Canada’s Real Estate Bubble Is So Big Even The Mother of All Crashes Can’t Fix It

Canadian real estate is now some of the most expensive in the world. Home prices across the country, not in pricey hubs, are now comically overvalued. At this point, not even a major housing crash can restore affordability. Many think this is pandemic-related, but overvaluation has long been a concern. For at least a decade, the central bank, government, and various agencies have rung the alarms. Let’s go through some of the numbers and see what price points they felt were a concern, and proceeded to do nothing.

More Than Half of Canadian Households Couldn’t Buy A Home Today

First, let’s start where the Canadian real estate market is currently sitting. The composite benchmark, (a.k.a. a typical home) was $798,200 in December, up 27.8% from a year before. It is at an all-time high for both price and annual growth. How does this stack up with household incomes?

National Bank of Canada’s latest estimate shows a down payment and income are far out of reach for most. A median household needs 6 years of savings for a down payment, double the average from 2000. Even if you have the down payment, incomes need to rise 88% higher to qualify for a mortgage. More than half of the country has zero chance of qualifying for a mortgage.

Good thing more than half of the country already owns a home, so this is just a problem for young people. To complicate the issue further, the academic-led non-profit Generation Squeeze highlights income disparity. When you say median income, you’re also referencing more established and older households. The median buyer looking to get into the market makes much less. On an inflation-adjusted basis, people between 25 and 34 years of age make less than they did in the 1970s. Affordability is rough for everyone, but try being at the bottom of experience and skill.

Let’s see how out of control this has become.

A Home Price Correction Brings Prices To When It Was “Unacceptable” To Fall

Let’s start with a minor technical correction for the typical home. If home prices dropped 10%, that would put the benchmark price at $717,100, where it was in April 2021. That month is the month a Canadian politician said a 10% drop in home prices would be unacceptable. On the upside, they also said home prices are still attractive to foreign buyers in that same interview.

A Crash Would Bring Prices To When A National Foreign Buyer Tax Was Proposed

In the technical sense, a price crash is when prices drop more than 20% from the all-time high. That would make the benchmark home price $638,560, putting them at January 2021 home price levels. A month before, they acknowledged home prices were unattainable, and floated a national foreign buyer tax.

Canada knows it doesn’t track corporate ownership, so it can’t accurately track residency. However, they still keep banging the drum on the issue, yet failing to actually track anything. The government is also conflating foreign buyers with non-resident capital, which has a bigger impact. An impact they’ve known about for almost three decades, but actively worked to bury evidence.

A Large Housing Crash Only Brings Prices To Pre-Pandemic Levels

What if a severe housing crash occurs, and home prices make a 30% drop. The typical home would cost $558,740, the same price as of December 2019. It wasn’t exactly a period where home buyers fawned over Canadian housing affordability.

The IMF had just told Canada its housing market was extended and vulnerable that month and year. They warned that “borrowing costs for riskier borrowers are near risk-free levels.” Essentially, the country was mis-pricing risk since riskier borrowers should pay higher premiums. Doing this undermined the impact of the central bank’s tightening of policy.

Funny story. The Bank of Canada (BoC) was buying mortgage bonds at the same time. This adds liquidity to mortgages, keeping interest costs lower. They scaled their purchases by 19x over the next year. It was the mullet of tightening policy — higher rates in the front, lower mortgages in the back.

Two Housing Crashes Would Bring Home Prices To Where Banks Warned It Was Out of Control

Okay, so we established a 30% drop would still be out of control. But let’s keep going to see precisely how negligent Canada has been. Let’s look at where Canada would be if home prices crashed twice in a row, making a 20% drop on top of a 20% drop. The unlikely scenario would put home prices at $510,848, levels last seen in February 2017. RBC CEO David McKay warned high home prices threaten Canada’s stability back then. Do you know how bad it has to be for the lender to sound the alarm? 

