US Federal Reserve Indicators Show Canadian Real Estate Buyers Still “Exuberant”

US Federal Reserve Indicators Show Canadian Real Estate Buyers Still “Exuberant”

Canadians are still overly enthusiastic about real estate prices. US Federal Reserve Bank of Dallas (a.k.a. the Dallas Fed) indicators show buyers actually became more irrational in the prices paid in the fourth quarter of 2017. Analysts from the reserve bank warn prices are still overheated across the country.

Exuberance, and Measuring It

Exuberance means “with excitement” in normal English, but is bankster for driven by emotion. When asset prices are driven by emotion, fundamentals are often disregarded. The enthusiasm is further driven by a “can’t lose” feeling, driving widespread speculation. Asset classes driven by enthusiastic speculators disregarding fundamentals, are better known as “bubbles.”

Since the Great Recession, the US has worked on a “smoking gun” indicator to identify bubbles. Efthymios Pavlidis of Lancaster University, and the Dallas Fed teamed up to measure “explosive dynamics” in pricing. They then figured out the longer the these dynamics persist, the more likely you can be sure it’s a bubble. Since then, the Dallas Fed has been monitoring global markets to identify bubbles.

Note: We’ve previously explained this in slightly more detail.

How To Read The Exuberance Indicator

Pavlidis and the Dallas Fed do the hard work, you just need to understand how to read the indicator. Despite the complicated documentation geared towards academics, it’s pretty easy to understand. There’s two sets of numbers, a threshold value and an exuberance indicator. When the exuberant indicator passes the threshold value (set at 95%), you’re in exuberant territory. If the market stays in this territory for over 5 quarters, you have an exuberant market. Here’s where we are.

Better Dwelling. Source: Efthymios Pavlidis et al., The Federal Reserve Bank of Dallas.

Canadian real estate exuberance is dropping, but it’s still very high. The fourth quarter of 2017 is up 1.57% from the third quarter, but is down 33.81% from the peak obtained in Q2 2017. We passed the threshold in the second quarter of 2015, and have remained in this territory for 11 quarters. Remember, anything above the threshold is high. Just because it’s declining, doesn’t mean buyers are now rational.

US Federal Reserve Indicators Show Canadian Real Estate Buyers Still “Exuberant” - Map
Better Dwelling. Source: The Federal Reserve Bank of Dallas.

Periods of exuberance are followed by periods of deleveraging, and price corrections. Assets are never priced perfectly, so expect a period of price exploration to occur. Often this leads to a drop below fundamentals, but sometimes not. Buyers aren’t great at deciphering how much emotion was used by previous waves.

Sure, demand is higher than supply, populations are increasing, and land is expensive. It doesn’t mean people aren’t overpaying for the luxury of owning a house today. That also doesn’t mean that people won’t stop overpaying soon.

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  • MB 6 years ago

    Can confirm, that while buying didn’t spike before B-20, the number of people asking for the most they can borrow did. Some people don’t seem to understand higher rates bring prices down, not prevent you from buying more expensive homes. Oh well.

    • Andrew 6 years ago

      Well, it both brings prices down and prevents you from buying more expensive homes. The difference is, if you buy in at the higher price, the price drop doesn’t mitigate the higher rates it only sinks you deeper underwater.

  • Investor 6 years ago

    I don’t really understand why people get so irrational, even after being tamed, lectured so many times. Unfortunately, by the time their remorse sets in and they regain their senses, everyone would’ve been dragged into the mud. I just don’t understand how any right thinking person could set out to buy a home, without considering the “what ifs”. Nothing in life is certain, but some are of the opinion that real estate will always trend up.

    • Joe 6 years ago

      Sir Isaac Newton, the father of Physics, and one of the smartest people in the history of the world, lost his life’s fortune in the South Sea Bubble. Newton later said “I can calculate the movement of stars, but not the madness of men.”

      Every generation has to go thru this.

