Canadian Real Estate Prints 19th Quarter In Bubble Territory: US Federal Reserve

Canadian real estate buyers are driving prices using irrational exuberance. US Federal Reserve (The Fed) data shows Canada’s homebuyers were “exuberant” in Q3 2020. This is when buyers disregard fundamentals, and paid more because they felt they couldn’t lose. This isn’t new, but it’s not as old as some have assumed. Canadian homebuyers irrationally drove price growth for nearly five years. The length of irrational buying firmly places the market in bubble territory.

Irrational Exuberance

“Irrational exuberance” is a term infamously used by former Federal Reserve chair Alan Greenspan. He used it to describe buyers of the Dot-Com bubble in the 1990s, who bought solely on enthusiasm. Good news received an irrational premium, and bad news was disregarded as temporary. Only one message is heard – buy as much as possible, as fast as you can. The term has since been used to describe bubble participants.

When’s the last time you heard someone say, “it only goes up” to describe an asset? Or even, “there’s no risk.” That’s exuberance. It’s the feeling you can’t lose, regardless of how much you know about an investment. It’s also infectious.

Once people see their friends and neighbors make money, they get FOMO and mimic the behavior. Inevitably, the majority of the market adopts the feeling it “can’t lose,” based on recency bias. It doesn’t matter if we’ve seen this before, it’s different this time. These situations are more commonly known as “bubbles.”

Post-Great Recession, the Fed developed a “smoking gun” indicator to identify real estate exuberance. Efthymios Pavlidis of Lancaster University, and the Dallas Fed teamed up to measure “explosive dynamics” in pricing. This is when home prices escalate faster than any fundamental improvement warrants. The longer explosive dynamics occur, the more likely buyers are exuberant.

The more confident you are in exuberance, the more confident you can be the market is ignoring risk. Investors say, “watch the downside, and the upside takes care of itself.” Exuberant speculators say, “there’s no downside.”

How To Read The Exuberance Indicator

Pavlidis and the Dallas Fed did all of the hard work, it just takes a quick explanation to understand what it means. There’s two values – a critical threshold value and an exuberance index reading. As buyers act less rational, the exuberance indicator rises further.

If the index is above the critical threshold, you’ve got exuberant buyers. If the index stays above the threshold for 5 quarters, you have an exuberant market. Once again, this is more often called a bubble.

Researchers can’t determine when a market will correct, or by how much. An exuberant market will need a correction in order to get back to normal though. Policy makers can delay a correction, however that creates moral hazard.

Moral hazard is when someone is encouraged to feel like they can’t lose. What happens when you get that feeling you can’t lose? You got it! Even more exuberance. It gets even worse.

Canadian Real Estate Has Been Exuberant For 19 Quarters

Canadian real estate hasn’t reached the exuberant level yet, so carry on. Just kidding, the index read 2.3 in Q3 2020, clearing the critical threshold by 67%. The reading is now at the highest level since 2017, when Toronto and Vancouver overheated. It’s also the 19th consecutive quarter the market has been exuberant. For those that don’t measure their kid’s ages by dividend payments, that’s a quarter shy of 5 years.

Canadian Real Estate Exuberance Index

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

Is Canadian real estate in a bubble? According to the Fed’s research, yes this is a market driven by exuberance. Only 5 consecutive quarters make a market exuberant, and Canada has 19 consecutive quarters. It may be up for debate if it was maybe one or two quarters over the threshold, but at this point – come on.  

The Fed data shows the exuberance doesn’t go back nearly as far as some think. Home prices largely moved with incomes and credit growth until 2015. That’s when Vancouver started to get heated, with Toronto joining until 2017.

The market is back to 2017 exuberant levels, but it’s very different this time. Instead of a handful of cities, almost every market is now experiencing huge price growth. Like I said, you can delay a market inefficiency with policy. That inefficiency still persists though, and is joined by even more moral hazard. On the upside, I’ve been told I can’t lose.

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  • Ahmed 3 years ago

    Under one government, eh?

    • SH 3 years ago

      Yep. The party that Millennials overwhelmingly voted for. When you vote for a hairdo rather than intellect and judgment, this is the result.

      • Average Man 3 years ago

        Don’t look at me, I voted Marxist-Leninist.

