Canadian real estate prices are more tame, but a correction may still be in the cards. The Federal Reserve Bank of Dallas (Dallas Fed), a branch of the US Federal Reserve, released exuberance indicators for Q2 2018. Exuberance is lower than it was last year, but we’re still nowhere near a healthy market.
The Dallas Fed creates an exuberance score to help predict markets at risk of a correction. The indicator measures the emotional premium people are paying, compared to fundamentals. It doesn’t tell you when a correction will happen, but it does tell you a correction is likely to occur. We’ve already explained how this works a few times, which you can check out here. For the rest of you that just want to learn how to read the chart, just read on.
The Fed does all of the hard work, producing a value for exuberance and a critical threshold. A correction is likely to occur when the exuberance number is above the critical threshold for more than 5 quarters. The critical threshold changes over time, so historic peaks aren’t comparable. Although you can still see spikes right around the periods of previous bubbles.
Canadian Real Estate Buyers Have Still Been Very Exuberant
Despite the drop in sales, Canadians are still showing exuberance when buying. The market first showed signs of exuberance in Q1 2015, before the BoC poured gas on that fire with a rate cut. We reached peak exuberance in Q2 2017, and we’re now ~43% lower than last year. Yay for buyers showing a little more restraint. Nay on that correction that’s still due.
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.
Exuberance is tapering, but it’s still very high. Buyers are still paying premiums to where prices should be, but seem tame compared to last year. The country’s national housing agency basically said the same thing earlier this week.
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