Canada’s national housing agency had also sounded the alarm. Its new leadership doesn’t feel the same way, however. Which brings up an important issue. Canada’s national housing agency is also a private company that insures mortgage risk. They have to actively try to make a profit, and warnings aren’t great for risk. Combining the two roles leads to an agency that easily slants with politics. It would be like Ontario telling the Ministry of Health it should pursue profit, and compete with Pfizer. It would be a bit of a conflict of interest, but that’s Canada’s housing market — the most overvalued in the G7.

Maybe 3 Housing Crashes Are A Charm? That’s Where The Bubble First Started

For shits and giggles, let’s see where home prices are if they experience a third housing crash. That would be a crash of 20%, pause, crash 20%, pause, and crash 20%. The unlikely scenario puts a typical home price at $408,700, which would be the level they were in January 2015. That was right before the US Federal Reserve exuberance index showed bubble behavior.

It wasn’t a bubble at this point, the Fed needs five quarters to declare a real estate bubble. At this point, responsible governments are supposed to begin addressing the risk. Otherwise, housing markets start to sap capital from more productive areas of the economy. This can lead to permanently slowed growth.

Shortly after was the first-time a newly elected Prime Minister promised to make housing affordable. Now in his third term, he’s finally getting warmed up, promising to fix an issue as though he had forgotten he already promised to fix it. Just three more terms, and BOOM! He’s going to get a plan in action, I feel it.

A Double Extreme Housing Crash Would Put Prices Down Where The BoC Warned of An Investor Bubble

Maybe a double extreme crash scenario, where real estate prices drop 30%, pause, and then drop another 30% afterward? That brings the national benchmark price to $390,200, about January 2014 prices. BoC governor Tiff Macklem was then deputy governor and warning of a housing bubble back then. He blamed investors, who had made Canada’s real estate market extended, and “vulnerable.” Now that he’s in charge, Tiff has said the country needs high home price growth. Bless his soul.

An Extreme Crash-and-A-Half With A Correction On Top Is Where The BoC Warned “Asian” Investors Are Making The Market Unaffordable

Let’s say Canada has a very unlikely, but one of the most extreme economic collapses in history. I don’t know what would trigger it. Flying beavers that shoot molten-hot laser beams out of their eyes or something. A crash and a half with a correction in one go — a 55% decline. Would take the benchmark price to $359,200 — 45% lower. Home prices would be at April 2011 levels. That’s when the Bank of Canada warned “Asian wealth” distorted the housing market.

“…now nearly 11 times the average Vancouver family’s household income, a multiple similar to those seen in Hong Kong and Sydney—cities that have also become part of a more globalized real estate market. Such valuations are extreme in both Canada and globally,” said then-Governor Mark Carney. I believe the former Goldman Sachs banker is the only central bank head to have warned of two real estate bubbles formed under their tenure. Now that’s something I’d put on my LinkedIn.  

Now, this isn’t to say home prices won’t be affordable if they make such a significant drop over time. Incomes have increased, and interest rates are much lower. Low rates are now a permanent fixture in Canada, with a neutral rate now forecast below inflation. However, that last point also means Canada’s optimal function for the economy at this point is a low-rate inequality driving machine. To put it bluntly, this is nothing short of a world-class fuck up, from at least a decade of bad policy.

The takeaway is, this issue didn’t just pop up overnight — many warnings were ignored. Every affordability measure rolled out made home prices more expensive. Even the BoC produced research showing monetary policy moved the wrong way for 30 years.

How do the federal government and central bank plan on moving forward? By doing the exact opposite of what the research shows. Instead they’ve repeated an industry narrative, failing to consider the value of money. Obviously, the best way to get out of a hole is to dig faster with bigger shovels.

On that note, maybe a small correction isn’t the emergency politicians claim it is. We keep hearing that homes are a retirement vehicle for people close to retirement. That a drop would unfairly penalize retirees that bought back in the 1980s. It sounds really wrong to let home prices fall, until you realize how much they’ve increased. It’s hard to believe retirements hinge on prices rising double the median income per year. Even more difficult to buy that narrative if you think that conclusion was drawn 40 years ago. It’s a tough sell to say retirees would be in jeopardy with a correction.

