Canada’s Housing Market is Correcting, Not Crashing

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Benjamin Tal

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Benjamin Tal, deputy chief economist, CIBC.

When it comes to the housing market, we need to understand what happened during COVID. This has been the most asymmetrical recession in Canadian history. During COVID, basically all the jobs, or almost all the jobs that were lost were low-paying jobs, young people, renters, and that’s why rent actually went down during COVID. Homebuyers, potential homebuyers, they are at their position, they are at their income, they were zooming, and interest rates were in the basement.

So we had the situation in which, and that’s extremely important to understand, a situation in which homebuyers during COVID got the benefit of the recession vis-a-vis extremely low interest rates without the cost of the recession vis-a-vis a broadly based increase in the unemployment rate. We have never, never, never seen anything like that. There was a sense of urgency to get into the market and people basically were front loading activity. We basically borrowed activity from the future because interest rates were so, so low.

So we borrowed activity from the future and the future has arrived. We are now in the future, and the market is correcting. And that’s a very healthy situation. After rising by 46% in two years, if house prices don’t go down now, we are basically in a bubble. So whatever we see now in the housing market is very healthy. And it’s basically a reset year and that will continue. Prices are down by about 20%. This is the average price. The benchmark price, which compares apples to apples, detached to detached, condo to condo, is about 9% down from the peak of February. I believe that will continue until at least the spring of 2023. And again, I believe that that’s a very healthy situation because you cannot have this kind of shock without a correction.

Is it a free fall? Is it a meltdown? No, it’s not. It’s not a crash by any stretch of the imagination. It’s simply reallocation of activity over time. We front loaded activity during COVID, and now we are resting with higher interest rates. That will continue to be the case. Prices will continue to go down. But there is one big difference so far between the current correction and decline in prices in previous cycles, and that’s supply.

What I mean by that is usually when the economy’s struggling, when the economy’s in a recession, when the housing market is slowing, like in the 90s and the 80s and even 2017, you see supply rising, namely people are selling their houses because they have to. So far at this point, there is no panic selling by any stretch of the imagination. In fact, supply is down. So all the decline in prices is really demand, and supply is not adding to it. The opposite is the case. If supply was rising, the price level would have been even worse.

So the point here is that at this point, there is no panic in the market. And the reason is the fact that this is still a mild slowdown with no major issue in the labour market. People have their jobs, they can finance their mortgage. However, the risk is overshooting by the Bank of Canada that can lead to a more significant recession. In this case, people will start losing their jobs. The supply of homes will rise. And that’s something that will have a negative impact on the market. So our main case scenario is that this slowing in the housing market with the negative price inflation will continue to be the case over the next six months or so. I believe that the market will start stabilizing around the springtime, but it will not go up in a very significant way.

What will prevent additional decline after the spring is the lack of supply. We still get new immigrants. We’re talking about roughly 420,000 new immigrants arriving every year. We have foreign students. Huge demand for rental and housing in general, and we simply don’t have the supply. In fact, the opposite is the case. The supply is going down because of the fact that builders are not building. The cost of construction has risen dramatically and builders are simply not building. We are estimating that for the GTA, one-third of projects are being canceled or delayed. This means that a year or two years from now when the fog clears and we are ready, the supply that we need will not be there. You don’t need to be a PhD in economics to determine where prices will go from that point.

So therefore, I believe that the correction that we’re seeing now is very healthy. It’s reallocation of activity over time. But this is not the beginning of a long-term decline given the extremely strong fundamentals of the housing market.