For a generation of Canadians, real estate was a golden ticket. A foolproof path to building wealth.
Well, we’re now exactly four years removed from the housing market’s high-water mark, and the value of the typical home in Canada is down by 21 per cent, making this a candidate for the worst housing bust on record.
If it hasn’t felt quite so grim, there’s a good reason for that. Household wealth continues to grow, despite the correction in home prices. The past eight fiscal quarters in a row, in fact, have seen record highs in net worth.
That’s happening because the stock market has been on an absolute heater.
The bull market in stocks has effectively papered over a national wealth shock that would normally accompany such a severe housing correction.
But when stocks do the heavy lifting, new risks come to the fore, especially for people in retirement or close to it.
Home equity and investment wealth are not one and the same. The first is typically slower-moving and gives homeowners the confidence to borrow and spend, knowing they have a concrete financial backstop – at least on paper.
Stock market gains don’t inspire the same confidence – for good reason. They can vanish at any moment.
The war in Iran and the run-up in oil prices are giving investors new reasons to fear that the stock market’s glory days are fading. How much longer can stocks realistically paper over Canada’s housing slump?
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Since the Toronto Stock Exchange last peaked almost four weeks ago, Canadian stocks are down by 7.5 per cent. U.S. equities are off their peak by 8.7 per cent. Recession and inflation indicators are both beginning to flash.
Such sell-offs weren’t as big a deal to household finances when the housing boom was in full swing. Between 2010 and 2022, the average Canadian household saw its net worth double to just over $1-million, according to Statistics Canada data.
Residential real estate, net of mortgage debt, powered more than half of those gains. Investment portfolios contributed around one-third. Pensions and life insurance kicked in another 10 per cent.
For years, the wealth of the nation hinged on the housing market, putting it front and centre of many Canadians’ finances.
For starters, there is a well-established wealth effect generated by housing booms. Basically, as the value of your house soars on paper, you feel richer, so you spend more. The Bank of Canada once estimated that for every dollar increase in home value, spending goes up by 5.7 cents.
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But, “the upward trajectory in house prices over the past two decades was about much more than a psychological lift to consumers,” Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal wrote in a recent report.
“It allows Canadians to approach their financial institutions confidently to ask for increased credit, using the gain in the value of their house as added collateral.”
As the market frenzy intensified, more and more Canadians leaned in, draining their savings to get on the property ladder, leveraging their soaring home equity to unlock funds and relying on their homes to finance their retirements.
Then came the turning point.
Since the housing market’s peak in March, 2022, the MLS Home Price Index is down by 21 per cent, according to Canadian Real Estate Association data.
“That ranks as arguably the most serious, sustained home price correction on record, even when adjusted for inflation,” Doug Porter, Bank of Montreal chief economist, said in a report.
During those four years, the depreciation of housing wiped out more than $500-billion from Canadians’ collective net worth. They still became richer over that time, though, thanks to the stock market. The S&P/TSX Composite Index posted a monster 52-per-cent gain since the housing downturn began.
Unfortunately, investment wealth doesn’t have the same virtuous knock-on effects as housing. The bump to consumer spending is thought to be minimal. And there are obvious risks to having too much of one’s nest egg tied up in the markets unless retirement is still many years off.
We’ve all been spoiled by double-digit annual gains in stocks, but returns like that cannot last. Regardless of whether the oil price shock spirals into a longer-term economic and financial scourge, every investor should be bracing for an eventual reversion to the mean. More disappointing long-term stock returns are a near inevitability.
Meanwhile, the long-awaited rebound in housing is nowhere in sight. “The combination of rising long-term yields, zero population growth, weak consumer confidence and affordability still not back to long-run norms spells a long drought ahead for the housing market,” Mr. Porter said.
We’ve been spared a wealth shock so far, but the stock market isn’t going to keep bailing us out forever.