What is in jeopardy is the Canadian economy. Two generations of households are now largely dependent on parental wealth for homeownership. A point reflected in the OECD’s latest housing forecast. They see Canada’s economy as the worst-performing in the group for the next 40 years. Now that’s quality leadership in action, eh?

39 Comments

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  • Trader Jim 8 months ago

    Nice plot twist. I thought this was going to be about how much it needs to crash, but really it’s about polticians perpetually exploiting young Canadians. kudos!

    • joe Bidden 8 months ago

      you could see the fraud in west vancouver, Vancouver etc…Years of new listings for millions more with the same furniture , even pictures…once twice three times,,, or more… Communist party mega millionaires agreed by the hundreds to buy, increase price and sell to each other to manually force prices up…just like the Hunt brothers did to the silver market in the 70s….BC loved the hundreds of nbillions in tax revenue which is a sick price add on to all sales… The major drug lords, gangs joined in with crooked dictatorships from around the world laughing …

      Politicians need to be charged with corruption as they knew as it happened… Close Canadas realestate to citizens only….with a minimum 5 years citizenship and full residency at least 90% of the year…Close it to communist China whom prints money as fast as they can to manipulate world markets…

  • Gerald Haw 8 months ago

    Real talk. Even a 50% crash in Vancouver puts you in tiny cube, they’re trying to make windowless.

    • Nassim 8 months ago

      Can’t wait for the inevitable “cubicle homes.” I imagine in the future, Boomers will live in bungalows with no property taxes, while Gen Z gets corralled into live/work cubicles. Just like a regular office, but with shared showers. All owned by Blackrock, or some other godforsaken alternative asset manager.

      They’ll say it’s the greenest way to live, and any thing else is irresponsible.

      • PatK 8 months ago

        Industry should step up, make vehicles that people can live in, off-the grid.

      • Joanne 8 months ago

        Oh my lord, this feels like an actual dystopian possibility.

  • Rob Turner 8 months ago

    I’m a home owner and I’d be more than happy to see home prices fall 50%. At this point it’s the only way to restore a productive economy, and the government just wasted the biggest borrowing binge of all times with special unaudited contracts to their friends. Every level, to be more precise. It’s not a partisan issue, it’s an incompetent politician issue at every level.

    • Tim Fiorito 8 months ago

      Bring this man a bourbon.

    • Jason Azevedo 8 months ago

      Many people said interest rates would never be allowed to rise. Many people also say home prices can never fall like they do in the end of every bubble that ever existed. People’s opinions are based on emotions not history and facts.

  • C.Rose 8 months ago

    Everyone knows you can’t lose in real estate… that is the general belief now. It’s time to give people a lesson in “economics 101” – start the tightening cycle now!

    • Kris 8 months ago

      Can a rolling combination over the next 5-10 years with;
      – with a period of higher than normal inflation;
      – a less significant house price drops;
      – and wage increases over a period of time where home prices stay relatively flat,
      not do the same thing as the unlikely 60% drop, but without the same short term shock value?

  • VinS 8 months ago

    Yea… I would take a 50% drop in value of my home so that this insanity is corrected. The future of young Canadians… so Canada… is at stake. Maybe I am naive but the government can fix this if they wanted right?!

  • Heather 8 months ago

    Me, too, Rob. I’d be more than happy to see a 50% drop in home values. Yes, some would be hurt, however, you stay put and just go about your business, and get on with life. Value will crawl back up eventually. I’ve dealt with a 15-20% drop one time. Quite frankly, I ignored it and go on with my life.

    Also, Trudeau can’t sort out 24 Sussex, the PM’s usual home address. (It’s a mess and he doesn’t live there.) If he can’t sort that out (fix-it bill is $36 million of tax payers money, or how about tear it down and build a Passive House?) how can we expect him to fix Canada’s housing woes?

  • Donald Stevens 8 months ago

    Canada’s national housing agency is also a private company that insures mortgage risk. They have to actively try to make a profit, and warnings aren’t great for risk.

