A home for sale in Vancouver. Canadians have been putting money into the red-hot housing market for years, and could be headed for financial pain with a correction underway, Tim Shufelt writes.Isabella Falsetti/The Globe and Mail
Every conversation about financial markets these days eventually veers toward the question of whether we are in a bubble – AI, gold, Big Tech.
But there’s another asset bubble already undoing itself in painful fashion, and this one means a lot more to the finances of the average Canadian than the stock market.
Home prices in Canada have been grinding lower for 3½ years and counting. And still, the long-awaited rebound has yet to materialize.
Sales are low. Buyers are in no hurry, and sellers are being forced to reduce their prices.
“It’s going to be at least five to 10 years from the peak before we get back to 2022 prices, just because of how frothy valuations got in housing,” said Robert Kavcic, a senior economist with Bank of Montreal.
“Real estate as an asset class in Canada is pretty much dead for now.”
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When you look back to major housing busts in recent history, this one is tracking fairly close to precedent.
There is enormous variation across regional markets in Canada that needs to be kept in mind. Weak demand and declining values are concentrated in the Toronto and Vancouver areas, which had years of bidding wars and intense speculation. In parts of the Prairies and Atlantic Canada, sales growth is much stronger.
At the national level, the average selling price has declined by about 20 per cent in nominal terms since 2022. Once you factor in inflation, that figure rises to 30 per cent.
That puts Canada’s current housing correction in line with both the U.S. housing crash that sparked the 2008 global financial crisis, and Ontario’s housing crash of the 1990s.
This one does not have the wave of foreclosures of the former, nor the severe recession and mass unemployment of the latter. But in terms of depth and duration, it’s very much on par, so far. In those two prior downturns, it took 10 years and 12 years, respectively, for home prices to recover to their previous highs.
Canada’s bear market in housing will drag on simply because it has to rebalance from a confluence of stimulants that is not likely to ever be repeated, Mr. Kavcic said. They include peak demand from millennial buyers, peak immigration to Canada, pandemic-era mobility, excess liquidity from government stimulus, rock-bottom interest rates and rampant market speculation.
From January, 2005, up to the housing market’s peak, the average home price more than tripled in Canada, topping out at about $820,000.
One side effect of a two-decade property boom is that it increasingly put Canadians’ homes front and centre of their finances.
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Even after the correction, real estate accounts for more than 40 per cent of total household assets, according to Statistics Canada data. (It peaked at 46 per cent).
Even though Canadians have record high levels of stock-market exposure, equities make up just 26 per cent of the average Canadian’s total assets.
Clearly, Canadians’ financial well-being is much more dependent on the housing market than the stock market.
This is especially true of lower and middle-income Canadians, since stock ownership is heavily skewed to wealthier brackets.
Having one of the world’s hottest markets conditioned a generation of Canadians to treat housing as a financial asset, and even a retirement plan.
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A recent survey found that half of unretired homeowners plan to rely on the sale of their home to set themselves up for retirement, according to a report released by Healthcare of Ontario Pension Plan in June.
A similar poll conducted last year found that one-third of Canadians are relying on their home as their only financial plan for retirement, according to a Re/Max report.
The risks of such an approach are now coming to the fore. If you’re counting on the equity in your home to finance your retirement any time soon, then you’re obviously vulnerable to declining property values.
Perhaps the stock market is in a bubble that will end badly. Meanwhile, many Canadians are enduring a correction that is already taking a toll on their financial health.