Whoops! Bank of Canada Warns “Most” Major Real Estate Markets Might Be Bubbles

Canadian real estate went from the narrative prices will always rise, to “look out below” in a matter of weeks. It’s not surprising to see a fickle public change their mind that fast, but it’s odd to see the Bank of Canada (BoC) do it. In the House Price Exuberance Indicator (HPEI) for Q1 2022, they warn “most” major markets have become exuberant. Exuberant markets are better known as bubbles to common folks like us.

What The Heck Is Exuberance?

For those only vaguely familiar with the term exuberance, let’s spend a second on what this means. Exuberance is a state of excitedness, usually leading to the dismissal of any and all risk. When you’re excited about something, nothing’s going to stop you. It’s a great idea when it comes to buying donuts at Machino’s but not so much for the biggest purchase you’ll ever make.  

Ever since Alan Greenspan used the term in 1996, at the suggestion of Schiller, it’s caught on. It’s now code in economics for “bubble,” and it’s a lot less panic-inducing. Saying, “that market is a bubble” creates fear and makes people defensive. Now if that market was just “hella’ exuberant,” it sounds a lot more ambiguous.

Bubbles are tricky — you never know how long they’ll last and you don’t know if policymakers will delay a correction. At the same time, they’re fragile. The only thing between the market price and fundamentals is how people feel. Emotions can ramp down just as quickly as they ramped up, as exuberance turns to fear. Negative economic shock doesn’t have to hit, just the feeling you can no longer cheat death has to arrive.

The House Price Exuberance Indicator (HPEI)

The US Federal Reserve has tracked exuberance in the Canadian real estate market for almost a decade now. After years of us teasing the BoC about the US knowing more about Canada’s real estate than them, they gave it a shot. Last year the House Price Exuberance Indicator (HPEI) was released, the BoC’s very own creation. 

Just like the Fed’s exuberance index, the HPEI looks for explosive price dynamics. These are price movements in excess of fundamental reasons. Fundamentals are things like income and mortgage rates. Fundamentals are not your cousin Jimmy saying he heard at the gym that real estate is gonna moon forever. 

The acceleration is measured as an index score and color coded to make it super easy. Stable markets are green, heating up markets are yellow, and red is an exuberant market. Everything between is the transition between stages, with darker colors meaning the sentiment is stronger. 

BoC Warns “Most” Major Real Estate Markets Now Show Exuberance

The BoC warns “most” large cities are showing exuberance. The last update to the measure was in Q3 2021, when Hamilton and Montreal were the only bubbles. In Q1 2022, Toronto, Vancouver, and Ottawa join them. It might be hard to believe, but the BoC didn’t consider Toronto a bubble while it was topping global lists. Suburban prices even climbed up to 60% and didn’t raise a warning sign. Gotta be fundamentals, I guess?

The central bank notes, “… these indicators were collected before the slowdown in housing activity and price growth in April. It remains to be seen whether data for the second quarter will support the same conclusion.”

Sweet. It’s been hours since the home prices stopped rising tens of thousands per month. Obviously the problem might have solved itself in just a few weeks. In just over a year, the BoC went from saying “we need the growth” to flagging “most” real estate markets as exuberant. Why wouldn’t the issue possibly be solved almost immediately? Sounds like someone is warming up to explain the bubbles were transitory, just like inflation.



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  • David Chan 6 months ago

    More like they’re all bubbles. Just because prices haven’t grown much in Calgary don’t mean they shouldn’t be falling more.

    • GTA Landlord 6 months ago

      Counter point: Calgary is the only city in Canada with a real industry that doesn’t involve selling the same goods back and forth to create value.

      But you’re right in the regard that just because prices haven’t increased doesn’t mean it’s undervalued. Everything should technically be repriced at higher interest rates soon.

  • Rob Turner 6 months ago

    Remember the Bank of Canada telling people rates won’t rise until 2023, back in 2020? They didn’t respond they were hoping to plan and they weren’t expecting the market to recover. The question is why did so many central all simultaneously respond with the promises rates wouldn’t rise for years before the impact?

    New Zealand didn’t, they hiked and ended QE while other countries were still pumping cash into the market.

  • J 6 months ago

    Since we can’t post pictures, I’ll try my best to ASCII art this!

