ANALYSIS: Is a Real Estate Crash on the Horizon for Canada?

By Matthew Horwood
Matthew Horwood
Matthew Horwood
Matthew Horwood is a reporter based in Ottawa.
July 18, 2023Updated: July 18, 2023

For decades, some economists and commentators have been predicting that the real estate “bubble” will cause house prices to crash in Canada. With the Bank of Canada now continually hiking interest rates, could the decline some have been predicting be on the horizon?

While some say the various factors putting upward pressure on prices—such as increasing immigration and lagging housing supply—will keep a crash at bay, others believe a housing market crash is in the cards.

According to Eric Miller, founder and president of the Rideau Potomac Strategy Group, a major price correction is unlikely. He says Canada’s housing market is unable to generate enough housing supply to meet demand, which will keep prices relatively stable.

“What it says to me is that there will be variations in price escalation, particularly as you get higher interest rates,” Mr. Miller told The Epoch Times. “But I don’t see prices falling, because, number one, none of the structural factors are there to bring significant numbers of new houses online quickly. And number two, it’s proven over the last 30 years to probably be the best investment that anyone could make.”

Mr. Miller cited the Canada Mortgage and Housing Corporation’s 2022 report, which claimed an additional 3.5 million homes need to be built by 2030 to increase affordability in the country. But he said various factors are making this return to affordability unlikely, such as a shortage of skilled trade workers to build units, complexities related to residential zoning, and taxes cities levy on homebuilders.

While Mr. Miller acknowledged that housing prices dropped between 1989 and 1996, with prices in the Greater Toronto Area falling nearly 34 percent, he said a similar scenario is unlikely to happen again because “the gap between supply and demand was much narrower in those days.”

“If you think about it, in the 1980s, that’s when places like Mississauga were being built and there was available land that was being developed. And so what you see in Ontario now are significant debates about opening up Greenbelt in Toronto for development,” he said.

“Maybe the growth rates of houses will slow, but that’s not the same as housing prices crashing and significant numbers of young people who can’t afford houses now being able to suddenly buy. And of course, the situation is most pronounced in Toronto and Vancouver, but this is something that you’ve seen in all parts of the country.”

Immigration Pushing Up Prices

According to Frank Clayton, a senior research fellow at the Centre for Urban Research and Land Development at Toronto Metropolitan University, housing prices won’t see a large correction due to immigration pressures continually pushing prices upward.

Mr. Clayton said Canada now leads the Group of Seven countries in population growth due to immigration, with the country poised to take in 465,000 new permanent residents this year, 485,000 in 2024, and 500,000 in 2025.

“Whenever there’s a growing demand and restrictions on supply, you’re going to have higher prices,” he said in an interview. “Our immigration, relative to the population, is so much higher than the United States, even with all the illegal immigrants they have coming in. So as a result, prices end up being higher on average here than in the United States.”

The Canadian Real Estate Association reported in February that the average Canadian home price was $816,720, while the U.S. Census reported that the average home price in the United States in May was US$487,300 (about $643,000).

Mr. Clayton said that when housing prices fell during the early 1990s, it was at a time when interest rates were raised much higher to combat inflation, with the prime rate sitting at 14 percent in 1990. The resulting recession and 11 percent unemployment rate resulted in Canadians having less cash on hand to buy houses, and the falling price of housing.

But he noted that the situation is very different in 2023, with the country having a much lower unemployment rate, inflation sitting at just over 3 percent, and jobs being continually created.

“Interest rates are not going up as they did back in the ’70s and ’80s, when we got rates up to double digits. So I personally don’t see any kind of housing crash as long as the economic conditions continue reasonably well and we keep having this inflow of immigrants,” he said.

The ‘Downwave’

Joseph Barbuto, director of research at the Economic Longwave Research Group, has a different view of the future of Canadian real estate. He foresees an eventual 30 percent to 50 percent collapse in Canadian real estate prices due to the end of the global “longwave” economic cycle, similar to what occurred during the economic crashes of 1873 and 1929.

“We call this the downwave, or the monetary wave where the financial assets take on a life of their own. Since 1981, the ability to carry more and more leverage has increased because people’s cash flow is limited in real terms,” Mr. Barbuto told The Epoch Times, referencing the stagnation of Canadians’ real wage growth since the 1980s.

“Their cash flow has gone sideways, maybe enabled to leverage with the price of credit falling. Well, that causes Ponzi finance, because that is not sustainable. And once you finally get a reversal, which we started seeing last year, now prices have to fall to adjust for the rise in interest rates.”

According to Mr. Barbuto, this longwave cycle typically lasts 55 years, but the end of the Bretton Woods economic system in 1971—which allowed governments to become more indebted because the values of currency were determined by market forces instead of being pegged to a specific value—has extended the length of the cycle.

“It’s a record in terms of length, but ultimately, once you understand the concept of energy and credit cycles, enough of us have warned that this is going to end very badly, and we’re just on the precipice of that, globally,” he said.

Mr. Barbuto, who was formerly a financial adviser, cited economist Richard Vague’s book “The Next Economic Disaster” as evidence that many countries like Canada are in a credit bubble. Vague claims that private debt-to-GDP ratios going over 150 percent typically foretell an economic crisis. Canada’s private debt to GDP ratio currently sits at 270 percent, while in the United States, it’s at 217 percent.

“The year 2020 was a blowoff, and it’s at a record level,” Mr. Barbuto said. “It’s larger than Japan’s in 1989 and the U.S. in 1929. And of course, we know what happened after that.”