      “It’s just money; it’s made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than its ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987 – Jesus, didn’t that fucker fuck me up good – 92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over; we can’t help ourselves. ” ~ Jeremy Irons, Margin Call

  • Bluetheimpala 6 years ago

    Nice to are data come out to support what we all saw going on. Expect the same for H1 2018 with a negative delay but still positive. Then watch it plunge along with prices this all happening a lot quicker. Will a major alt lending scandal bubble to the top soon along with more examples of fraud? More developers cancelling developments? More agents pumping the current narratives? Very interesting. Tick tock

    • Trader Jim 6 years ago

      Developers stopping projects is a bad sign. Agents love spreading the rumor that these projects are going to be rebooted at higher prices, but really it has to do with financing. If the developer is being charged a rate that they stand to lose money on if there’s any delays, they won’t build. They’re better off selling the land.

      Speaking of which, anyone else notice all of the foreclosed developer lots for sale?

  • Alistair McLaughlin 6 years ago

    The more worrying thing is that we never had a correction for the extreme exuberance of the 2002-2008 period. We had just a mild contraction before we started working our way into a new extreme phase of the bubble. Essentially, we’ve got two bubbles stacked one atop the other, and they might both deflate at once. Ouch.

    • xelan 6 years ago

      Exactly. Credit should’ve been deflated in 2008 like it happened in US but instead we saved RE market but inflated credit bubble even bigger.
      It will be deflated sooner or later. People just can’t live in debt forever and since most of this debt is tied to Real Estate it has to collapse as well.

    • Grizzly Gus 6 years ago

      Issue raised by WSJ but now covered by globe

      Canada is not alone in this. Basically, all western advanced economies that weren’t as of levered in 2008 will be the source of next crisis. We got same low rates by we levered up while those impacted levered down

      • xelan 6 years ago

        Thanks for the link, it is a global trend indeed.

        Among all those indebted countries Canada is proudly holding 1st place in household Indebtedness vs GDP:

        So no way we will be able to dodge the bullet next time like it happened in 2008.

        • Grizzly Gus 6 years ago

          I think we are in for some serious pain.

          At least we don’t have interest only loans to deal with (at least I dont think its a problem here…… hopefully not with the big banks if it is)

          Something rotten from the land down under

          • Xelan 6 years ago


            What I like about that Global house prices collapse thing is that nobody will save Canada when our RE collapses.
            I mean if it would be only issue with Canada, after prices drop 20% foreign buyers would definitely jump in to buy Canadian RE at discounted price but if it happens around the world it won’t be the case anymore or at least only to some extent.

          • Grizzly Gus 6 years ago

            I would think that a global debt squeeze and or crash would actually result in current foreign investors dumping overseas property to square debts at home……….. especially if they own local businesses and their true source of wealth comes from their home country. I really think China is the big X factor there. Not only the largest source of foreign investment over the last while, but resource rich countries like us and Australia got a huge boost after the recession due to China’s crazy infrastructure development. Believe it’s something like they poured more concrete in three years then the US did in the 20th century……………… maybe India can pick up some of the slack?

          • Xelan 6 years ago

            I don’t know what’s going on in China, all I know that you can’t trust their data at all, even government data. Also I know that they accumulated huge amount of debt since 2008.

            Overall I think we are slowly approaching the end of our monetary system because it became unsustainable. Deficits are huge and they only generate 1-2% GDP growth? Global debt is 225% of global GDP and I don’t see how it’s possible to pay it back without causing massive depression.

            I’m closely watching Japan because it has the worst government debt situation in the world with 25% of all taxes going towards interest payments.
            They tried QA, they tried negative interest rates and nothing really helped to ignite growth and raise inflation.
            Here is nice video about their debt problem:

            I understand that they have no immigration and aging population but I still see it as ultimate scenario which is going to happen to all advanced economies under the current monetary system. And for more than 25 years Japan was unable to find its way out.

          • Beh G. 6 years ago

            Sure we do Gus… they’re called HELOCS! 😉

            They weren’t set up that way or for that purpose but unfortunately a large part of the population is using them that way. There are also a lot of interest only private mortgages out there.

          • Grizzly Gus 6 years ago

            HELOCs are a massive problem here. And yes they are interest only until you reach a threshold of I believe of 65%. From parents borrowing to help kids get into market. Do it yourself lenders borrowing at 4% then lending out at 12%+. To spend happy average joe who believes he is being responsible by paying off his credit card with the HELOC to only go out and max the credit card once again. ARMs and teaser rate mortgages are a different animal however. Not to say Canadians are screwed but Aussies also have HELOCs on top of this as well

          • Grizzly Gus 6 years ago

            *are NOT screwed. HELOCs and even the type of mortgage here will sink a lot of people

  • Sam 6 years ago

    If only we could see numbers specific to GTA and GVA… :S

    • Micca 6 years ago

      Toronto and Vancouver are half of all dollar volume in the country. That should give us an idea. 😂

      People also don’t realize that rates are taken into account when calculating fundementals. As rates climb, the overvaluation of homes will rise.