    • Bernie 3 years ago

      The fed. printing money has nothing to do with it,of course!!!

  • V 3 years ago

    But I keep hearing Al Sinclair keep saying prices will keep going up! Are you telling me that Remax and Al are full of $hit.
    He keeps telling people to jump on board the inflation train like I’m sure he was in 2016/2017 before that bubble deflated a bit.
    Should we be listening to this money hungry punk only concerned with his bank account at the end or should we be listening to people with the data and brains?

  • Oldguy 3 years ago

    I have watched for the last few years as the government played every card in its hand: zero interest rates, quantitative easing, lax lending standards, cash giveaways, immigration and laundered money. Unless I have missed something, these have all run their course, except for the last two.
    So my guess is that we will see a huge push towards new immigrants with lots of money and turning a blind(er) eye to laundering. The only other way out is for the bubble to burst, and the feds will not let that happen.
    So watch as the people and dirty money floodgates open.

    • SH 3 years ago

      “So watch as the people and dirty money floodgates open.”

      As the money-launderers stream into Canada, they can high-five young Canadians as they stampede in the opposite direction out the exit door. I wonder if Biden will accept financial terrorism as a viable case for asylum? Because that’s exactly what is being committed against the young in Canada.

    • AA 3 years ago

      Not sure how old are you but have you ever thought about who would have paid your CPP/OAS/GIS in retirement and who’s going to watch after you in a LTC facility, if we didn’t have an immigration program in place. Without immigrants, Canadian population would have been continuously shrinking and getting older and older. And so would the retirees’ quality of life, as the young need to work to support the old in retirement. Having more old than young in a society would screw the old big time.

      • Oldguy 3 years ago

        There are so many responses to your nonsense. Your answer is that you will grow the GDP per person by adding people. How about productivity?Developing new products and industries. Capitalizing on the inherent natural wealth of the country.
        With all respect, you have drunk the kool aid. I can only wish you luck in you old age, because you may find yourself disappointed.
        What if we all got off our asses and committed to building a great country for our children and grandchildren? It would be hard work, but I find it a lot more appealing than bringing in millions of people to do it for us.

      • Average Man 3 years ago

        My issue isn’t with immigration per se, and it’s certainly not with the immigrants themselves. It’s how we handle it.

        Why is immigration determined at the federal level, but all of the things immigrants need (housing, education, health care) are handled provincially or municipally? (Yes, I know the answer is the constitution, but that’s not a law of nature.) If you want to let in 400k people a year, honestly, have at it, but then we need a cohesive plan to house them and give them health care and make it so they, and the people who already live here, can get from point A to point B.

        Either we need to have a national housing policy and transit policy, or let the provinces control how many immigrants they take in.

        (There’s also the question of “Is immigration still good for the immigrants, or are they coming over after being sold a bill of goods?” but that’s a whole other thing.)

      • SH 3 years ago

        You do realize a very large proportion of immigrants we take in are under “family reunification” – i.e. 90-year old grannies who arrive at Pearson and get free healthcare from day 1 to which they never contributed.

        • AA 3 years ago

          Not sure what you mean by “a very large proportion of immigrants” but if you look up stats, the “Parents and Grandparents” intake represents about 5% to 7% of the total annual immigration inflow. Whether it’s good or bad, I’ll leave it to someone else to judge. All I’m saying – these %% do not fall into my definition of “a very large proportion of immigrants”.

          • SH 3 years ago

            7% out of 400,000 per annum, who will never contribute a dime and will get everything paid for courtesy of the taxpayer, is not a small number and puts quite a dent in the immigration lobby propaganda you were stating. Maybe you could explain why Canada requires 3x more immigration per capita than the US, as is currently the case?

            I don’t believe the Canadian middle class should be forced to see their neighbourhoods destroyed in order to insulate landlords from investment risk.

  • SH 3 years ago

    Question for Millennials – are you pleased with the federal government YOU elected (only age bracket that put the Libs on top in 2019) and which you still seem to adore despite it doing everything in its power to destroy your future?

    Maybe Gen-Z will be wiser and won’t base their votes on a hairdo.

    • Ian 3 years ago

      70% of millennials didn’t vote for the Liberal party.

