Canadian Real Estate Prices Don’t Always Rise Everywhere Forever: BMO

Canada’s oldest bank has a warning for homebuyers — prices don’t always rise. The uncharacteristic message came from BMO‘s chief economist Douglas Porter. Canada has seen few home price corrections, causing homebuyers to think of it as “risk-free.” Not just in Toronto or Vancouver, but virtually every market in the country, all simultaneously. BMO wants you to know that’s not always the case, and risks rise the longer home prices avoid a correction. 

Canadian Real Estate Prices Climbed Despite A Decade of Warnings

Canadian real estate has faced “bubble” warnings for nearly a decade that have not come true. Some dudes named Poloz and Macklem were even ranting about it back in 2013 but have since come around. Justified or not, listening to warnings for a decade tends to desensitize people. BMO argues this can’t go on forever, especially with the recent movements intensifying. 

Oxford Economics, a global macro research firm, had a similar warning. They cited it as a potential example of positive duration dependence. This economic concept states that risk rises the longer it’s absent.

“There is a sense among some that the Canadian housing market can never falter. After all, in the face of more than a decade’s worth of dire warnings, prices have mostly climbed relentlessly,” said Porter.  

Canadian Real Estate Has Only Had Two Major Stumbles

Canadian real estate has only experienced a limited number of corrections since 2000. Just two, to be more precise. There was the 2008/09 cycle during the global financial crisis. Then there was the foreign buyer mini-bubble in 2017/2018. The central bank had also begun to raise rates during the latter, cooling price growth. Vast injections of mortgage credit reversed both slow periods. Flooding the market with credit only extends market inefficiencies though, turning a minor issue into a big one. 

“Looking back to the start of the century, the market has had only two brief stumbles, even after adjusting for inflation,” he said. “… But, realistically, it’s mostly been a one-way trip north for the past 20 years.”

Canadian Home Prices Can’t Rise Always and Everywhere Forever

Great, that means party on? Not exactly. The bank warns that this hasn’t always been the case, and the corrections have been rough. “Note the two brutal corrections in the early 1980s and then again through the first half of the 1990s. In fact, had you bought a home in 1989, your investment would still have been down in inflation-adjusted terms 15 long years later,” he adds.

According to the bank, Canadian home prices had only recovered from the late 1980s bubble in 2004. Some experts warned that the US housing crash would spill over. However, Canadian home prices had only made modest gains by then, compared to the late 80s peak. 

Toronto real estate also charted a similar path, but it took much longer to recover. The city’s home prices didn’t overtake its 1989-inflation adjusted peak until 2011. When experts like Macklem had warned, they hadn’t taken inflation into account. Which seems fitting in hindsight, doesn’t it?  

No, BMO isn’t calling an epic crash that blows up the global economy in the next few months. “To be clear, we are not in the ‘deep correction’ camp, but we are in the camp that believes housing does not always and everywhere rise in value,” he said.

The bank sent a similar message earlier this year- once again — warning, but not calling a housing crash. Instead, they suggest make sure you like the place you buy because buying in a “bubble” means you can be stuck with it for a while. After all, no one wants to do hard time in a 400 sqft box for 15 to 20 years because the mortgage was a steal.

18 Comments

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  • Ike 10 months ago

    Nothing lasts forever, except for diamonds.

    – DeBeers

    • RainCityRyan 10 months ago

      … and loans which cannot be discharged by bankruptcy.

      *FTFY*

  • M.Bury 10 months ago

    Yeah, I remember the 80’s crash…one moment my high school mates were making $5k per week bragging about how smart they were, the next week they were stumbling around asking “What does bankrupt mean?”

  • Barron 10 months ago

    The government has promised to do everything possible to make sure that housing always goes up.

    They are TERRIFIED of raising interest rates.

  • Julian 10 months ago

    I really fine it hard to believe that prices will go down and stay down for any significant amount of time, at least in Ontario. There is such a housing shortage and the immigration flood gates are wide open again. For prices to be depressed such as was the case in 90s we need to see a huge shift from the status quo here. Maybe some very bad stagflation, the result of massive economic ineffiencies. Could happen but there is still such a pent-up demand for housing I can’t see prices going down and staying there for 5 years.

    • Alex 10 months ago

      Bubble bursts are unique in the sense that they typically are catalyzed by a rapid change in investor behavior, we don’t really have a lack of supply as much as we have a lack of housing liquidity as people and investors are unwilling to sell due to rising prices. If prices start declining rapidly, you will likely see a swath of housing stock hit the market in a very short amount of time, making supply a non-factor. It took 17 years for prices to climb back from the 1989 highs the last time our real estate went through a massive inflation cycle. People were saying back then the exact same thing you are now too.

  • mylifeisnotforever 10 months ago

    yeah, not forever, if it lasts for another 30 years then my life will be over too.

  • Youcant 10 months ago

    You can’t just let the whole world buy up all the properties at Canada and leaving Canadians no where to live !

  • Michael Westen 10 months ago

    Looking forward to seeing a re-hashed version of this article in 10 years. “It can’t keep going up forever guys it’s only a matter of time!”

    This crash can’t come soon enough.

    • Chang Xiu 10 months ago

      This site has already been doing that since it’s inception so you can just look at today’s.

  • Gordon 10 months ago

    Of course it does…it doesn’t always go in a straight line, no

    But anyone that thinks real estate in Canada will be cheaper in 20, 30, 50 years is not only delusional but on hardcore drugs

    • Alex 10 months ago

      Funny, it’s been 30 years and Japanese real estate hasn’t come anywhere near all time highs since the 91 crash(same with their stock market).

      It’s also important to note that the Japanese economy in the 80s was far larger and more diverse than the Canadian economy is now, and they had their central bank behind their backs as well.

      Don’t discount the idea that a housing crash in a highly leveraged market like ours could wipe out decades of wealth accumulation.

  • Common man 10 months ago

    This is Canada .Anything is possible… We are exceptions to the world.. Prices will not come down and no Politician can dare to bring it down, until a collapse happens.

  • Arthur 10 months ago

    There will come a time soon, when the logical choice in Canada real estate investing will be leave Canada.
    Tax collection will be unreliable from foreign investors unless Canada Revenue Agency pursues tax code changes to apply withholding tax on property sales of foreign owners. Similarly a withholding tax on sales proceeds for owners with undisclosed beneficial owners will be necessary.
    However, while current management inaction may not be indicative of future actions, likely current management will do nothing going forward. Think Turkey has a currency value problem, it’s nothing to what simmering for Canada. How much will your real estate value be with a near worthless cDN dollar (small c going forward)

  • Daniel Frustaglio 10 months ago

    Money is cheap cheap cheap…- demand goes up up up….. – prices go up up up……. Money costs more more more – demand goes down down down…prices go down down down – simple economic theory – for any good or service – including a house /condo

  • RWZM 10 months ago

    “What is Moral Hazard?”

    Moral hazard is all around you. It’s in the air you breathe.

  • Pratik 10 months ago

    I hope my kid will afford washroom for 10 million dollar in future. Because all a person need is atleast washroom in G7 country.

  • Average Man 10 months ago

    I think they should crash it just for funsies. Do Vancouver, too

Comments are closed.