Did Canadian Real Estate Prices Just Make An Exhaustion Move?

A few weeks ago, Bay Street’s top strategist invited me to breakfast, to talk kittens and rainbows. Kidding, we obviously talked about Canadian real estate. Most of the conversation was just a rehash of data we post here, but he did say something that stuck with me. Towards the end of breakfast he goes, “an exhaustion movement is obvious to guys like you and me, but kids have to learn the hard way.” Since then I’ve been thinking, do young people know what an exhaustion movement is? Here’s a quick rundown.

Assets and Exhaustion Movements

An exhaustion movement is when the price of an asset moves very quickly (and irrationally) in a direction, while buying tapers. Every financial asset will experience an exhaustion movement. It doesn’t matter what it is, but people are prone to deviating from 100% logical movements. The stages of exhaustion movement are pretty easy to understand, and can be broken down into 7 distinct observations.

Stage 1: Volume Increase

The first step is a sudden surge in sales volume, after steady decent returns have been made on the asset. The volume rush is typically run by market entrants, that have a slight case of FOMO.

Canadian Real Estate Sales

Canadian real estate sales rising in volume through 2016, as reported by the Canadian Real Estate Associaion. Seasonally adjusted for your pleasure.

Source: CREA, Better Dwelling.

Stage 2: Price Increase

The surge in volume from a rush of new buyers pushes prices higher. Usually there’s also the belief that this is a new normal level of buying activity. People ignore that the level of buying can’t be maintained for an extended time… unless people begin buying and selling the same asset over and over.

Canadian Real Estate Prices As Volumes Rise

Canadian real estate prices increasing as prices rise. Not just in Toronto and Vancouver, but across the whole country. Numbers are expressed in relative movements, as determined by the Canadian Real Estate Association.

Source: CREA, Better Dwelling.

Stage 3: Inventory Decrease

The quick rise in prices causes existing asset holders to hold onto their inventory. Why would you sell if you can make more by just holding onto it a little longer? This behavior was famously captured when Baron Nathan Mayer Rothschild said “fortunes are made by buying low and selling too soon.” What does he know, right? He only built one of the wealthiest families in history. He could have made more if he just held on. *eye roll*

Active Inventory Declines In Toronto and Vancouver

A dramatic decline in the number of active listings of homes available for purchase on the MLS occurs as volume rises.

Source: CREA, Better Dwelling.

Stage 4: Price Capitulation

The increased shortage of inventory causes severe FOMO. Buyers believe there will never be another opportunity. They consequently pump themselves up, and disregard risk to “secure” the asset. Bitcoins on your credit card, anyone?

Canadian Real Estate Prices Push Even Higher

Despite declining sales volumes and rising inventory, Canadian real estate prices continued to push higher.

Source: CREA, Better Dwelling.

Stage 5: Inventory Increase

The majority of people now believe they’re priced out of the market, or the risk doesn’t make sense. Inventory begins to rise, as a few of the Stage 3 people make out like lucky bandits. Prices trend higher, since buyers at this stage don’t believe prices will ever adjust. Just hodl, things will be fine.

Canadian Real Estate Inventory Pushes Higher

Real estate prices hit new highs, while prices continue moving higher. Also, 1 in 10 Toronto real estate owners plan on selling in 2019.

Source: CREA, Better Dwelling.

Stage 6: The Bad News

Declining buying activity and increasing selling activity means inventory levels are swelling. Bad news or regulation is announced, hitting the last few potential buyers over the head. Buying activity drops dramatically.

Canadian Real Estate Sales Decline

Canadian real estate sales are declining while listings are rising.

Source: CREA, Better Dwelling.

Stage 7: Supply Flood

Remember in stage 3, when everyone decided to hold onto their asset to attain maximum value? This is when those people decide it’s a great time to cash in. Everyone blames the regulations or bad news for their loss. That damn OSFI/shortseller/SEC/government! If only they hadn’t gone ahead, and regulated it, prices would have doubled every year.

The Delusional Canadian Real Estate Forecast

An agent once told me prices increasing another 30% was “unreasonable,” people should expect appreciation to half that for the next 20 years. Let’s run the numbers, does something look wrong to you?

Source: CREA, Better Dwelling.

Did Canadian real estate make an exhaustion move? I’ll let you decide, but since the Great Recession, real estate has acted more like a financial asset than a place to live. This means the local fundamental narratives apply much less, and market psychology means a lot more. By the way, how many real estate investors know how fundamental land values are determined? Oh, they’re hoping the person that bought right before them didn’t pay too much, skewing their comp? Got it.

