Canadian Real Estate Bubble May Crash Until 2025 As Indicator Flashes Warning

Canada’s real estate bubble is popping, and another indicator is flashing a warning. Residential investment as a share of GDP fell again in Q3 2022, after peaking a year before. Such a large drop in housing investment has only ever preceded the popping of a real estate bubble. Central bank research also indicates real home prices are likely to fall until 2025, lining up nicely with prominent forecasts.

Residential Investment Is Great Until It Swallows Your Economy

Residential investment is the contribution to GDP made by housing investment. It includes new housing construction and major renovations, as well as some services. It’s the most direct contribution to GDP, but far from the whole impact. Related industries like finance and construction are strongly influenced by housing too. 

Residential investment growth is great, until it consumes your economy. A rising share of GDP means it’s outpacing general economic output. That’s a sign of a real estate bubble, since excess growth is sunk into a non-productive asset. Non-productive means it doesn’t provide more goods or services, regardless of cost. It could cost a nickel or $1 million, but it does the same thing for output.

The US Housing Bubble in 2006 is the best known example of housing consuming GDP. Residential investment peaked at 6.7% of GDP in 2006—nearly 1 in 15 GDP dollars. It fell sharply after the correction kicked off, falling to nearly 2% by 2010. An economy is more dependent on real estate as this surges, increasing the risk of shock. Countries don’t want a significant share of their economy to be just warehousing people.

Sharp Drops In Residential Investment Precede Sharp Corrections In Home Prices

The BIS, a central bank for central banks, produced a working paper confirming this. They found residential investment surged relative to GDP before spikes in home prices. A decline in the share is typical of real home price growth decelerating. On average, they found a recession occurs 2 years after investment contracts. Home prices also fell for an average of 4 years, according to an analysis of dozens of recessions.

What about cuts to interest rates? Rate cuts during steady investment periods have historically sent home prices surging higher. That’s due to the impact of pulled forward demand, but the impact is different post-bubble. The BIS found rising interest rates are associated with lower residential investment. However, the opposite wasn’t statistically significant.

Why it fails to stimulate home price growth was outside of scope for the research. They speculate reluctant sellers avoiding price drops to a sufficient level prevents the cycle from completing. If prices fell sufficiently, a faster growth cycle would then follow once again.

That said, on to Canada’s latest data. 

Canada’s Economy Was More Dependent On Housing Than The US In 2006

Canada’s residential investment is falling almost as fast as it increased. It represents 6.7% of GDP in Q3 2022, down 0.4 points from the previous quarter, and 0.9 points lower than last year. It remains at a level that was thought to be unusually high for the US, but it’s coming down sharply.

Canadian Real Estate Might Not Bottom Until 2025

It’s not just interest rates either. The share of residential investment peaked at 8.7% in Q1 2022, and fell 1.1 points in the year leading up to rate hikes. Annual real home price growth peaked one quarter after, according to US Fed research. A ballpark estimate using average timelines in the research would see a recession next quarter, and real home prices fall until 2025. The former is easier to see than the latter.

Canadian Residential Investment Vs Real Home Price

Canadian residential investment as a share of GDP compared to the annual percent change in real home prices.

*correction period is peak to trough for real home prices following a real estate bubble.

Source: Statistics Canada; US Federal Reserve; Better Dwelling.

Canada’s Real Estate Bubble Typically Pops With A Drop This Big

How does this hold up historically? Canada had two major real estate bubbles with sharp corrections—one in the early ’80s and early ’90s. The early ’80s bubble saw residential investment peak in Q2 ’81, and home prices a quarter after. The correction lasted peak to trough for nearly 4 years, close to the average. 

The ’90s real estate bubble saw residential investment peak in Q4 1989. Real home prices followed two quarters later, before a correction in ’96. Nearly 7 years of sliding prices until the market returned to growth. 

No two corrections are the same and the timelines are based on averages. In the ’80s, the correction was slightly under the average and the ’90s was much longer. However, an average length correction is what prominent forecasters are calling.

Global macro forecasting firm Oxford Economics sees home prices bottoming in mid-2024. RBC’s model shows the deepest correction in history, with prices bottoming in 2025. They used different models but came to similar conclusions on timeline. But maybe that random real estate agent that said rates can’t rise is right and home prices will rise this year.