      Even if 100% of them voted for the Liberals, it still wouldn’t have mattered, because Boomers and Gen X together control the voting power.

      I’m not sure why old people need to make up things that can easily be checked.

      • SH 3 years ago

        Your link actually proves my point. Millennials (and the first few years of Gen-Z) were the only age bracket that put the Liberals on top. Despite losing the popular vote overall, Millennial voters concentrated in the big cities gave the Hairdo enough seats to win.

        I’m simply wondering if Mills have any buyer’s remorse on the party they put into power which now seems determined to wreck them financially or force them out of the country.

        It’s strange that you would think the largest demographic in the country (there are now more Mills than Boomers) isn’t influential in electoral outcomes.

        Oh and I’m not (that) old. Born 1980, only a year removed from the start of the Mill cohort.

        • Jason B 3 years ago

          I am an older Millennial.

          The answer is no, my generation doesn’t have any buyer’s remorse.

          Because my generation is brainwashed.

    • JB 3 years ago

      Show me the alternative.

      • SH 3 years ago

        It was patently obvious in 2015, and well past confirmed in 2019, that Trudeau would spike immigration to suppress wages of young people (primarily) and create housing shortages. That’s exactly what happened, but Mills voted the Hairdo back in 2019.

        The other parties are terrible, but at least their leaders and policies aren’t explicitly anti-Canadian. So any of them would have made a better alternative.

    • Brittany 3 years ago

      I’m a millennial and my generation has lost it. Gamestop happening, should have shown the power of the invisible hand. Many of my friends (from business school mind you) saw this as a reason to implement MORE regulation and that free markets were to BLAME for what occurred. They have psychologically manipulated, after a year of trying to improve financial literacy with the people around me I am not sure it’s even possible to get through to these people. They are way too confident that they’re anti-capitalist outlook is the correct one.

      • Brittany 3 years ago

        repping the millennials well with several grammar and punctuation errors lol (and I consider myself one of the good ones… Yikes! :P)

  • Trader Jim 3 years ago

    GDP per capita. Grinding lower per person, since they’re loading the country up with debt.

    They’re using immigration as a cover for terrible performance. That’s why they can’t stop. People will realize the economy has been slipping backwards since before the pandemic. This is like $100 in stock dropping to $90, and buying $12 more in stock and boasting about 2% growth.

  • Mike from Canmore 3 years ago

    I’m done you guys, like I just have nothing left to give, I have no more rage, I have nothing. I don’t see how this can fall, the government will just prop it up.

    Having said that, I’m not willing to put it all in on a 3 bed 2 bath tear down in TO for 1.8 Million, eat KD every night, not take my kids on vacation, have no retirement savings while dreaming of the day
    in 2040 when I retire, sell my home for 70 million dollars (20 years at 20% CAGR, compounded annually) and then move to Sudbury or Timmins, Churchill MB, or however far people have been pushed by bidding wars.

    Sure the US is terrible due to no health care, rampant violence, and is possibly on the brink of civil war, BUT I could easily afford a home. So I’m going to rent for 3 more years in Toronto and if things don’t get better by then, I’m just going to ask my company to relocate me to the US, they’re willing to do it, so why not. More money, lower housing costs, they’ll pay health insurance. I’ll wait it out for the up to the next 20 years and then come back at 60 and retire here worst case, Sudbury, Timmins, or somewhere rural in the Atlantic or the prairies should still be waiting for me by then.

    • SH 3 years ago

      Why on earth would you wait? I ditched Canada 6 years ago and have no plans to return. It’s the bottom of the barrel in the Western world in terms of quality of life.

      Your work situation can easily change in 3 years and you might not have the option to move. What are you waiting for? If you don’t leave now you might never get the chance. Canada is not going to get better. Leave the place to the Boomers and their beloved money-launderers and realtors.

    • Jason B 3 years ago


      The only reason I’m still here is family and friends.

      The US is superior in all respects for a working, thinking professional, except for some health care issues. “Rampant violence” is only a feature of… well… some very specific regions.

