{"id":22499,"date":"2022-12-16T08:00:00","date_gmt":"2022-12-16T13:00:00","guid":{"rendered":"https:\/\/www.zolo.ca\/blog\/?p=22499"},"modified":"2022-12-16T09:55:53","modified_gmt":"2022-12-16T14:55:53","slug":"real-estate-housing-market-canada","status":"publish","type":"post","link":"https:\/\/www.zolo.ca\/blog\/real-estate-housing-market-canada","title":{"rendered":"How Canada\u2019s Real Estate Housing Market Looks Based on Historical Cycles"},"content":{"rendered":"\n\n\n<p>These days, finding a good news story about Canadian real estate takes time and effort. Both <a href=\"https:\/\/www.cbc.ca\/news\/business\/crea-house-data-october-1.6651867\">sales and house prices are down<\/a>. House prices are down by more than $170,000 on average since February, and <a href=\"https:\/\/www.cbc.ca\/news\/business\/crea-september-numbers-1.6616369\">sales are down<\/a> by around 30% year over year. But among the doom and gloom, there is a silver lining: we&#8217;ve been here before. We survived it, and we&#8217;ll survive it again. Here&#8217;s what you can expect while looking at Canada&#8217;s real estate housing market as we head into 2023.<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/canada-real-estate-market-2022\">What Does Real Estate Look Like for the Rest of 2022?<\/a><\/p><\/section>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"is-this-the-end-of-a-market-cycle?\">Is This the End of a Market Cycle?<\/h2>\n\n\n\n<p>If you study enough economic history, you&#8217;ll notice a pattern emerging. Some assets tend to have a cyclical value pattern, and these cycles have been going on for centuries. In most cases, the typical fuel for these patterns is debt. When buyers use debt to buy things, the economy grows. Eventually, buyers must pay back that debt, which causes a contraction in the value of that asset, and sometimes that effect can be more widespread. In this case, the entire economy can contract, also known as a recession. You can better understand every ongoing economic trend based on this simple observation.&nbsp;<\/p>\n\n\n\n<p>Canada&#8217;s real estate housing market follows these same cyclical value patterns and has experienced downturns. The last time we saw a significant downturn in Canada was in <a href=\"https:\/\/www.mpamag.com\/ca\/mortgage-industry\/business-growth\/revisiting-the-90s-recession\/287925\">the 1990s<\/a>. This downturn was marked by a few key conditions that make it easy to compare to the present day, like:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Speculation in the housing market<\/li><li>Major military conflicts<\/li><li>Oil price shock<\/li><li>Fear of inflation<\/li><\/ul>\n\n\n\n<p>The real estate downturn in the 1990s left lasting fear in that generation&#8217;s real estate investors. As a result, many baby boomers have decided to steer clear of this asset class.&nbsp;<\/p>\n\n\n\n<p>What happened in the 1990s was dramatic, but the downturn followed the typical real estate cycle&#8217;s usual pattern. A real estate cycle has four phases. Each phase has unique challenges for homeowners, sellers and buyers. You can tell which stage we&#8217;re in based on the absorption rate or how many homes sell in a set period.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Recovery:<\/strong> Phase one is known as the recovery phase and matches what you see in a seller&#8217;s market: less construction, rental rate increases, lower vacancy and a moderate absorption rate<\/li><li><strong>Expansion:<\/strong> Phase two is the expansion phase, similar to a seller&#8217;s market. But you&#8217;ll see more construction activity, mild rental rate increases, and lower vacancy. The absorption rate in this phase is moderate.<\/li><li><strong>Hyper supply:<\/strong> Phase three is hyper-supply or a buyer&#8217;s market. In this phase, you&#8217;ll see high construction rates, low rental rate increases, and higher vacancies. The absorption rate is usually lower.<\/li><li><strong>Recession:<\/strong> Lastly is phase four, known as a recession. We&#8217;d still be in a buyer&#8217;s market, but what&#8217;s changed is there will be less construction, low rental rate increases, and higher vacancy.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"1756\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/12\/Understanding-Real-Estate-Cycles-1024x1756.png\" alt=\"Buyers market vs sellers market\" class=\"wp-image-22500\"\/><\/figure>\n\n\n\n<p>To understand what is happening in real estate today, we need to look at history. Looking back at economic cycles in decades past will help explain what&#8217;s happening in Canada now. This context should comfort the average homebuyer or homeowner because we&#8217;ve been down this road before and recovered. The 90s correction, for example, affected many millennials&#8217; parents, who owned real estate through that era. Most still own their home today and recovered financially from the downturn.<\/p>\n\n\n\n<p>Let&#8217;s review Canada&#8217;s last three real estate housing market boom and bust cycles to find lessons for 2023 and beyond.