After several years and a 20-per-cent hit to the average price of a home nationally, the Canadian housing market has finally stabilized.Todd Korol/The Globe and Mail
The Canadian housing bubble is sure starting to look like it has fully deflated.
After four-and-a-half years and a 20-per-cent hit to the average price of a home nationally, the market has finally stabilized.
Not that boom times are back. Far from it. But a gradually tightening market, with prices steady for about five months, suggests we are now seeing the bottom.
If that proves to be the end of it, what stands out most is how well it was contained. The decline in prices lasted nearly as long as the U.S. housing crash which started in 2008-09, and was deeper than the bear market in Ontario real estate in the 1990s, making it arguably the most severe correction on record.
And yet, there have been few signs of broader economic fallout. Where’s the contagion? Why no recession?
Part of the story is how adaptable and resilient the modern economy has become. Again and again, relationships that were once thought to reliably predict recessions have broken down in recent years.
“Housing is the business cycle,” American economist Edward Leamer wrote in 2007. His point was soon proven when the collapse of the U.S. housing market triggered a global financial and economic crisis.
Mr. Leamer, who died in 2025, argued that trouble in the residential real estate market was the best warning sign of a coming recession.
If true, the Canadian economy should have been doubly vulnerable, given how much of the country’s resources were poured into housing. At its peak in 2021, residential investment accounted for one dollar out of every $10 generated in the economy.
Exceptionally high levels of household debt and a banking system saturated in residential mortgages surely meant that when the bubble burst, a grim fate awaited the country.
Thousands of realtors are leaving the industry as house sales stall
For at least a decade, the end was perpetually nigh upon us. Canada’s housing market was heavily showcased as among the world’s most inflated.
And then finally, it happened, courtesy of a sharp rise in interest rates that, up to that point, seemed like a thing of the past.
At last, the housing market fell. The sky did not.
Certain regions were hammered. After factoring in inflation, some markets in the Greater Toronto Area saw price declines of about 40 per cent.
While the Canadian economy stagnated, to be sure, it never came close to a proper recession. There are several reasons why.
The downturn was largely a necessary unwinding of the excesses in Canadian housing during the pandemic, said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.
“Prices are now where they would have been if COVID was only a bad dream,” he said.
“The adjustment is simply undoing a crazy period when people where blinded by low rates and prices went up totally detached from fundamentals.”
Other forces helped to offset the pain of the housing slump. Gains in disposable income in the few years prior to the housing market peak helped Canadian consumers manage higher mortgage payments. And the booming stock market kept household wealth at record highs despite falling property values.
“Interestingly enough, Canadians have probably directed more investment dollars into financial markets since real estate, as an investment class, died temporarily when the correction began,” said Robert Kavcic, senior economist with Bank of Montreal.
CMHC forecasts lower homebuilding over next two years
Still, it seems like a minor miracle for Canada to have largely absorbed what could have been a domestic economic shock.
Homeowners and lenders alike avoided the “mortgage-renewal cliff” that many feared awaited those renewing at much higher interest rates.
The big banks managed their exposure well, while few borrowers resorted to defaulting.
Lots of Canadian construction workers avoided unemployment by pivoting to infrastructure projects, Mr. Tal added. And most of the big developers were strong enough to wait out the slump.
A similar narrative has played out globally the last few years, in ways big and small. Predictors of recession flash red, then everything turns out fine. The inversion of the yield curve and sharp downturns in survey data are two examples. A few years ago, it was widely thought that only a global recession could quell runaway inflation.
Many feared U.S. President Donald Trump’s tariffs would trigger another major inflationary wave. Or that the blocking of the Strait of Hormuz would torpedo the global economy.
In all cases, the outcome was better than expected. Companies rerouted supply chains to avoid tariffs or bottlenecks, borrowers managed higher interest rates to avoid defaulting, consumers shifted to cheaper alternatives to withstand inflation.
The economy has been battle-tested. Perhaps that’s made it better at weathering the shocks that once would have cascaded into recession.