Canada's Housing Market Crash History

Real estate is a major component of Canada's economy and many people's largest asset. So understanding the history of housing market crashes in Canada is an important part of understanding the Canadian economy.

In this piece we explore the history of housing market crashes in Canada and draw insights from each slump that can inform our understanding the market today.

When will the housing market crash in Canada next?

Let's start with the question everyone wants to know: when will the next housing market crash hit Canada? 

The truth is that we don't know. Experts have various theories and predictions for Canada's housing market, but no one knows for certain.

What we do know is what has happened in the past, and we can learn from previous housing market cycles to better understand what is happening right now. Let's now turn to previous housing market busts in Canada and see what we can learn. 

Early 1990s Housing Market Crash

Inflation in the 1970s and 1980s increased the consumer price index (what we use to measure inflation) to four times what it was at the start of 1970. Canadians, concerned over rising inflation, began to invest in the housing market. They regarded housing as both a hedge against future inflation and also an opportunity to use inflation to wipe out mortgage debt.

According to the Bank of Canada, inflationary psychology picked up during this time, meaning that Canadians did a lot of buying in anticipation of rising inflation, even if they didn’t have the cash for it. 

The Bank of Canada raised interest rates to levels that would shock people now (as high as 13%) in order to curb inflation. 

This, coupled with the buildup of debt during the inflationary period, resulted in a recession. Inflation-adjusted GDP growth fell to -3% by 1991 and unemployment grew to 11%.

As more workers were laid off and people grew pessimistic about the future of their jobs, Canadians stopped buying homes and prices fell, dropping continuously in some major markets from 1989 to 1996 (imagine, house prices actually going down). House prices in the Greater Toronto Area (GTA) dropped by nearly 34% from late 1989 to the start of 1991. 

2008 Canadian Housing Market Recession

The U.S. housing market imploded in late 2007, causing a cascade of economic devastation that threw the global economy into a deep recession. Then Bank of Canada Governor Mark Carney’s policies, along with a more tightly regulated banking sector, helped Canada avoid the worst of the fallout. Our housing market, however, was still impacted and prices fell in some markets.

Nationally, new housing starts dropped to 118,000 from an average of 175,000. Sales of existing homes fell by 40% from their peak. The national resale price for a house dropped by 9.5% and new home prices fell by 3.5%.

However, Canada's housing market did not plunge in the same way that the American market did. Analysts attribute this to a range of factors, including: 

  • A more regulated banking system which prevented lenders from giving mortgages to those who could not afford to pay them. 
  • Less securitization of mortgages, in which mortgage debts are packaged up and sold as securities.
  • Compulsory mortgage insurance for many borrowers. 
  • A smaller run-up in prices prior to the Recession compared to the American market. 

In response to the recession, the Bank of Canada lowered in interest rates and home prices in Canada soon began to rise again.

2017 Ontario Housing Market Downturn

Home prices started to pick up again after the 2008 recession, particularly in major markets like Vancouver and the GTA. In Toronto, prices grew steadily before spiking significantly in 2015, increasing by 15%. By March 2017, home prices in the GTA were at their highest, up over 34% from the same month in 2016. 

In response to the rapid increase in prices, the Ontario government at the time introduced the Fair Housing Plan, which contained 16 measures to cool the housing market including a 15% foreign buyer tax and expanded rent control rules. That plan worked to cool the housing market for a time: home sales dropped 15% and prices fell by 20% over the course of the year following the implementation of the legislation.

This drop, however, was temporary. 

By 2020, the detached housing market in Toronto — the part of the market most impacted by the Fair Housing Plan — had fully recovered and pushed past previous highs, erasing any effect of the downturn.

What's next for Canada's housing market?

Housing prices skyrocketed across the country during the COVID-19 pandemic due to a range of demand-side factors, including a greater demand for more living space during lockdown, city-dwellers moving to smaller towns, record low interest rates, and more savings piling up in people's bank accounts. 

As a consequence, the cost of owning a detached home in Canada now consumes 55% of the average household's income and residential investment makes up 9% of total economic output. The housing market is becoming an ever more important part of Canada's economy, for better or worse. 

Expert predictions on when (or if) the housing market will crash vary widely, and we don't have a crystal ball. But by looking at past housing market crashes we can learn some lessons: 

  • The housing market crash of the 1990s teaches us that housing prices can drop sharply and stay down for a long time. Investors who believe housing prices only go up are forgetting their history.

  • The housing market crash of 2008 shows us how badly a problem in the housing market can damage the rest of the economy, compounding the problems. Canada's heavy mortgage debt loads and dependence on real estate makes our economy more fragile.

  • The Ontario housing market downturn of 2017 shows that government policy can have a sharp and sudden impact on prices, but ultimately fundamentals of supply and demand prevail. The Fair Housing Plan may have achieved certain objectives at the time, but high demand and limited supply ultimately has pushed prices to new heights.

Suffice to say, we do not know what will come next for Canada's housing market or whether another crash is in our future. But it has happened before, and it could happen again.