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  • Omar 1 year ago

    You can see their point about home prices taking a longer time to correct from the forecast price drop and what’s affordable. It’s clear that more than half of people will no longer be able to own a home until the end of the fourth industrial revolution and there’s a shift in social structure we have yet to understand.

    There isn’t enough people able to absorb the share of housing needed at these prices though, and rents will become very unstable in the not-so-distant future at this rate.

  • Kyle 1 year ago

    Can’t understand how politicians intentionally fed people more credit while home prices were rising at unsustainable levels, and now they’re panicked about any of it rolling back. =

    They lost massive amounts of productivity.

  • Bruno 1 year ago

    Immigration is strong enough to prevent prices from falling.

    • Trader Jim 1 year ago

      Population growth during those two previous bubbles was higher than the current rate spread over a two-year average.

      People don’t realize the recent record growth includes people in 2021 that didn’t arrive, and are now balanced together in a larger cohort.

      Prices still fell, since the value of money is relative.

    • Mark Bayly 1 year ago

      Filling the country with destitute immigrants is not going to help your economy it will make it much worse If immigration was a great thing the immigrant capital of the planet Ontario would have a 500 billion dollar surplus not a 500 billion dollar debt

    • Ray 1 year ago

      Do you actually believe all the immigrants coming in can afford million dollar houses. FYI many immigrants are abandoning Canada faster than you realize especially Indians. Many even said they wish they were told how ridiculously expensive this country is. They never would have come.

    • Michael 1 year ago

      Hey Bruno, Trader Jim is right. The largest immigration period in Canadian history started just before the 1990’s bubble and continued all the way through it. The “immigration will sustain high real estate prices” narrative is a fallacy and it doesn’t take much research to figure that out. Credit will be the undoing of this next real estate correction and it will destroy paper AND real wealth.

    • Alex 1 year ago

      Immigration is so strong in fact, that we would never even be in this “correction” without government interference. The demand for homes is still very high, supply is nowhere near the demand, and the price drop is only the result of reduced affordability due to rate hikes. Too many, too soon.

  • Trader Jim 1 year ago

    Current market is very familiar in contrast to the late 70s. It’ll be interesting to see what the difference needs to be created to balance the ineffectiveness. In the 70s it was the collapse of Bretton Woods that led to the new era of borrowed growth.

    • J 1 year ago

      Not much coverage from mainstream Canadian Media on the pop. Have to look elsewhere for news coverage. Stinks to high heavens lmao.

      • john hartley 1 year ago

        do not underestimate the power of the construction developer consultant media web all of whom gorge on the gold rush. They will not be silenced by reality – never have and never will – more myths legends and fairy tales will be spun to support more “development”. It is just so much easier than actually producing more productivity and more goods and services.

    • Jo 1 year ago

      At 38, I just learned about Bretton Woods last year! Why isn’t it taught in the public school system? I feel like the BW agreement it is hugely important to the current state of our world!

  • Tom Wolfe 1 year ago

    Rather than trading houses among Canadians as prices fall, allowing some to adjust and others to enter the market, we will welcome 500,000 immigrants annually – most of whom will qualify for immigration by bringing buckets of money – to support housing. They will continue to buy the houses and the average Canadian will remain SOL or worse. We all know change is constant but few expected this unfortunate turn of events. Oh Canada indeed.

    • Martin Turner 1 year ago

      And yes you are right. When you can fill sports events with 80000 plus people paying 3 00 to 500 a seat, 10 a beer ,and whatever for for their identification swag that they dress the whole family with, poor citizens….give me a break! Gents …. have this seen this cycle happen over and over. At prime at 19.99 % , guess what,….we survived! Surprisingly so did the country. Dont listen to these so called M B A s…they know from text books ….not reality from the past is their guide book.

  • Rick Abrams 1 year ago

    In the US, we have trouble thinking that Canadians can do anything foolish. A Canadian is “an American who know how to treat people decently.” However, anyone can fail to realize that when a valuation of anything exceeds its true market value is it top portion is in FTX, i.e. it has no intrinsic worth. It’s inflated value is based upon the hope-delusion that someone dumb will come along and pay the inflated value. In other worse, is like a pyramid scheme.