    >>>—–> O . . . X

    Or all scream on the downward slope of a rollercoaster.

  • Rick Abrams 6 months ago

    Gee, they construct density upon density which people do not want and then are shocked when they discover have too much housing of the type no one wants. It’s like stocking ham hocks at a Kosher butcher and wondering why they aren’t selling. Down here in LA, people simply move away from excessive density and the bubble grows larger each minute. KAMBOOM day is coming.

  • C.Rose 6 months ago

    So ,they convince everyone that it was okay to buy and now that you are all in… they yell SURPRISE!!! Fooled you sucker. I would be sick to my stomach if I had bought in the last couple of years. I’m glad I wasn’t fooled.

  • dave frazer 6 months ago

    Yes its a long way down for property and getting deeper by the day. i have noticed that nothing much is selling these days particularly in the last few weeks.. Buyers have realized that things will be much , much cheaper in the not too distant future. Sellers have not they are still asking yesterdays prices and will get a shock when offers start to come in 20 to 25% below their advertised price. If they dont sell soon it will be 40 %. I would guess before the year is out in some areas.

    • Kim 6 months ago

      Dave what you’re saying exactly bang on and I expect prices to drop minimum 40% before this is said and done and potentially 50%.
      The secret in this type of a market is getting rid of whatever you need to sell fast so reduce reduce as quick as possible before the other guy does.

  • V 6 months ago

    I’m glad I sold!

  • Smeg Stillborn 6 months ago

    If your buying with Bitcoin, housing prices are still going up like crazy.

  • Yoroshiku 6 months ago

    Betting the central banks are hoping to break the back of inflation quickly so they can slash interest rates again and re-inflate the bubbles.

  • Average Man 6 months ago

    I am a man of average intelligence and no special training. How did I figure this out years before the tall foreheads at Canada’s banks?

    • dan 6 months ago

      i agree, the average ppl were able to see something is not right. FOMO has been on the tv radio, real estate agents saying now is the time… but guess what they were in on the scam.. now its time to pay the price for being a gullible follower. just like those sheep that lined up for the jibby jabs. haha suckers. should of listened to us avg ppl.

  • Old Greg 6 months ago

    Ohh my lanta, can you see the blood in the streets? Rates are going to go so much higher than all these RE pumpers can ever imagine, couple that with a decade of inflation… Cheap cheap cheap RE just around the corner, I will be looking this winter when desperation and panic ensue! So what have we learned? We have learned that the bank representatives understand little about economics and that the public at large is so so so very easy to lie to and absolutely the most gellable lots of people to ever walk the earth! Enjoy the chaos and take full advantage of it, this is where the wise will become wealthy beyond their wildest dreams!

  • L Brandenburg 6 months ago

    Really people, one only has to look at history, we the average joe/jane always get caught up in the greed of the time. History repeats itself over and over and each time the boom and bust cycles become larger and larger. You want to know where inflation and interest rates are going look at history it tells you. The pattern we are in now matches the pattern of the late 1970’s and early 1980’s. Interest rates are going away up and will take a few years to get the world economies back in balance. Could we see the interest rates as high as 21% again, I think not but a 5 yr mortgage will likely see 12% within 18 months. I was in Calgary at that time I went through the housing crash and don’t kid yourselves the crash has started. This time around it’s Toronto and Vancouver that are going to see the largest declines in Housing prices.

    • Kim 6 months ago

      I sold real estate during the early 1980s and we were selling houses that had mortgages of 21 to 24% at the time and when the crash was happening we were reducing prices weekly 5%.
      I’d say the challenge I felt at the time was that we had to get our price down lower than anyone in the neighborhood was asking so we could get rid of that property as quick as possible because if we didn’t the other guys house would sell and we would be stuck refinancing at 21 to 24%.
      There was no way that the homeowners at the time could afford such huge increases.
      If they were refinancing their mortgage payments were quadrupling.
      When the dust settled, I would say we were down at least 30%.
      So a house that had been selling for $130,000 ended up selling for around $80,000.
      Believe me those sales were grueling and painful.
      I feel this bust is going to be worse than any other bust in the last 50 years.
      It is going to be brutal…..
      For a very very very long time!

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