Has Canada’s housing bubble burst? It may depend on time and place

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Some economists are declaring that Canada’s housing bubble has burst. The housing market has indeed slowed considerably since its peak in February and March, but unfortunately economic bubbles are notoriously difficult to identify and are often only noticed after they burst.

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We should probably set some parameters defining the bubble in order to get a better grip on the market. Is the bubble defined, for example, by the collapse of housing prices, sales or both? Should market change be measured from top to bottom or viewed monthly or year after year? What level of decline in prices and sales constitutes a bubble burst, rather than just the usual market fluctuations in response to changes in demand or the regulatory framework?

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Examining housing market indicators quickly reveals that possible conclusions about the state of the housing market depend on the benchmarks used in their examination. A top-to-bottom comparison suggests a much larger drop in prices than annual comparisons reveal. Benchmarks are less relevant when comparing the decline in sales, which are down significantly year-over-year and peak-to-trough.

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A recent report by RBC Economics stated that the expected slowdown in home sales and prices is a result of rising interest rates. RBC expects interest rates to rise further, forecasting “the national benchmark to decline 14 percent (quarterly) from peak to trough.”

Again, comparison prices may differ from average prices, which do not take into account differences between housing quality and size over time. During a recession, sales activity may shift from larger, higher-quality homes to smaller, lower-quality homes; therefore, the change in average prices does not represent the change in the price of an average apartment.

At the same time, in some housing markets the decline in sales and prices will be greater than in others. For example, the RBC report shows that housing activity in Calgary has proved more resilient than in Toronto.

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Consider that the MLS Home Price Index (HPI), which adjusts for differences in home size and quality, fell 1.3 percent in Toronto in October compared to the same period last year, while Calgary rose 9.1 percent.

Peak-to-trough declines were also more pronounced in Toronto than in Calgary. Calgary’s HPI fell 4.2 percent in October after peaking in May. In Toronto, the index fell 18 percent from the peak in March. The RBC report noted that falling prices in Toronto have already given back half of the gains made during the pandemic.

The decline in apartment sales is steeper than prices. October sales in Toronto fell by 49 percent from the same time last year. In other major housing markets, the annual decline was smaller, 45.5 percent in Vancouver and 35 percent in Montreal. Annual home sales in Calgary fell even less, 14.9 percent.

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Is the 49 percent drop in sales the bursting of a bubble? Consider that very low interest rates introduced earlier during the pandemic fueled sales growth, with 60,000 more homes sold in Canada in 2020 and over 170,000 more in 2021 compared to 2019.

This year, the reversal of the interest rate system will lower the housing market to the pre-pandemic level. Even as interest rates rise, the Canadian Real Estate Association is predicting more sales in 2022 and 2023 than in 2019. The higher-than-pandemic sales forecast suggests housing demand is likely to be strong as the dust settles on interest rates.

There is no denying that the Canadian housing market has experienced a significant and expected slowdown since February. Will this form a bubble? The answer can be found in your own perspective.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be found on the Haider-Moranis Bulletin website, www.hmbulletin.com.