US Federal Reserve: Exuberance For Canadian Real Estate Plummets, But Still Elevated

Canadian real estate exuberance is quickly cooling, but still above critical levels. The US Federal Reserve’s Reserve Bank of Dallas has published their quarterly update on global real estate exuberance. Canada’s numbers show buyer exuberance is down to a multi-year low, but is still very much exuberant.

The Exuberance Index

The exuberance index is the US Federal Reserve’s “smoking gun” indicator for bubbles. The indicator captures “explosive dynamics,” which is a smart-y pants way of saying, “a fast rise in price.” Sudden moves in prices are typically the result of emotion, and are a detachment from fundamentals.

Since the premium being paid is driven by the buyer’s emotions, they tend to not stick around for very long. Emotions change with big events – such as policy, recession, or a rise in unemployment. As a result, markets tend to “correct” or “crash” once people stop feeling so rosy about the market.

Efthymios Pavlidis and the Dallas Fed developed a fairly straightforward system for analyzing the index. They publish two sets of numbers – an exuberance indicator, and a threshold value. When the exuberance indicator is greater than 95% of the threshold value, the market is in exuberant territory. If the value stays above for more than five quarters, we have an exuberant market. Most of the hard work is already done for you.

Canadian Real Estate Exuberance Indicator Drops Over 32%

Exuberance for Canadian real estate is dropping very quickly. The indicator dropped 22.58% in 2018 Q3, compared to the previous quarter. This represents a 32.72% decline from the same quarter last year. The indicator hasn’t been this low since 2015 Q1, before the last interest rate cut.

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 For Canadian Real Estate Is STILL Elevated

Those of you that paid attention in the explanation probably noticed the market is still exuberant. The indicator is 15.73% above the 95% critical threshold. The most recent quarter is the 15th its been above the threshold, so Canadians have extended the market quite a bit. Yeah, we know – not what you read in your local real estate board’s annual report.

The market has cooled significantly, but buyers are still displaying exuberant behavior. If things don’t feel like they’re bubbly right now, there’s a term for that – the “return to normal.” Professor Jean-Paul Rodrigue’s now notorious chart marks this feeling as a typical phase in an asset bubble.

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  • Mica 5 years ago

    Basic math: Prices WILL correct when interest rates more than triple in a year. Yes, they are low. But people loaded up on debt when they were low.

    The Bank of Canada is most likely pausing rate hikes so people can accrue more equity in their home. The accrual doesn’t mean home prices will not drop. It means that people will be able to afford to lose the equity, without losing their homes.

  • Oleg R 5 years ago

    Of course. Prices have barely corrected, except in Vancouver. Until prices correct, the exuberance remains.

    • SUMSKILLZ 5 years ago

      3.4 million folks in the 905 would beg to differ. Nobody’s wondering, “when will the correction come?”

      • Joe 5 years ago

        I agree, the 905 is hurting really bad. But I do say it’s kind of expected when they didn’t have the support for such huge increases in prices during those *golden years*.

        The 416 on the other hand had stronger support for the increase in prices and are therefore more price resilient and this is showing very clearly in the current market. Of course there are pockets that rose way too much during those years and are feeling the hurt like the 905. (e.g. Willowdale area where bungalow lots were selling over 2m+ and now they are going below 2m)

        If you look at the market in the 416 this month (Jan), it does feel like prices are still holding relatively well despite fewer sales. In fact, I would even argue that houses (detached/semi/townhouses) are showing gains in some pockets especially for those around/below the 1.3m range.

        • MH 5 years ago

          GTA Jan MOI trend deserves a glance…

        • JJ 5 years ago

          I think the spring season will be telling of whats to come. Sales are certainly slowing and it will be interesting to see how that plays out when inventory starts to really pick up. Will the first-time buyers come out to support the market? Are they able to? Mortgage rates are lower than they were in October, but stock market volatility has probably also eaten into buyer’s budgets.

          My guess is buyer confidence won’t have improved and sales will continue to slow. As the top of the market (detached) continues to tumble, the downward pressure will push down on semis, townhouses, and condos. TO appears to lag 12-14 months behind Vancouver and their condo market started to rollover at the beginning of 2018, so who knows what 2019 has in store for TO.

      • rx81 5 years ago

        As a potential buyer in the 905 in the next 3-6 months, I am wondering when the correction will come. The prices I see on are still outrageous for the Oakville / Mississauga area where anything below $1.3 million requires major renovations.

        Given that many of the listings are sitting there for several months, it could be that sellers are simply in denial and believe market will recover as summer months approach and when they don’t get what they’re looking for and the listing has expired multiple times, they may take an offer 15-20% below their expectation.

  • Canuck550 5 years ago

    Rates WILL increase; however, mortgage amortization will be extended to 35, 40, 45 years and beyond, problem solved, institutions continue to make money, no one will own anything in the future except the wealthy few

  • Nemo 5 years ago

    Why on earth would anyone still want to be in the 416 or VAN? Blech, get waterfront near Kingston or Ottawa and a second place in Bangkok or Mendoza and never have a crap winter again. Everywhere has good internet now.

    • Some Guy 5 years ago

      “Why on earth would anyone still want to be in the 416 or VAN”

      Sadly, there is still the odd person here and there that needs to work for a living…

  • Rana 5 years ago

    Time to lose pants

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