  • xelan 6 years ago

    It’s not only US Fed realize the problem.
    Our local banks are starting to understand the risks too. TD just increased its mortgage rates significantly:
    RBC will follow by the end of April

    So even if BoC is trying to protect indebted homeowners by keeping the rate smart banks don’t want to take those risks by renewing at rock bottom rates and adjust rates accordingly.

    • Kash 6 years ago

      RBC just hiked their rates as well…

      • Sonny 6 years ago


        RBC says its rates are changing as follows on April 30:

        * 1yr-4yr Fixed: up 15 bps
        * 5yr-10yr Fixed: up 20 bps
        * Variable closed mortgage: down by 15 bps.

        Still awaiting confirmation on specifically which posted and special offer rates are changing.

  • Jason Voorhees 6 years ago

    smart people know fundamentals only take you so far with real estate – you must learn how to monetize exuberance. some people get lucky and time the market by accident – experts know when to buy and when to short RE. my expert opinion – It is still not time to short RE.

    • xelan 6 years ago

      Any stats or data supporting your point of view? Or you just hope to drop here your “expert” opinion and think that everyone will take it seriously?

      How about 6 months of inventory in Vancouver, or 17(!) months in West Vancouver?
      Sounds like it may be the right time.

      • Tommy 6 years ago

        True but West Vancouver is just one area and it is a very expensive luxury market of multi-million dollar homes. A 6 month absorption rate there puts it in Buyer’s market territory but I would assume that the historic average for such a neighborhood would be much higher than 6 months. We need to see that kind of absorption rate in the housing that most people are competing for and live in. Based on overall Vancouver stats at there is only 2.7 months of inventory which is similar to the GTA.

    • Alistair McLaughlin 6 years ago

      And how do you “short” RE in Canada unless you’re shorting the lenders?

      The folks over at wish they were short RE as of last year, instead of 2X long.

      • John 6 years ago

        Great comment AM!

      • Bob 6 years ago

        I posted this earlier, but since there is interest:

        “The Fund

        Investment Thesis
        Canada has one of the most overvalued housing markets in the world and the Canadian economy is over-reliant on debt growth and the housing market. Both supply and demand will begin working against the housing market in 2015

        Investment Objective
        To provide Canadians with an avenue to mitigate their exposure to housing and its potentially negative impact on their livelihoods and savings

        Investment Strategy To find investments that will benefit from a decline in Canadian house prices. We aim to find investments that earn an asymmetric payoff, suffering small losses when we are mistaken and large gains when we are correct
        See Offering Memorandum for full details.”

        I am not an investment adviser and this is not investment advice. See a professional and read the full memorandum. I am just putting this out there as information, since the Spartan fund is not a widely known vehicle.

        The latest monthly report shows they got killed in 2016 and 2017 (down over 50% each year!). But they are up almost 40% already YTD in 2018.

        Food for thought – I do not know exactly what they buy and sell to achieve their objectives.

        • Alistair McLaughlin 6 years ago

          Personally, I just buy put options on Canadian lenders. But that’s an indirect short on RE . I believe the Spartan hedge fund also shorts Canadian lenders. There is no direct short on Canadian RE so far as I know. Not like in the US a decade ago, where a lot of builders were publicly traded (they’re all private up here), and a lot of those same builders were into the lending game as well, financing their buyers kind of like car companies do. Some were bank-owned.

          Shorting those effers must have been a bonanza.

          • xelan 6 years ago

            Also huge money were made in US on credit default swaps (CDS) which basically entitled the person who owns it to receive default insurance payment in case house owners defaults on mortgage.
            I don’t think we have those CDS in Canada or the market is very tiny so there is no liquidity in it.

      • xelan 6 years ago

        Alistair, I’m pretty sure he meant to short lenders and everything else related to RE industry.
        For all those who don’t know what “short” means:

  • DataDude 6 years ago

    New lenders are scooping mortgages from Big lenders. A new player called ‘StreetCapital’ is paying all the penalties to big lenders and giving better rates to buy the mortgages. My friends in the suburbs are all moving to these small new players.