  • JB 3 years ago

    To everyone blaming the Liberal party that “millennials elected”:
    I paid very careful attention in the last election. Watched debates, read platforms, listened to interviews (I even went to an interview at CBC with Scheer!). NONE of the three main parties were willing to address the main problems with real estate. All of their responses to issues about housing had to do with helping more buyers get into the market. 30 yr mortgages, lowering/removing stress test, increasing supply. They were all variations of “help more people buy,” with very few solutions to address the root rot of Canada’s real estate system. So it seems they’ve ALL bought in to the idea that housing is too big to fail. Not just the Liberals. One of these parties needs to be brave enough to leave the comfort of that consensus.
    In the meantime, those of us wanting to buy a house in which to raise our families instead of renting forever under constant threat of eviction-due-to-development—we might just have to jump off this cliff and then we’ll also be hoping this bubble never bursts.

    • Jason B 3 years ago

      “NONE of the three main parties were willing to address the main problems with real estate.”

      Yes but do you think the conservatives would’ve reacted to 10% unemployment and a global pandemic with “this is a great opportunity to triple the immigration target to 400,000 people for 2021?” No, they wouldn’t have.

      See, conservative are like the brakes on your car. They don’t get you where you want to go, but you can count on them to slow down how fast things get worse. And in a situation like this you need conservative chemotherapy: even if it’s bad for you, it’s worse for the thing that’s worse for you.

  • EB 3 years ago

    Housing prices are being driven up outside of Toronto and other major Urban centres because for the first time in forever, the pandemic has people seeing value in trading amenities for breathing room.

    I left a decade ago. All my guests from back home were roundly impressed with the ROOM, but all balked at leaving. Finally, after being stuck in shoeboxes for over a year, they are looking elsewhere. This is why prices are rising so broadly: the _massive_ pent up demand to buy that never had a chance to do so in TO and elsewhere is finally giving up on their urban hell.

    So yes, there will be a bubble popping — <400 sq ft condos and those counting on massive rental returns will loose. Single home houses in big city's may stagnate for a bit. But the demand for homes out with the plebs is not going anywhere.

    • AA 3 years ago

      “But the demand for homes out with the plebs is not going anywhere” – until all those moved out of the city will have to start commuting back for work.

  • Sam 3 years ago

    There’s a lot of Canadians who feel the same way. I’m beyond credulity.

    I think things are beyond correction, or recession, or bubble bursting or anything like has been experienced before. I’m actually very concerned for my future grand-children.

    Canadians felt very smug in 2008 watching the US precipitate a big recession via sub-prime mortgage lending. We said to ourselves “Our banking & lending standards are much more regulated, conservative & safe….aren’t we superior….” It’s kind of embarrassing. At least the American system allowed a big vomit to re-set their out-of-hand housing situation. Our Banks, BOC, Government just keep putting on bigger stretchy pants as they gorge on interest rates and sacrifice shelter to meet economic targets.

    Anyways, once I start writing about it, 10 years of frustration, incredulity, anger….all starts coming out followed by a sense of futility…’s an embarrassing time to be Canadian. Our PM should put a paper bag over his head….to accurately reflect our country on the world stage.

    • Oldguy 3 years ago

      This is a terrific note. I have been saying the same thing for the past 10 years to anybody who will listen.
      Nobody does.
      My wife and I are getting older and we would like to move back to Canada, but we cannot make sense of it at any level.
      The whole thing is a mess and we are very sad.

  • JB 3 years ago

    Here’s another take on the idea of “exuberance” and FOMO.

    As a prospective buyer, I can tell you, my partner and I are looking at this market and know it makes absolutely no sense. Buying right now feels like a trap. But, we’re also in the situation where we’ve been priced out of the city that we live in for YEARS, and now the possibility of moving elsewhere is real because of working from home. We don’t want to feed that fire of unsustainable growth elsewhere, but we also don’t want to get priced out the way we have where we currently live. So yes, it’s absolutely FOMO, but not for speculative reasons. It’s because we’re tired of renting. We’ve already experienced getting “reno-victed.” We want to feel some security about where we live, and put down roots somewhere. And we can afford to buy a house elsewhere, even if we cringe because that house would have been $200k less a year ago. It’s a throwing-our-hands up moment. How long must we wait for the market to return to rational? Will it ever?

    • KG 3 years ago

      “years.” Technically correct, because it’s been 4.5 years, 3 years if you don’t count the qualifying period. The problem with a lot of people is they exaggerate to the point it’s hard to actually tell if there’s a problem.


