Homes and Condo Mississauga

US Federal Reserve Indicators Show Canadian Real Estate Buyers Still "Exuberant"

Canadians are still overly enthusiastic about the prices of real estate. US Federal Reserve Bank of Dallas (also known as the Dallas Fed) indicators show that buyers actually became more irrational in the prices paid in the fourth quarter of 2017. Reserve bank analysts warn that prices are still becoming overheated throughout the country.

Persuasion, and measurement

Exaggeration means "with excitement" in normal English, but is a banker driven by emotion. When asset prices are determined by emotions, the fundamentals are often ignored. The enthusiasm is further driven by a "can not lose" feeling, the driving of widespread speculation. Activa classes powered by enthusiastic speculators without the fundamentals are better known as "bubbles."

Since the Great Recession, the US has been working on a "smoking gun" indicator to identify bubbles. Efthymios Pavlidis from Lancaster University, and the Dallas Fed have worked together to measure the "explosive dynamics" in pricing. They then found out that the longer these dynamics persist, the greater the chance that you are certain that it is a bubble. Since then, the Dallas Fed has been monitoring the global markets to identify bubbles.

Note: We have explained this in a little more detail .

How To The Exuberance Indicator

Pavlidis and the Dallas Fed are doing the hard work, you just have to understand how to read the indicator. Despite the complicated documentation aimed at academics, it is fairly easy to understand. There are two sets of numbers, a threshold value and an enthusiasm indicator. When the exuberant indicator passes the threshold value (set to 95%), you are in an exuberant area. If the market remains more than 5 quarters on this territory, you have an exuberant market. This is where we are.

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

Canadian real estate exuberance is falling, but it is still very high. The fourth quarter of 2017 increases by 1.57% compared to the third quarter, but falls by 33.81% compared to the peak in the second quarter of 2017. We have passed the threshold in the second quarter of 2015 and are remained in this territory for 11 quarters. Remember that everything above the threshold is high. Just because it is declining does not mean that buyers are rational now.

Better home. Source: The Federal Reserve Bank of Dallas.

The periods of exuberance are followed by periods of debt reduction and price corrections. Assets are never perfectly priced, so expect a period of price discovery. This often leads to a decrease among the fundamentals, but sometimes not. Buyers are not so good at deciphering how much emotion was used by previous waves.

Of course, the demand is greater than the supply, the population is increasing and the country is expensive. It does not mean that people do not pay too much for the luxury of owning a house today. That does not mean that people will not stop paying over time.

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