    Please note. CMHC is a federal Crown not a private company

    • Olivia 8 months ago

      There are two kinds of companies, private and public.

      A public company is confusingly a company must consult its shareholders for major decisions, and explain material risk. They must also have their director appointments voted on by publicly available equity.

      A private company is one that is generally in control of its assets, and does not require notifying the public. Crown-corporations are arms length state-owned companies, where the state is the only shareholder. It’s technically a private company, since its management is only subject to performance. There’s a reason its always headed by former Goldman Sachs bankers, and not public servants.

      company must consult the public in it’s appointment of directors, and have that regularly reviewed and subject to shareholder recall.

      A pr

  • Arthur 8 months ago

    Excellent recap of the highway to hell Stephen.
    Unfortunate that some don’t agree with you. I guess inflation targeting but failing is a good result for those wishing to re-write history in a different light.

    Building on success
    Tiff Macklem – Governor Empire Club of Canada
    Toronto, Ontario
    December 15, 2021
    Inflation targeting has served us well
    ….It has also protected those with lower or fixed incomes from losing their purchasing power.

  • Dean Orama 8 months ago

    I’d like to move, but even though my house is now “worth” more than a million, I’m priced out of any area as nice as the one I’m in now. What a mess.

  • Freddy 8 months ago

    What a great article Stephen. Jaw dropping sober reality.

  • V 8 months ago

    Very good article!

  • Mara 8 months ago

    Stephen, this surpasses in quality any article in the field. Laughing at the humorous touches, impressed by the optimization of communication obvious in your articles. What about writing about Florida real estate, a dear topic for many Canadians?

  • Tony Fontana 8 months ago

    Great article… just the right amount of sass on an issue that has really been doom and gloom for anyone under the age of 38 without rich parents. I like the references to article headlines written in the last ten years. It’s incredible how much bs media can sell and keep the lie going. If we don’t do something to fix this soon, everyone will end up being a realtor by 2030

  • Woolsock 8 months ago

    Wow.
    If I could distill Canadian real-estate into a resilient, spray-on industrial coating, patent it and sell it, I might actually be able to afford to buy…Canadian real-estate.

    I’m no economist, but I would suspect Canadians are going to have serious currency problems in the next while. (Maybe some good news for manufacturing?)
    Sometimes this website terrifies me.

  • Scott 8 months ago

    I keep telling people about what I read here (and tell them to read along too). They look at me like I’m an anti vaxxer (I’m not, but I think I’ve become an anti-owner)…

    • Doomcouver 8 months ago

      That’s what it’s like to be a contrarian I guess. I always think about it like this: if your average car cost $500,000 would you still want to own one? For some weird reason no one does the same mental math for housing. I’m convinced it’s a greed/fear thing.

      At some point it’s just too expensive to buy as shelter. If rents catch up to house prices I certainly won’t be capitulating and buying housing. I’ll be moving away or living in an RV or something. It’s not worth the down-side risk right now.

  • Ahmad Ali 8 months ago

    He’s right, young people can’t afford a home. There is no chance. We are unable to afford what was considered a family home 10 years ago.

    Pathetic really.

    If I was a criminal I would definitely be in real estate, the government did nothing to protect the middle class citizens.

  • Virginia 8 months ago

    🙃😉 I’m not smart enough to leave a witty comment, but I really did enjoy the read.

  • Vic 8 months ago

    Reality is 400,000 new immigrants every year, and the recent housing prices is much lower than Asian country.

  • Rational Thought 8 months ago

    Like to understand the following logic:
    1. If Canada ranks among the most expensive and less affordable markets in the world, why would foreign dollars continue to invest here? Assuming investors are rational.
    2. If prices have gone up substantially during the pandemic (closed or restricted borders) foreign buyers are buying our homes without viewing or visiting first?
    It’s very convenient for politicians to put blame on something that detaches them from all responsibility. The issue is supply. In BC, the ALR has prevent additional land from being developed. City planners (architects) warn against “urban sprawl”. It’s the vested interest control the market and the narrative.