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"the-1980s-recession:-the-era-of-19.7%-mortgage-rates\">The 1980s Recession: The Era of 19.7% Mortgage Rates<\/h2>\n\n\n\n<p>In 1981, the Canadian Consumer Price Index (CPI) was up an astounding 12.47%. The rate has been consistently rising since 1976. The Bank of Canada (BOC) tripled the prime interest rate during that period to fight inflation. This environment of hyperinflation and high-interest rates made housing extremely unaffordable across the country. The average mortgage rate in the 80s was comparable to a credit card rate today: <a href=\"https:\/\/brokersforlife.ca\/so-how-does-todays-mortgage-payment-compare-to-1981\/\">19.7%<\/a><\/p>\n\n\n\n<p>However, 1981 marked the peak of rising prices before the BOC policy began to have its intended effect. By the year&#8217;s second half, Canada was officially in a recession. Disinflation set in, encouraging the BOC to cut interest rates accordingly. Meanwhile, house prices that had peaked in the third quarter of 1981 would drift 30% to 50% lower over the next two years.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"1097\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/12\/The-1980s-Recession-1-1024x1097.png\" alt=\"high mortgage rates\" class=\"wp-image-22502\"\/><\/figure>\n\n\n\n<p><strong>Key lesson: <\/strong><em>Rapid rate hikes successfully broke the back of inflation. As a result, house prices dropped when disinflation set in.&nbsp;<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"the-1990s-recession:-a-lesson-in-curbing-inflation\">The 1990s Recession: A Lesson in Curbing Inflation<\/h2>\n\n\n\n<p>In 1991, CPI inflation was 5.6%, the highest rate in seven years. Again, the Bank of Canada deployed its most potent tool: rate hikes. It&#8217;s worth noting that <a href=\"https:\/\/www.inflation.eu\/en\/inflation-rates\/canada\/historic-inflation\/cpi-inflation-canada-1991.aspx\">inflation surged from 3.9% in 1986 to 5.6% in 1991<\/a>, even as the BOC doubled the prime rate over this period. Policymakers learned their lesson from the previous cycle and were more aggressive with rate hikes this time.&nbsp;<\/p>\n\n\n\n<p>The peak of inflation and interest rates also marked the peak for real estate prices in this era. <a href=\"https:\/\/www.cbc.ca\/archives\/1990s-real-estate-1.5899840\">As a result, house prices across Canada<\/a> fell from 40% to 50% from 1989 to 1996.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"1038\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/12\/Inflation-in-the-1990s-1024x1038.png\" alt=\"high inflation levels in Canada\" class=\"wp-image-22503\"\/><\/figure>\n\n\n\n<p><strong>Key lesson: <\/strong><em>Front-loading interest rate hikes capped inflation sooner but caused a deeper dip in house prices.<\/em>&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"the-2008-recession:-the-global-financial-crisis\">The 2008 Recession: The Global Financial Crisis<\/h2>\n\n\n\n<p>The Global Financial Crisis (GFC) of 2008 was an external shock from U.S. inflation. Rates were not in an upward trend before this crisis, but the U.S. Federal Reserve cut interest rates sharply to deal with this crisis which compelled the BOC to cut rates to unprecedented lows. By 2010, the overnight rate was near 0%.&nbsp;<\/p>\n\n\n\n<p>This recession didn&#8217;t start like those from the 1980s and 1990s. Instead of rapid inflation and subsequently increased interest rates to tame demand, an external shock did the opposite. As a result, this recession caused deflation and convinced policymakers to lower rates.&nbsp;<\/p>\n\n\n\n<p>The GFC resulted in a decade of access to ultra-low interest rates and cheap borrowing. These conditions fueled over a decade of the Canadian real estate boom. Since 2009 average home prices in Canada have surged from $ 300k to $735k. That&#8217;s a compounded annual growth rate of 17.5% over 14 years. This boom is just ending now.<\/p>\n\n\n\n<p><strong>Key lesson: <\/strong><em>Canada&#8217;s rate cuts created a prolonged and unsustainable housing boom.<\/em><strong>&nbsp;<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-can-we-expect-in-canada's-2023-real-estate-and-housing-market?\">What Can We Expect in Canada&#8217;s 2023 Real Estate and Housing Market?<\/h2>\n\n\n\n<p>Today&#8217;s downturn looks strikingly similar to the traditional cycles we experienced in the 1980s and 1990s. In addition, there&#8217;s an energy crisis and rising inflation due to COVID-related stimulus and worldwide supply chain shortages. As a result, the <a href=\"https:\/\/www.bankofcanada.ca\/core-functions\/monetary-policy\/key-interest-rate\/\">BOC is deploying rate hikes<\/a> to curb demand and tame inflation.&nbsp;<\/p>\n\n\n\n<p>Based on our lessons from past cycles, home prices will continue to fall until inflation decreases enough to end the BOC&#8217;s rate-hiking campaign. This phase could take several years, especially given how elevated valuations were during the recent boom. That said, there&#8217;s no guarantee that the current downturn will resemble what we&#8217;ve seen in the past, so staying informed is essential. Moreover, dropping housing prices isn&#8217;t all bad. If the trend follows the recessions we&#8217;ve seen in the past, there could be opportunities for new buyers or those looking to move up the housing ladder.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"967\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/12\/Daniel-Foch-Real-Estate-Expert-1024x967.png\" alt=\"real estate cycles\" class=\"wp-image-22504\"\/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-what-can-home-buyers-expect\"><strong>What Can Home Buyers Expect?