Posthaste: Canada’s housing boom has been unprecedented; the fallout will be too, say these economists

Good Morning!

Most agree that Canada’s housing boom during the pandemic has been unprecedented.

Low interest rates, pandemic shifts in homebuyers’ preferences, excess household savings, ever higher price expectations and speculators and investors piling in have worked together to send home prices 50% above pre-pandemic levels as of February.

Now Oxford Economics argues that the aftermath of this boom will be unparalleled too.

In a report that goes beyond other forecasts of a cooling market, Tony Stillo, director of Canada Economics at Oxford, predicts that a housing correction beginning this autumn will see home prices decline 24% by mid-2024.

Oxford sees three triggers for the correction. First, and perhaps foremost, is the market itself. By late 2021, home prices were 19% beyond the borrowing capacity of median-income households in Canada, the report says, and the gains since then have just made it worse. Oxford expects by mid-year home prices will be an unprecedented 38% above what the average household can afford.

“We believe this will cause the housing market to reach a breaking point and crash under the weight of its own success before year end,” Stillo said in the report.

Second is higher borrowing rates. The Bank of Canada began its hiking cycle with a 25 basis-point increase earlier this month. Oxford expects a cautious path with three more hikes this year, a pause to assess the economy, and then gradual increases that will lift the rate to 2% by mid-2024.

Fixed-rate five-year mortgage rates are expected to rise to 4.25% by the end of this year and then climb gradually to 5% later in the decade.

The third trigger is new government housing policies. Some of the proposed national initiatives in the pipeline include a house-flipping tax, temporary ban on foreign ownership and a tax on non-resident-owned vacant homes.

A 24% drop in home prices sounds scary, and in normal times it would be.

But it would still leave prices 15% higher than before the pandemic, and lead to a healthier market, argues Oxford.

Home builders should have enough incentive to keep building and with a new government focus on increasing the housing supply, 2.35 million new units could be constructed this decade, outpacing the projected 1.9 million new households in Canada by 2030.

If that happens, Oxford forecasts home price growth would slow to about 0.7% a year between 2025 and 2030, less than inflation and income gains, gradually bringing homes back to a price Canadians can afford.

There are risks. While a 24% fall in home prices will knock near-term economic growth, it is unlikely to cause a recession or stress the financial system, said Oxford, though it adds that can’t be entirely ruled out.

However, if home prices continue to rise at the pace they have been there is a growing risk that prices won’t just correct, they will crash, the economists said.

“Although unlikely, a crash could see home prices plummet by 40% or more, with dire consequences for the broader economy and financial system,” Stillo wrote.

“The fallout from a housing crash would look a lot like the US housing meltdown during the global financial crisis, despite a minimal role for subprime lending in Canada.”

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