introduction

Canada’s housing market has been a topic of intense discussion and speculation in recent years. As home prices continue to surge, many have expressed concerns about the sustainability of this growth. In this blog, we will explore the various factors affecting Canada’s housing market and the possibility of a housing bubble burst, drawing parallels with the U.S. housing market crash of 2008.

The ratio of home prices to household incomes surged to historical extremes last year, underscoring how expensive housing has become. The Bank of Canada’s housing affordability index has also deteriorated markedly because of both sky-high home prices and the recent surge in mortgage rates

Low Inventories: A False Security?

One common belief is that low inventories will act as a safety net for home prices, preventing them from plummeting. However, this argument lacks substantial support. While limited housing supply has certainly contributed to rising prices, it is not a guarantee that prices will remain stable indefinitely. The real concern lies in the rapid construction of new housing units outpacing household formation, a trend that has persisted for decades. This growing gap between supply and demand may soon manifest itself in the housing market.

Rising Unsold Completed Homes

At present, the number of completed homes sitting unsold is relatively low. However, as investment demand cools down, this figure is expected to rise. Furthermore, a substantial wave of housing supply is on the horizon, with a record number of housing units currently under construction. This impending influx of new properties could exert significant downward pressure on prices.

Immigration and Affordability

Some hope that increased immigration will help sustain housing demand. However, the affordability crisis plays a critical role in determining the feasibility of this scenario. The question arises: Is Canada attracting immigrants solely based on wealth, or can it offer them jobs with significantly higher wages than existing Canadians? Without either of these conditions being met, new immigrants may also find it challenging to enter the housing market, despite their aspirations.

The Risk of a Housing Bust

The looming threat of a housing bust prompts comparisons to the U.S. housing market crash of 2008. While there are similarities, such as the potential for a painful adjustment period, there are also key differences. The global economy is currently on a more robust footing, which may help mitigate the impact of a housing market downturn. Canadian policymakers will need to closely monitor and manage the situation.

The Way Forward

Canada is undoubtedly facing a challenging decade ahead if the housing bubble begins to deflate. Policymakers will be tasked with finding effective solutions to stabilize the housing market and minimize the economic fallout. A proactive approach, involving measures to address affordability, housing supply, and immigration policies, will be essential in averting a crisis.

Conclusion

The state of Canada’s housing market is at a critical juncture, with the possibility of a housing bubble burst looming on the horizon. While the future remains uncertain, it is clear that policymakers will need to take decisive action to navigate these challenges and ensure a stable and sustainable housing market for all Canadians. The day of reckoning may be approaching, but with prudent policies and strategic planning, Canada can weather the storm and emerge stronger on the other side.