Canada

US Federal Reserve: Canadian Real Estate Buyers Returned To Exuberance Before Pandemic

Canadian real estate buyers were excitedly disregarding risk before the pandemic hit. The US Federal Reserve Bank of Dallas (Dallas Reserve) exuberance index shows expectations surged in Q1 2020. The index is designed to capture explosive price growth, detached from fundamentals. A single quarter isn’t enough to say the market is bound for further detachment, but it does show buyers enthusiastically ignored fundamentals before the pandemic.

The US Federal Reserve’s Exuberance Index

The exuberance indicator is the US Federal Reserve’s “smoking gun” indicator for bubbles. The index responds to explosive dynamics in real estate price movements. Sudden increases indicate buyers are becoming more emotional about their purchase. More emotion involved in prices, means fewer fundamentals are being considered.

Emotional premiums tend to be vulnerable to, well, changes in emotion. A sudden spike in unemployment, a recession, or a new policy can quickly derail opinion. When emotions are quickly removed, you’re left with the potential for prices to deflate, or even the c-word – cr*sh.

So how do you read this magic emotion meter? Efthymios Pavlidis and the Dallas Fed did all of the heavy lifting and calculations already. They publish two sets of numbers – an exuberance indicator, and a threshold value. When exuberance is greater than the threshold value, the buyers are demonstrating exuberance. If the value stays above for more than five quarters, the market has become exuberant. When the market has become exuberant, the odds of a correction jump.

Canadian Real Estate Buyers Jump Back Into Exuberance

Canadian real estate buyers were heading all-in before the pandemic struck. The index read 1.51 in Q1 2020, up 25% from a quarter before. Exuberance cleared the critical threshold for the first time since Q3 2018. The indicator was also at the highest level since Q2 2018. Buyers were definitely under the impression they were in the clear.

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.

Despite the jump in the territory, the market has only seen a small burst of exuberance. It would need another 4 quarters for the market to officially be in this territory. With just a spike for a single quarter, the downtrend is still intact for now. Generally emotions don’t just drop down in a straight line.

Canadian real estate markets saw elevated activity in the first quarter, pre-pandemic. This doesn’t mean it will persist into the second quarter, but it doesn’t mean it will totally stop either. Most markets have been completely frozen, with prices moving fairly laterally, as the buyers left disregard any long-term impact. While they’re disregarding long-term market consequences though, risk firms are warning to expect a dramatic shift in the second half.

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7 Comments

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  • Mortgage Guy 2 months ago

    Can confirm. People do not care about the pandemic. Mortgage brokers are anecdotally saying they don’t understand the number of people trying to hide the fact they’re on CERB, thinking their job will come back in just a few weeks. At least wait until you’re back at work.

    • Trader Jim 2 months ago

      Moral hazard combined with economic insecurity. People most likely think just owning a home is a more secure than work.

      Which is a culture issue that’s going to plague economic growth for a very long time in Canada.

      • Jason Chau 2 months ago

        The government has said as much.

        They expect it to be used as an ATM to stimulate buying, and they inflate prices prices because handing people cheques is too obvious of a plan.

  • David Leham 2 months ago

    Detached in Vancouver is fire right now. Condos, not so much.

    Not sure how first-time buyers can skip the most “affordable” house, and skip to the most expensive segment.

    • SH 2 months ago

      Is this comment facetious?

      Obviously these aren’t “first-time buyers” purchasing these homes, aside from the very small percentage with very wealthy and very generous parents.

      I think it’s now clear that British Columbia isn’t really intended for young Canadians. It’s now Boomers who won the birth lottery and foreign money-launderers. Young Canadians are not welcome. I personally don’t care – never lived in BC and never will. But I find it astonishing what born and bred BCers have allowed to happen to their beautiful province.

      • GTA Landlord 2 months ago

        The stats showing there’s almost no first-time homebuyers in BC were literally published on this site just a few days ago. I can see the article in the suggested reads while I’m typing this FFS.

    • alvi 2 months ago

      In Ontario detached homes sales in July so far appear to have weaken compared to June.Supply seems to be up too

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