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  • AgentX 6 years ago

    I think this highlights a bigger issue, that agents will make any claim to keep it going. “Half that” is such a reckless statement, and most don’t even realize what they’re saying. Look at some of the pre-sale sales sheets distributed overseas, predicting returns in the 100s of percents.

    • EP 6 years ago

      What is ‘overseas’. Hong Kong? China?

      • AgentX 6 years ago

        Yes, as well as Singapore, the UK, etc. Any financial hub.

  • Trader Jim 6 years ago

    One missing note, it’s called “exhaustion” because first you run out of inventory, then you run out of people that will buy.

    Good layout of the points though, it’s interesting to see it all laid out at the same time. Didn’t know CREA economists observed prices rising across the country like that, a key sign of national misallocation of financial resources, a.k.a. people have run out of constructive places to put money.

  • AJ 6 years ago

    We run out of credit for Assets which require credit to buy. Real estate is such an asset. The next level would be automobiles and the next level would be appliances (like dishwashers, laundry machines etc) and finally consumables (which would almost never require credit to buy)

    So even if we have all the people in the world willing to buy an asset the ratio of Debt to Cash typically needed to finance it determines the cyclical nature in the product’s life cycle.
    More interesting would be to correlate these 7 stages with the chart which Stephen has presented many times which shows the various stages of manic depressive market psychology when it comes to asset price cycles.

  • Lahdeedah 6 years ago


  • Rick abrams 6 years ago

    Aw such silliness. As we learned in the US in 2008, real estate prices always rise. There is no such thing as excessive construction or too much construction in a particular stratum of the market. Also, buyers have an inexhaustible supply of money.

  • Oliver 6 years ago

    I just wonder if the government will do something to start the market , like they did in the past? I don’t know what they can do but the political pressure will start to mount soon, if boomers can’t get their money.

    • CS 6 years ago


      Me thinks boomers HODLED a little too long.

      But hey, they can always get a reverse mortgage now and if they HODL a little while longer they will be looking at 20 million eeeeeasy.

      Relax, everything is going to be ok. Doug Ford will repeal the Fair Housing and foreign buyers will come back….and 30% growth per year will be the norm. Holy Cow, they might even be looking at 40 million then !!!

  • Not a Regular 6 years ago

    A perfect example of stage 3/4 out west has been the recent water-cooler advice to “buy anywhere you can just to get into the market, even if it is not your preferred area to live, become a landlord there, and rent where you want to live. “

    Regardless, get in now! Before they run out of land… in Abbotsford.

    A fair amount of the population seems to be in stage 5 now (maybe inventories indicate early 6). FOMO is largely gone, not because of hope, but because people have resigned to having missed out. Friends are changing life plans and moving away, or spending on vacations and other things that aren’t down payments on starter condos. We’ll see what the future holds.

  • SUMSKILLZ 6 years ago

    There is no shortage of detached homes for rent in the 905.

    A friend expecting child number five, in a home way too small, is planning to rent out his home and buy a bigger one, refusing to take the paper loss he sees. He can do that as the home is almost paid off. I hear similar stories from my network all over the GTA- Oshawa, Newmarket, Milton, Richmond Hill. ‘I refuse to take the paper loss”…I should get some t-shirts or bumper stickers printed.

    • Lessdanadalla 6 years ago

      The difference between suburban equity geniuses and market bulls is that the second group knows when to cut losses and walk away … stickers and t-shirts aren’t bad idea.

      • Beh G. 6 years ago

        It’s probably not even a loss, if he’s paid off the home… the suburban and urban equity geniuses alike , actually consider selling in a downturn a loss even if they’re actually selling the house for more than what they paid for it! The sure way to make an absolute mess of a lucky investment. Interestingly, they’re now all holding out for Ford to scrap the foreign buyer’s tax! 😉

  • Beh G. 6 years ago

    Thanks for the article Stephen… interestingly enough, I just read a John Pasalis article from a few days ago where had done an analysis and concluded that 28% of Toronto homes for sale are vacant, in other words stage 7: Supply Flood!!!

    Not related to this topic, I got some time to check sold prices on John’s web site and I finally understand the privacy concerns TREB had. Looking at some of the prices people paid and what the house next door sold for (and some are mind-boggling), you know exactly where the suckers live! 😉

    I do expect the release of this data be the last nail in the coffin of the GTA real estate as people do more research and become more informed… Zoocasa has tripled their traffic and HouseSigma has had a mind-boggling 800% increase in traffic since the ruling!!!

    I do wonder how many people who paid more money than they should have will now come out of the woodwork to sue their agents for not having disclosed the prices of nearby properties, especially if shit hits the fan on a largerr scale.

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