The US Fed Still Sees “Exuberance” In Canadian Real Estate Buyers

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.

Exuberance Indicators

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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  • Ewan 4 years ago

    No s!%t. Prices in Vancouver need to come down at least 50% for people that live in the city to be able to afford them. Not once China cracked down on outflows, buying volume fell off of a cliff.

    • Jodee 4 years ago

      Keep dreaming. There’s a 0% chance prices in Vancouver can fall that much, even if the chicken farmer goes on the news every day to say so.

      • DA 4 years ago

        Keep dreaming too. We are now in the denial phase of the cycle. Capitulation is the next phase of the cycle.

      • Lessdanadalla 4 years ago

        Dream on dreamer. West Van dipped already 20% and the shakeup haven’t truly started yet. When dust settles, some parts of Vancity will see decline larger than 50% … buckle up!

      • Mtl Matt 4 years ago

        Even after a 50% drop it would still be overvalued from a price to income ratio. But I forgot the new normal where people don’t have to pay back their mortgage, I guess.

  • Mike Costigan 4 years ago

    Ah yes, so we’ve mapped out buyers hitting the “return to normal” phase of the bubble. This is always my favorite phase.

    • someguy 4 years ago

      It’s a fun phase. “Of course 30% YOY couldn’t continue, so now we’ll just settle in to a solid 8% from here.”

  • Patrick Q 4 years ago

    No shock, no significant price correction. Unless there’s a problem with our fundamental economy, we don’t have to worry about prices. The economy is roaring, and employment has never been lower. We’ll get tax cuts in Ontario, similar to Trump’s tax cuts, and the economy will do another leg up.

    Enjoy that you live in such a prosperous country.

    • SUMSKILLZ 4 years ago

      Mirage: something that appears real or possible but is not in fact so.

    • AK 4 years ago

      Gm announced 18,000 buy outs/ layoffs across NA yesterday and Ford is expected to follow. A sign of a roaring economy. Buy now or be locked out forever ~sarcasm.

    • Dar Robbins 4 years ago

      The economy appears to be roaring based only on the metrics you happen to be looking at. Most likely GDP and Unemployment. GDP measures transactions not prosperity. If you borrow a dollar to purchase a dollar’s worth of widgets are you any richer? Unemployment in its simplest form measures the number of people receiving unemployment cheques. Assuming there’s only one person working in Canada, the unemployment number would be zero. Should that person lose his/her job, the UI number would be 100%. Once the UI benefit expires and that person has not found a job the unemployment number reverts back to zero. On must look at other measures of employment statistics. Why is the labor force participation rate at 65% so low? It hasn’t been this low since women entered the workforce in the early seventies. Both GDP and Unemployment statistics misrepresents the true state of the economy.

    • someguy 4 years ago

      Are you just poking fun at the exuberant, PQ? If so, well played. If not, wow.

    • Beh G. 4 years ago

      Neither those two metrics you mentioned (economy roaring and [un]employment being low) has anything to do with affordability or house prices in the Czech Republic would be three times there are in Toronto!

  • Dar Robbins 4 years ago

    Canadians have very little cash and credit extension has reached its maximum. Even if you lend them money for free (0%), they don’t have the earnings capacity to repay the principal if they spend it. They must continually borrow to service their obligations. This will eventually trigger a Minsky Moment when debt service is no longer possible. Loans will be called-in and asset transfers will be necessary.

  • vnm 4 years ago

    Sound familiar?
    1929, the economy was booming, unemployment was less than 4%, stocks were soaring,
    a technological revolution (electrification and motorization) had transformed society.

    ” The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007.

    “The famous stock market bubble of 1925–1929 has been closely analyzed. Less well known, and far less well documented, is the nationwide real estate bubble that began around 1921 and deflated around 1926. In the midst of our current subprime mortgage collapse, economists and historians interested in the role of real estate markets in past financial crises are reexamining the relationship of the first asset-price bubble of the 1920s with the later stock market bubble and the Great Depression that followed.”

    The difference now is we’re in an everything all at once bubble. The housing bubble should have come and gone, but the BofC extended it until now by crashing interest rates.

    Oh, and let’s not forget climate change: When drought began in the early 1930s, it worsened these poor economic conditions. The depression and drought hit farmers on the Great Plains the hardest. … However, even with government help, many farmers could not maintain their operations and were forced to leave their land.

    “Imagine something similar to the Great Depression of 1929 hitting the world, but this time it never ends. ”

    At least back then they had the Roosevelt and the New Deal. We’ve got Trump and Ford.

    • Dar Robbins 4 years ago

      Roosevelt was the most financially treasonous president in the whitehouse aside from Nixon.
      He could not dilute the money supply as political crooks do today as the dollar was anchored to gold. Therefore he stole saving from people through confiscation at $25 oz then revalued the dollar downwards at $34 oz to finance his new deal which didn’t work. By 1938 unemployment was back up to 24%. He needed a war to get people back to work. War with Germany was not feasible as GM and Ford were supplying the Nazis with vehicles. He thus sanctioned Japan economically for a year until he suckered them to attack Pearl. His administration knew they were going to attack. All modern naval ships were deliberately moved out of port leaving only relic ww1 ships to be attacked.

  • ken 4 years ago

    “FED still sees exuberance in Canadian housing market.”

    Translation- Rates will go higher.

    That’s the message, and sentiment metrics are what govt’s and central banks quote when they have no real stats to make their case, and want to push forward with a very unpopular agenda which will clearly cause a crisis.

    • Dar Robbins 4 years ago

      Short term rates are rising to prevent the dollar from triggering too much inflation. Long term rates are rising because the world is de-dollarizing thus fewer need to buy Treasury bonds.

  • Michael 4 years ago

    To all my friends in Toronto. I cannot comprehend the prices you pay for real estate. The price of real estate is based on it’s income and you have cap rates that make it very clear that renting is far cheaper. The everything bubble will pop and I would predict 50-60% declines in single family, 40% declines in all other sectors. Get out while you still can, whomever is still holding the bag will get destroyed.

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