    People fall to miss this aspect of the Bubble because the asset has some value. For example, an office building in Los Angeles’ downtown has some utility similar to how a car manufacturing plant has genuine value. A pyramid scheme has no intrinsic value and the only thing that keeps it going for a while is the expectation that more people will be dumb enough to buy into the “business plan.”

    When all the people who can be duped to buy into the grossly inflated market have been exhausted, the market crashes.

    The problem with Los Angeles is that it is not merely that real estate is far into the FTX zone, there are not non-speculators left. LA has ruined its Family Millennial class who have abandoned the city. As home values drop, there are not enough families left in LA to purchase the properties. To make matters worse for LA, the developers have construct dense apartment complexes which Family Millennial detest at any price. LA is basically left only with money launderers to buy into its inflated housing market.

  • Mark Bayly 1 year ago

    Government debt will continue to explode paying for Cadillac government services for the millions of vote importing immigrants Trudeau is bombarding the country with Taxes will go higher wages lower Not sure how housing prices will suddenly go through the roof again Maybe Trudeau will hand out a million dollars to every liberal voter who knows

  • V 1 year ago

    But Al Sinclair said house prices were going to keep going up and was telling people on CP24 to buy now……
    How could he be wrong?
    How could all these Realtors who told people prices were going to keep going up and to buy be wrong?
    One word……..GREED!
    Commission, commission, commission….
    That’s all they care about….wake up people!

  • Scott MacKinnon 1 year ago

    The result of politicians prioritizing their own re-election over sound decision making. I wish Stephen had become mayor…

    • Mike From IT 1 year ago

      He spoke to our municipal IT team (I’m out West), and he’s a good guy. From the sounds of it he’ll have a much bigger impact in his new role across more cities, and we’re looking forward to working with him.

      I don’t think he’s charismatic enough to win over the average person as a politician, but he comes across as trustworthy and generous one on one. I don’t think that can scale, but it can win over teams for leadership.

  • zalzon 1 year ago

    If Canadians don’t have the money for these homes, how would immigrants.

    Immigration is looking like a pyramid scheme to uphold property prices. But just like in 2008 in Florida, despite an influx of people into the states, real estate prices crashed hard.

  • Go T 1 year ago

    With poor leadership by unprofessionals, here’s the result. Minister of finance without financial degree. Son of the father who created the mess with real estate collapse before. My only question: didn’t all theses politicians understand this crush was coming at least 10 years ago? What was done to stop it? Continue lowering interest rate to stimulate speculation? Let non-residents to by properties for cash to laundry money? Now, bring more people to this country to skyrocket poverty and homelessness!! Seems like that’s the goal.

  • Anthony 1 year ago

    Been in real estate a long…long time and worked really hard maintaining and investing time and sweat. Buy in good locations, rent them out and forget about media and blah..blah..blah from so called experts. Let time take care of the rest. Bought a few properties for 200,000 and 300, 000’ each one of these properties are worth millions even today after the drop.

  • Jo 1 year ago

    At 38, I just learned about Bretton Woods last year! Why isn’t it taught in the public school system? I feel like the BW agreement it is hugely important to the current state of our world!

  • Yoroshiku 1 year ago

    I’d love it if BetterDwelling would respond to these comments:

    1) Immigration is strong enough to prevent prices from falling. (Common belief)
    2) If Canadians don’t have the money for these homes, how would immigrants?
    Immigration is looking like a pyramid scheme to uphold property prices. (I and others have this question too. Is every new immigrant a multi-millionaire?)

  • Barney 1 year ago

    Today got my BC Assessment on my home here and it is up 21% over last year. Still see sold signs here I await my tax notice with fear and trembling. Been in this home since 1973 and not for spec, or greed just a roof over my head and neighborhood has grown up around me. Too old to move or start over. Never expected to make anything on it. Just a home.

  • John Grant 1 year ago

    Everyone knows real estate has nowhere to go but down, way down and that most immigrants don’t have $600k – 1.3 million to buy a home….just ask a realtor

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