    • xelan 6 years ago

      Those are great news for all Canadian taxpayers because we won’t have to cover collapses of those small/private lenders. Bad news for all people who hold deposits at those lenders, especially if those exceed insurable amounts.

      If you asking why they are doing it? The answer is: either greed or inability to properly calculate risks and they will pay for it as soon as the RE prices will start to go down.

      There is nothing wrong to borrow from them but I would never hold any deposits with those aggressive lenders.

    • Michael 6 years ago

      my guess is that your friends are doing 5year prime – 0.85% and didn’t read the fine print ?
      Street Capital Prime Rate is the annual rate of interest that is established by Street Capital and may change at any time at our discretion.

    • Alistair McLaughlin 6 years ago

      I’m not sure what advantage Street Capital can offer. They are a Schedule 1 federally-regulated financial institution, and thus subject to all OSFI stress-testing rules.

      Founded in 2007 as Street Capital Financial Corporation, the company proudly operated as a successful residential mortgage lender for almost ten years before receiving approval to convert into a Schedule I bank.

      Also, their mortgage rates are no better than what is on offer elsewhere.

      Last week CIBC still had a fiver at 3.19%. Street Capital is 3.59%. No advantage there.

      Paying off the penalties to poach new customers sounds like an expensive, potentially high-risk strategy to me. That immediately raises their cost of mortgage origination compared to others. As Home Capital Group found out last year, the patience of depositors and investors is not unlimited. The sentiment of either can turn on a dime.

  • Justin Thyme 6 years ago

    It has nothing to do with ‘buyers being exuberant’.

    It has everything to do with the untold trillions and trillions of exuberant money that is available, with nowhere to put it.

    Until there is another outlet for this exuberant money, it will be directed towards the stock market and the real estate market.

    People can’t be ‘exuberant’ unless they have the ‘exuberant money’ to do it with.

    I am not sure that a really, really big earthquake on the west coast, wiping out San Francisco or similar completely, would be enough to soak up the excess exuberant money.

    • Grizzly Gus 6 years ago

      I think raising rates and the unwinding of QE will work its magic soon enough

    • John 6 years ago

      Such a good point JT. Your psychology can only take you as far as your wallet can.

      In this case the credit market is tightening, and for RE it’s tightening quickly considering banks are raising rates without the BoC.

      This will consume the exuberant money.

    • xelan 6 years ago

      Justin, you are correct only in case we talk about money that people OWN.
      In case of Canadian RE people are clearly speculating with the money they lend, or overleverage themselves.
      This is pure exuberance.
      And even when we talk about smart investors with a lot of cash – making your bet on equity appreciation is pure speculation.

      Truly smart investment in RE will give you a positive cash flow but it’s almost impossible now in GTA or GVA.

    • Alistair McLaughlin 6 years ago

      Money can’t be exuberant. Only people can be exuberant. You’re misunderstanding, thus mis-applying, the meaning of the word ‘exuberance’. Look it up in a dictionary.

      • Justin Thyme 6 years ago

        If i have a million dollars available to spend, and nothing to spend it on, that money is exuberant. it is in excess of what I need. Unless I decide to buy something at an outrageous price – like spending a million dollars on a $5 widget. But then this just transfers the exuberant money to someone else, who now needs to spend it. THEY might lend it out to someone else who wants to spend the exuberant money on something that is vastly overpriced, and the exuberant money just keeps getting spread around. Stocks are also an outlet for exuberant money – when you buy a stock in a company, you really aren’t buying anything but a piece of paper. Paying $10 for a burger that costs $2 to make. The exuberance just goes from your pocket to the pocket of the franchise owner, who now has to spend it on something. The best place they could spend it on, to absorb it, is in wages. Ontario raising the minimum wage was the most effective way to absorb this exuberance – it has to be spent on something of practical value – and perhaps the most effective way to calm down the real estate market. The wage earners will spend it on necessities, not exuberant frivolities.

        Until there is something of practical value that this exuberant money can be spent on, it will just keep growing and the price of the ‘exuberant vehicle’ (stock market, real estate, art work) will just keep going up and up.

