Canadian real estate has long been frothy, but how does it look compared to other countries? According to the US Federal Reserve (the Fed) exuberance index in Q1 2021, pretty bad. Only two G7 countries are considered exuberant markets (a.k.a. bubbles) — Canada and Germany. Those two countries are also the longest-running bubbles of any advanced economy. The longer a market remains exuberant, the greater the drag on quality of life and the economy. They also tend to require much larger corrections, with greater economic fallout.

Exuberance Index

We just took a dive into the exuberance index last week, so we’re only going over what you need to know. The Fed tracks global housing markets for exuberance, looking to identify bubbles. In this case, exuberance means explosive price growth beyond market fundamentals. When this happens, people are buying based on the excitement of paying more, or fear of being locked out. Whatever the reason, it’s an emotional one. By tracking this, they hope to prevent a 2006-like event from happening again.

One or two quarters isn’t a trend — it happens. The problem is when exuberance becomes persistent, without any correction. Fed researchers say five quarters of exuberance is when the market is exuberant. An exuberant market is better known as a bubble, and bigger corrections are needed to fix them…read more.