<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>More monthly payments going to mortgage interest<\/li><li>Decrease in buying power (budget) as interest rates go up<\/li><li>Stricter criteria from lenders<\/li><li>Prices stabilizing into a seasonal cycle (i.e. &#8220;spring market&#8221;)<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-what-can-homeowners-expect\"><strong>What Can Homeowners Expect?<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>More significant monthly payments at mortgage renewal<\/li><li>Loss of home value or home equity<\/li><li>Less liquidity of home equity (more complex to get a HELOC or refinance)<\/li><li>Less liquidity of the asset (harder to sell)<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-what-can-sellers-expect\"><strong>What Can Sellers Expect?<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>A noticeable decrease in homebuyers&nbsp;<\/li><li>Selling a home will take much longer than during the pandemic&nbsp;<\/li><li>Offers that are conditional on financing and inspection&nbsp;<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"where-does-the-bank-of-canada-stand-today?\">Where Does the Bank of Canada Stand Today?<\/h2>\n\n\n\n<p>The BOC and the Federal Reserve signalled that they <em>intend<\/em> to end their rate hiking cycle relatively soon. However, the ultimate fate of interest rates depends on inflation. Based on statements from <a href=\"https:\/\/www.federalreserve.gov\/newsevents\/speech\/powell20221130a.htm\">Jerome Powell<\/a> and <a href=\"https:\/\/www.bankofcanada.ca\/2022\/12\/reflections-on-2022\/\">Tiff Macklem<\/a>, the central banks will likely make an effort to pause the increases but hold rates steady for a sustained period.&nbsp;<\/p>\n\n\n\n<p>History would tell us that interest rate hikes can lag up to 18 months before we fully feel the impact. As such, this next phase of monetary policy aims to see if increased rates accomplish the goal of lowering inflation. When inflation declines, the BOC will begin to reduce interest rates to stimulate the economy.<\/p>\n\n\n\n<p>The BOC has stated that its policy objective is to balance the labour market and eliminate job vacancies. This move would dampen wage inflation and eliminate the risk of a <a href=\"https:\/\/www.investopedia.com\/terms\/w\/wage-price-spiral.asp\">wage-price spiral<\/a>. However, it is worth noting that there <em>is<\/em> a risk that the <a href=\"https:\/\/ca.sports.yahoo.com\/news\/risk-overshooting-rates-lessening-bank-of-canada-cibc-172539980.html\">BOC &#8220;overshot&#8221; monetary policy objectives<\/a> by being too zealous with its rate hikes and may have inadvertently triggered a recession. Recessions can be economically painful for Canadians. However, they also have a 100% success rate for eliminating inflation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-can-you-do-to-manage-your-real-estate-risk?\">What Can You Do to Manage Your Real Estate Risk?<\/h2>\n\n\n\n<p>Buying real estate comes with risk. First, there is the risk your home won&#8217;t increase in value or that it could someday be worth less than when you bought it, which can cause problems if you want to sell your home. This risk increases when prices are higher and steadily climbing because there is a bigger chance of the value of your home decreasing due to market fluctuations.<\/p>\n\n\n\n<p>Conversely, a home purchased during a depressed or falling market is less risky because there is more opportunity for your home to increase in value as the real estate market recovers. Timing the market and buying at the bottom is difficult, but a declining market still represents an opportunity for savvy buyers.<\/p>\n\n\n\n<p>Although weathering a difficult economy, Canada&#8217;s real estate and housing market has continually rebounded through many historical economic moments. So, if you plan to buy or sell in the next two years, don&#8217;t panic. Keep an eye on the market and practice patience.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What can you expect to see over the next quarter? Real estate expert Daniel Foch shares his thoughts<\/p>\n","protected":false},"author":115,"featured_media":22505,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"guide":[],"class_list":["post-22499","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news-trends"],"acf":[],"zolo_excerpt":"","_links":{"self":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/22499","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/users\/115"}],"replies":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/comments?post=22499"}],"version-history":[{"count":3,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/22499\/revisions"}],"predecessor-version":[{"id":22508,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/22499\/revisions\/22508"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media\/22505"}],"wp:attachment":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media?parent=22499"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/categories?post=22499"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/tags?post=22499"},{"taxonomy":"guide","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/guide?post=22499"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}