Canadian cities are among the biggest real estate bubbles in the world, but Canada doesn’t see it that way. The Bank of Canada (BoC) House Price Exuberance Index Indicator (HPEI) ranks just two cities as lavish in Q3 2021. Neither of those cities is Toronto or Vancouver, despite both being among the largest real estate bubbles in the world.

House Price Exuberance Indicator (HPEI)

The HPEI is the BoC’s city assessment of real estate exuberance. It looks for explosive dynamics in house price growth and ranks them. An explosive dynamic is when house prices grow above what the fundamentals support. Fundamentals include income, mortgage interest and population growth. They do not include your broker/personal trainer’s belief that prices are rising forever.

Reading the index is quite easy. If the city has an HPEI of more than 1.0, the market is declared lavish and turns red on their color-coded map. If it is green, the market is considered healthy with no signs of exuberance. It is comparable to the Federal Reserve Exuberance Index. The big difference is the results, but let’s get to that later.

Hamilton and Montreal Real Estate are the only bubbles in Canada

With house prices soaring to 60%, all this commotion doesn’t seem like explosive growth to the BoC. Correct. The HPEI shows only two housing bubbles in Canada: Hamilton and Montreal. Toronto and Ottawa are warm, but the declining index values ​​show that they are cooling.

Hamilton real estate is attracting worldwide attention for its frothy valuations. The city last saw a healthy market in 2015, spending 15 of the past 25 quarters as a buoyant market.

House Price Exuberance Indicator (HPEI)

Source: Bank of Canada.

Real estate in Montreal has seen a colossal price increase since 2017, but only just received a lavish label. The market was exuberant for three quarters in a row. Each of them scored higher ranks, showing that the dynamics have become more intense.

Wait… Toronto Real Estate is not a bubble?

The BoC’s indicator only looks at explosive dynamics, meaning it can’t tell us if a market is still a bubble. It only looks at whether or not trading 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 bigger, but those issues are easily confused in some reports from the BoC.

Greater Toronto real estate has seen a buoyant market for 14 of the past 26 quarters. It was lavish a quarter ago, and it’s still overheating. The market still has frothy valuations as house prices have not been adjusted. However, this index is not looking for frothy valuations. It only measures whether the price growth is exuberant.

Put bluntly, this index tells us that growth is cooling. The BoC doesn’t seem to think it’s a concern unless there’s a current acceleration. For context, UBS and Oxford Economics put both Toronto and Vancouver at the top of their respective global bubble lists.

The BoC thinks Vancouver real estate is a rational market

Greater Vancouver real estate is a beautiful and healthy market with few red flags. That is the view of the BoC, which shows only three quarters of the exuberance of the market in a decade. A quarter in 2015 and the other two in 2018. Much of Vancouver would probably disagree, as would the global indexes. But not Canada’s central bank.

The BoC index is an interesting contrast to the US Fed’s Exuberance Index. Fed researchers see Canadian real estate as bubbly (bubble) nationally. The BoC sees exuberant activity in only two cities. Either those cities are frothy enough to sound the alarm for the country, or the BoC needs to work on that index.

As an aside, does the BoC still think inflation is transitory?