      No, you couldn’t have even got a degree in the length of time it’s been a bubble. COLLEGE! IT’S LASTING FOREVER. OMG 4 YEARS. There’s a problem, but when you exaggerate to that extreme, it turns policy makers into people that think you’re just complaining.

      Buy a house. You don’t need to tell everyone a sob story about it being forever, and renting for 4 years has been like living like a POW.

      • JB 3 years ago

        Sweet. Thanks for the advice.

      • Claude Taillefer 3 years ago

        You touch on something very important, Millenials have been stuck in their parents homes or renting with roomies for much too long and are now entering the market in masse fuelling this stage of the bubble. Who can blame them? They should have been in their first home ten years ago, some longer.

        The Government and the Banks will never let Homes fall below what they need to liquidated them for to get their money back. So there will be no massive correction.

        There are still a dozen markets in Canada where homes are not overvalued and if I was a young person looking to put down roots, I would be going to one of these cities. Some like Moncton, Saguenay and Halifax are quite nice but they are starting to catch fire, in six months these markets will be over valued as well. Ontarians are buying them sight unseen over the phone/internet.

        • JB 3 years ago

          So funny you say that. I have a friend who is moving to Moncton at the end of April. Bought a house, site unseen! It’s so tempting. Just would put us very far from our families…

    • JasonB 3 years ago

      I saved and invested for 10 straight years, delayed marriage, delayed kids, and I am about half a million dollars worse off for it. If there were a single person responsible for this, I would find that person and [redacted to keep myself off watch lists].

      If I were in your position (and it sounds like I am), I would not buy until at least the vaccine is rolled out and the economy reacts. People are absolutely out of their minds. But at that points, if there are no positive trends on the horizon, I’d say go ahead and buy if you can afford it–there’s a difference between buying something you can’t afford due to FOMO, and risking overpaying for something that you can afford.

      Government debts have reached vertiginous heights and even if inflation kicks in, they will let inflation run hot. Your money will get less valuable. Things will get worse. If you take on a housing debt you can afford, the government will inflate it away over the decades even if the market experiences a significant correction.

      Just make sure you can afford it. Personally, even if all my saving and investing, I still can’t afford something acceptable. So if it doesn’t change, I will eventually leave.

      • JB 3 years ago

        “I’d say go ahead and buy if you can afford it–there’s a difference between buying something you can’t afford due to FOMO, and risking overpaying for something that you can afford.”

        This is basically where we’re at. We figure we’re paying rent anyway and sitting on cash, so… *shrug* We’re trying to be very careful about where/what we consider buying, making sure that we’d be happy to stay put for a while even if there’s a giant collapse. It just kills me, though, when all the older folks are all “we’re in such a good position now because we made such smart decisions!” But really it’s just that they had good options. Right now, all the options feel risky or unpalatable. It’s fine, though. Everything is fine.

  • RonnieRaven 3 years ago

    The above is a very interesting string of comments, with a few themes.

    1/ Blame the political party currently in power.
    Not accurate, as every government since the 1970’s has produced policies that contributed to the housing bubble (and hyper inflation).

    2/ Blame immigration
    The problem is financial immigration, not the actual immigrants. We are a nation built on immigrants, the hard working kind, and we should thank those immigrants for their contributions. In recent years our government has given the robber barons of the world, an opportunity to buy their way into Canada. Naturally these hyper-wealthy crooks need a safe place to launder their money.

    3/ Blame the high cost of housing
    Actually housing has only appreciated modestly, our dollar is collapsing. The real culprit is inflation. Our various governments and the BOC have all endorsed policies, and printed money, contributing to massive inflation.
    The CPI is a fiction that is used to help keep government expenses artificially low (pensions, wages, welfare, cpp, oas, gis). I have an excellent pension with a COLA (cost of living allowance) clause and my increase for 2020 was .5%. Really?

    • JasonB 3 years ago

      “We are a nation built on immigrants” – This irrelevant bromide always crops up in these cultish defenses of the issue. Millions of extra people coming here affects the price. Just because you are psychologically conditioned to deny this doesn’t make it less true.

      What percentage of transactions are foreign buyers? Not a lot. It’s readily available info.

Comments are closed.