Canadian real estate is perfectly efficient, and households never display signs of exuberance. That or it’s a ticking time bomb, waiting to go off. This year marks the 24th year of expanding home prices in Canada, and we’re two quarters into it. This isn’t just the longest expansion in Canadian history, it’s one of the longest in the world. The current expansion has lasted almost twice as long as the next G7 country. This one is going to take a little unpacking, so let’s get to it.

Duration Dependence
Duration dependence is a belief in economics that a trend is more likely to end the longer it persists. It’s common when discussing risk, especially around the business cycle. Longer periods of expansion are more likely to correct than brief ones. Similarly, longer periods of contractions are more likely to end and show growth.

Why? Human nature. The longer a trend occurs, the more likely it is to be overextended from a fundamental driver. Trends will often persist just because everyone thinks that’s what it does. Have you ever heard someone say, “real estate prices will rise,” without a reason other than “they always do”? That’s someone who now thinks growth will occur for the sake of growth. They believe the market is running solely on the same philosophy as cancer.

The further a trend extends from fundamentals, the higher the risk to shock. One wrong earnings report, too few sales, or everyone changing their mind can blow it up. Correcting inefficiencies can be delayed, but that only makes a market more inefficient. Inefficient markets result in toxic spillover. Ultimately, this creates a larger and more destructive market inefficiency…read more.