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Canadian Real Estate Prints 19th Quarter In Bubble Territory: US Federal Reserve

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Canadian real estate buyers are driving prices using irrational exuberance. US Federal Reserve (The Fed) data shows Canada’s homebuyers were “exuberant” in Q3 2020. This is when buyers disregard fundamentals, and paid more because they felt they couldn’t lose. This isn’t new, but it’s not as old as some have assumed. Canadian homebuyers irrationally drove price growth for nearly five years. The length of irrational buying firmly places the market in bubble territory.

Irrational Exuberance

“Irrational exuberance” is a term infamously used by former Federal Reserve chair Alan Greenspan. He used it to describe buyers of the Dot-Com bubble in the 1990s, who bought solely on enthusiasm. Good news received an irrational premium, and bad news was disregarded as temporary. Only one message is heard – buy as much as possible, as fast as you can. The term has since been used to describe bubble participants.

When’s the last time you heard someone say, “it only goes up” to describe an asset? Or even, “there’s no risk.” That’s exuberance. It’s the feeling you can’t lose, regardless of how much you know about an investment. It’s also infectious.

Once people see their friends and neighbors make money, they get FOMO and mimic the behavior. Inevitably, the majority of the market adopts the feeling it “can’t lose,” based on recency bias. It doesn’t matter if we’ve seen this before, it’s different this time. These situations are more commonly known as “bubbles.”

Post-Great Recession, the Fed developed a “smoking gun” indicator to identify real estate exuberance. Efthymios Pavlidis of Lancaster University, and the Dallas Fed teamed up to measure “explosive dynamics” in pricing. This is when home prices escalate faster than any fundamental improvement warrants. The longer explosive dynamics occur, the more likely buyers are exuberant.

The more confident you are in exuberance, the more confident you can be the market is ignoring risk. Investors say, “watch the downside, and the upside takes care of itself.” Exuberant speculators say, “there’s no downside.”

How To Read The Exuberance Indicator

Pavlidis and the Dallas Fed did all of the hard work, it just takes a quick explanation to understand what it means. There’s two values – a critical threshold value and an exuberance index reading. As buyers act less rational, the exuberance indicator rises further.

If the index is above the critical threshold, you’ve got exuberant buyers. If the index stays above the threshold for 5 quarters, you have an exuberant market. Once again, this is more often called a bubble.

Researchers can’t determine when a market will correct, or by how much. An exuberant market will need a correction in order to get back to normal though. Policy makers can delay a correction, however that creates moral hazard.

Moral hazard is when someone is encouraged to feel like they can’t lose. What happens when you get that feeling you can’t lose? You got it! Even more exuberance. It gets even worse.

Canadian Real Estate Has Been Exuberant For 19 Quarters

Canadian real estate hasn’t reached the exuberant level yet, so carry on. Just kidding, the index read 2.3 in Q3 2020, clearing the critical threshold by 67%. The reading is now at the highest level since 2017, when Toronto and Vancouver overheated. It’s also the 19th consecutive quarter the market has been exuberant. For those that don’t measure their kid’s ages by dividend payments, that’s a quarter shy of 5 years.

Canadian Real Estate Exuberance Index

The US Federal Reserve Exuberance Index for Canada, and critical value threshold. A market that is is above the threshold for 5 consecutive quarters is considered to be exuberant. Source: US Federal Reserve, Better Dwelling.

Is Canadian real estate in a bubble? According to the Fed’s research, yes this is a market driven by exuberance. Only 5 consecutive quarters make a market exuberant, and Canada has 19 consecutive quarters. It may be up for debate if it was maybe one or two quarters over the threshold, but at this point – come on.

The Fed data shows the exuberance doesn’t go back nearly as far as some think. Home prices largely moved with incomes and credit growth until 2015. That’s when Vancouver started to get heated, with Toronto joining until 2017.

The market is back to 2017 exuberant levels, but it’s very different this time. Instead of a handful of cities, almost every market is now experiencing huge price growth. Like I said, you can delay a market inefficiency with policy. That inefficiency still persists though, and is joined by even more moral hazard. On the upside, I’ve been told I can’t lose.

Source:- Better Dwelling

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Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

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TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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Homelessness: Tiny home village to open next week in Halifax suburb

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HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.

Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.

Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.

The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.

Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.

They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.

The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.

This report by The Canadian Press was first published Oct. 24, 2024.

The Canadian Press. All rights reserved.

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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