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House Price Exuberance Indicator (HPEI)
The HPEI is the BoC’s city-level assessment of real estate market exuberance. It looks for explosive dynamics in home price growth and ranks it. An explosive dynamic is when home prices grow over what fundamentals support. Fundamentals include incomes, mortgage rates, and population growth. They don’t include your real estate agent/personal trainer’s belief that prices rise forever.
Reading the index is pretty straightforward. If the city has an HPEI over 1.0, the market is declared exuberant and turns red on their color-coded chart. When it’s green, the market is considered healthy with no signs of exuberance. It’s similar to the Federal Reserve Exuberance Index. The big difference are the results, but let’s come back to that in a few.
Hamilton And Montreal Real Estate Are The Only Bubbles In Canada
With home prices rising up to 60%, all of this commotion doesn’t strike the BoC as explosive growth. That’s right. The HPEI only shows two housing bubbles across Canada — Hamilton, and Montreal. Toronto and Ottawa are running hot, but the falling index values show they’re cooling down.
Hamilton real estate is catching global attention for its frothy valuations. The city last saw a healthy market in 2015, spending 15 of the past 25 quarters as an exuberant market.
House Price Exuberance Indicator (HPEI)
Source: Bank of Canada.
Montreal real estate has seen colossal price growth since 2017 but only just got an exuberant label. The market printed three consecutive quarters of exuberance. Each one of them scored higher ranks, showing that dynamics have been getting more intense.
Wait… Toronto Real Estate Isn’t A Bubble?
The BoC’s indicator only looks for explosive dynamics, meaning it can’t tell us if a market is still a bubble. It only looks at whether or not trade in the quarter showed excessive growth, beyond what fundamentals would support. That doesn’t necessarily mean the market isn’t a bubble. It just means the bubble isn’t getting any bigger, but those issues are easily conflated in some of the BoC’s reports.
Greater Toronto real estate saw 14 of the past 26 quarters show an exuberant market. It was exuberant just one quarter ago and is still overheated. The market still has frothy valuations since home prices haven’t been corrected. This index isn’t looking for frothy valuations, though. It just measures if price growth is exuberant.
More bluntly put, this index is telling us the growth is cooling. The BoC doesn’t seem to think it’s a concern unless there is current acceleration. For context, UBS and Oxford Economics rank both Toronto and Vancouver near the top of their respective global bubble lists.
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The BoC Thinks Vancouver Real Estate Is A Rational Market
Greater Vancouver real estate is a nice and healthy market with few red flags. That’s the take from the BoC, showing just three-quarters of market exuberance over a decade. One quarter in 2015 and the remaining two in 2018. A good portion of Vancouver would probably disagree, and so would global indexes. Not Canada’s central bank though.
The BoC index is an interesting contrast with the US Fed’s Exuberance Index. Fed researchers see Canadian real estate as exuberant (bubble) at the national level. The BoC only sees exuberant activity in two cities. Either those cities are frothy enough to ring alarms for the country, or the BoC needs to work on that index.
