Canada’s real estate bubble is the second longest in the world: US Federal Reserve

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Canadian real estate has long been sparkling, but how does it look compared to other countries? According to the index of exuberance of the US Federal Reserve (the Fed) in the first quarter of 2021, rather bad. Only two G7 countries are considered exuberant markets (aka bubbles): Canada and Germany. These two countries are also the oldest bubbles of all advanced economies. The more exuberant a market, the more the quality of life and the economy are penalized. They also tend to require much larger corrections, with greater economic payoffs.

Exuberance index

We just dived into the Exuberance Index last week, so we’re just going over what you need to know. The Fed is tracking the exuberance of global housing markets, seeking to identify bubbles. In this case, exuberance means explosive price growth beyond market fundamentals. When this happens, people buy based on the excitement of paying more or the fear of being locked out. Whatever the reason, it is emotional. By following this, they hope to prevent an event similar to the one in 2006 from happening again.

One or two quarters is not a trend, it happens. The problem is when the exuberance becomes persistent, without any correction. Fed researchers say five-quarters of exuberance occurs when the market is exuberant. An exuberant market is better known as a bubble, and larger corrections are needed to address it.

When the correction will occur is a bit more difficult to determine, due to policymakers. Governments will often expand credit bubbles, despite increasing economic risk. Nobody wants to be the guy on call when a bubble bursts, so it turns into a hot potato game. The last tenant is the person who ruins a generation!

Canada has the second longest bubble in the G7

Only two G7 countries are exuberant markets: Canada and Germany. Canada became exuberant 24 quarters ago without correction. Both quarters showed faint signs of exuberance, barely a hair’s breadth. However, they weren’t long enough for prices to correct or set a new trend. This makes Canada the second longest bubble in the G7, after Germany.

How does Germany compare? It only beats Canada by a quarter and has seen much lower price growth before. The country has recorded its 25th quarter without a break, just a direct commitment to create a bigger bubble. It should be noted that the Fed estimates that prices in Canada increased 173% from 2005 and 74% in Germany. The price growth in Germany, on the other hand, seems minimal, but rest assured, it is astronomical.

Canada’s housing bubble lasted much longer than other advanced economies

The narrative is that buyers are rambunctious around the world, but according to the Fed they are not. They follow 25 advanced economies for exuberance, and only six are exuberant. Besides Canada and Germany, there are Luxembourg (19 quarters), Croatia (8), Belgium (7) and the Netherlands (6). More and more markets are showing recent signs of exuberance due to programs such as quantitative easing (QE). They haven’t been doing this long enough for these markets to be exuberant.

Exuberance of the global housing market

The number of quarters since the start of the current streak of buyer exuberance in advanced economies, without correction. Five consecutive quarters of exuberance means that the market has become exuberant.

Source: US Federal Reserve; Better accommodation.

Longer bubbles tend to create a bigger problem – a bigger fundamental disconnect. As countries like Canada and Germany hold their bubbles longer, they pass the problem on. The longer this lasts, the greater the correction must be to get back to fundamentals.

Ultimately, these countries face two deaths – a sharp correction or an economic downturn. A strong correction hits like a sack of bricks and prevents people from investing for a while. A slow diverts disposable income into housing, slowly killing other industries… before it hits like a sack of bricks.

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