        For instance, if there is a huge earthquake, and it takes billions to reconstruct, this will absorb some exuberant money in something of practical value. Climate change disasters, hurricane damage, forest fires.

        Even building hyper loops between major cities, or between continents.

        The only country currently spending exuberance on practical projects is China, with the Belt and Road initiative, and the colonization of the moon. Projects that are not for immediate profit but for long-term practical reasons (this was the demise of America – use money for profits first, instead of using money for practical but low-profit ventures. Forget about money on public roads and infrastructure – they are eminently useful and very practical, but where is the profit? Let them rot. They are built with public money – TAX money – and thus, for profit purposes, just wasted money. Thus, the major outlet for exuberant money to be absorbed was completely shut down when taxes were kept to a minimum).

  • Bob 6 years ago

    The city announced this week that Vancouver will collect $30,000,000 in ’empty homes tax’ revenue. As it is a 1% tax, that means that there is $3,000,000,000 worth of real estate in Vancouver proper sitting empty. Assuming this is under-reported, there is likely something in the neighborhood of $5 billion dollars of empty property in Vancouver alone.

    This has nothing to do with real estate fundamentals. It is a storage vehicle for concentrated global wealth. And in the big picture, it is a drop in the bucket of said wealth.

    • CS 6 years ago

      I think you mean global debt, not global wealth.

  • Beh G. 6 years ago

    Just wondering if the Dallas Fed report looks at any exception or extraordinary factors to adjust the exuberance level up or down?

    There seems to be consensus (from a more global perspective) on Canada, Australia, China and Sweden but the most common views in Europe are that UK prices are in dangerous territory high while Germany is more balanced (the opposite of what the Dallas Fed suggests).

    Germany obviously had a HUGE and exceptional inflow of refugees in 2016 + the spillover demand from Brexit. That would obviously create additional demand for housing that may come across as exuberance but it’s not… it’s genuine demand.

    The reverse of that is of course true for the UK. Net migration is down significantly since Brexit and the companies moving headquarters or staff out of the UK because of Brexit has also lowered demand. So, while it may not look like it’s in exuberant territory, the market may still be overheated.

  • Xelan 6 years ago

    Very good article about one of Alternative lenders:

    Credit score doesn’t matter anymore:
    “Unlike the traditional bank lenders, Firm Capital doesn’t focus on a prospective borrower’s credit score when considering a residential mortgage deal, lending primarily on asset value”

    Even major builders go to alt lenders now:
    “the company provided a first mortgage for $147 million to finance the construction of Canada’s tallest condo tower, The One”

    And it’s backed by high profile persons:
    “The company counts former Canadian Finance Minister Joe Oliver and Frank Newbould, a retired judge who oversaw high-profile bankruptcies like Nortel Networks Corp., among its board of directors.”

    Our whole mortgage market is shifting to those companies now, which are barely regulated.

  • Xelan 6 years ago

    At the time when many developers already facing financing issues and condo prices skyrocketing city decided to increase development charges.

    Thank you very much government for making our condo market even more unaffordable.

  • Justin Thyme 6 years ago

    In 100 years, this will all be moot.

    Houses built directly on land will always retain some value, that is – the price of land.

    In 100 years, when all of these condos reach ‘end-of-life’ (they are being built so cheaply) and have to be demolished, there is nothing of any value left for the owner. The entire exuberance will be lost, absorbed. it’s like investing in Cabbage Patch Kids – when the dolls wear out, the entire exuberant ‘investment’ is lost. The ‘value’ just disappears.

  • Justin Thyme 6 years ago

    The single most effective way to moderate the real estate market in Ontario was to drastically raise the minimum wage. It is no coincidence that, immediately after this change, the real estate market cooled.

    Now, the available exuberant money in the pockets of those who have far too much of it (franchisees. for instance) has to instead be absorbed in wage increases, and into the pockets of people who will spend it on practical things.

    The real reason for the rise in house prices is that there was too much exuberant money floating around, and nothing to spend it on except houses and the stock market. Now, it has to be spread around.,

    • Investor 6 years ago


    • Xelan 6 years ago

      Justin, you should’ve put a disclaimer at the end “This ad was sponsored by Ontario Liberal Party “:)

  • Darryl 6 years ago

    The only one to blame for this is the government.

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