in Toronto and Vancouver.

    Time for a real estate speculator tax, time to organize and fight back.

  • Ted Brayer 1 month ago

    Got to love the title. If it became any more bubbly it would just be 100% air (no water)

    Also got to love the “risk of a bubble” that get posted, while Toronto is the #3 biggest inflated real estate bubble in the world. I think 10 years ago there might have been “risk” but 2020 its a plain old bubble.

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