    • JB 8 months ago

      Talk to any realtor. Foreign buyers buy real estate without seeing it frequently.

    • AB 8 months ago

      I suggest that you read the book Willful Blindness. You don’t have to look at a home before you buy it if you have no interest living in it. Investors will pay overinflated prices to launder their money because our government makes it easy for them to do it here.

  • Rational Thought 8 months ago

    1. If Canada ranks among the most expensive and less affordable markets in the world, why would foreign dollars continue to invest here? Assuming investors are rational.
    2. If prices have gone up substantially during the pandemic (closed or restricted borders) foreign buyers are buying our homes without viewing or visiting first?
    It’s very convenient for politicians to put blame on something that detaches them from all responsibility. The issue is supply. In BC, the ALR has prevent additional land from being developed. City planners (architects) warn against “urban sprawl”. It’s the vested interest control the market and the narrative.

    • Omar 8 months ago

      This has become the issue banks have been pointing out. Residential investment now outgrew all other types of investment. Now the gov is going to have to borrow to incentivize foreign income into the country.

    • Peter willmott 8 months ago

      They like Canada as we have stable governments and is considered a safe haven.
      Also to date they haven’t been overly taxed.
      A lot of money comes from the pacific rim ( Hong Kong and China) where I believe they are in constant fear of the government taking what they have away.
      They don’t need to look at it as they have no intention of ever living in it they just want it as an investment vehicle to protect their wealth.

  • Collin Wiancko 8 months ago

    These articles are laughable.

    FACT: Canada has only ever had 1 real estate crash. 1989

    The truth is that the Canadian economy is heavily reliant on real estate and the banking system that goes with it. All the talk in the world will not change the fact that real estate prices are not going down permanently any time soon. Even 5-10% corrections don’t happen all that often and reverse relatively quickly.

    FACT: Last time BoC went on rate hike cycle? 2016-2018. Are real estate prices higher today or in 2018?

    My point? Rate hikes won’t change real estate prices in the long run.

    • Peter Drunken 8 months ago

      Slow bus making a stop around here today? Your point isn’t even in the same realm as the author, so start there.

      Also, Canadian real estate crashes:
      – 1990
      – 1982
      – 1978
      – 1968

      Just because you make stuff up, doesn’t make it true.

  • Luco Lalo 8 months ago

    Great article.
    However what is sustaining housing prices is a shortgage of qualite homes in the affordable price range.
    Even if prices drop, the equivalent rent would still sustain a worthy yield for investors.
    I would hold for another summer before selling into a normalized post covid world.
    We will simply see more intergenerational housing or multi families dwellings.

    .

  • Peter Willmott 8 months ago

    Maybe the government could start by legislating that real estate agents must realistically set the asking price for homes so we don’t to continue to see the” sold over asking ” signs.
    At least if they were listed at the real anticipated value it might slow down the bidding wars, which further aggravate the situation.
    The penalty could be based on how much it went over asking price by. Say they forfeit 25% of the inflated price to the purchaser….$100,000 over asking give the purchaser $25,000 back. Not perfect, but brain storming here as residential real estate agents are making a killing all in the name of getting more money for the vendor, never mind themselves..

  • F. Frak 8 months ago

    While the data is shocking – a 30% crash only takes us back to late 2019.

    I think the real takeaway is that like any investment, time in the market is better than timing the market.

    I have many friends who are waiting for a crash to buy, but have missed out since 2016. When a house has become the greatest investment vehicle in Canada, it must be treated as such. Sure you may only could have bought a condo or small townhouse, but at least you would be in the market with whatever gains you made.

  • David 8 months ago

    We’ve got crazy high gov deficits paid for by creating money out of thin air… Euro, usd, cad… No sane rich person for example would buy Greece or Canada bonds at interest rates below inflation when chance of getting paid back is near zero long term. More money chasing after the same goods, houses. If it isn’t something to housing it’ll cause big inflation somewhere else

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