Is Canada's Housing Market Crashing? Here's How to Tell

When Canada’s real estate market screeches to an unexpected halt, it’s fair to wonder if a housing crash is on its way.

But full-on market crashes are rare. When home sales and prices fall after an intense period of growth, a correction — a return to whatever “normal” means for Canadian housing — may be the more likely explanation.

Let’s explore the difference between housing crashes and corrections, and then try to answer the trillion-dollar question: Is Canada’s housing market crashing in 2023?

Recent housing crashes in North America

Before diving into crashes and corrections in general, a little historical perspective will be useful.

The two most recent crashes to impact North American housing markets were the 2007-2013 downturn that impacted the U.S., and the crash that brought down Canadian housing values in the early 1990s.

America’s housing crash during the Global Financial Crisis saw the country’s median home price fall by 29% between July 2006 and January 2009. During that period, the housing market is estimated to have shed more than $4.5 trillion in value.

Canada’s last housing crash, which lasted roughly from 1989 to 1995, wasn’t as catastrophic, but it hit certain markets especially hard. By August 1993, the average home price in Toronto, for example, had dropped by 28% from its April 1989 peak, bottoming out at $189,000.

What would a Canadian housing crash look like?

There’s no technical definition of a housing crash, but we can see that they have at least two common outcomes: severely decreased home prices and years-long recoveries.

To get a full sense of what a Canadian housing crash might look like, we have to consider the causes. Three factors that fed into Canada and the U.S.’s most recent crashes were:

High unemployment. During Canada’s last housing crash in the early 1990s, a two-year recession contributed to employment hitting 11.3% in 1992. During the crash that hit the U.S. market, the unemployment rate rose from 5% to 10% from 2007 to 2009.
External triggers. The 1990s crash in Canada resulted from a combination of inflation, recession and job losses spilling over into the housing market. In the U.S., it was shady subprime mortgages that put U.S. homeowners into loans they had little chance of paying back.
Lack of predictability. Crashes tend to blindside the housing market, which may be partly why the repercussions last longer. In The Big Short, for example, the book and Oscar-winning movie that detailed the U.S. housing crash, one gets the feeling only a handful of people in the entire world saw America’s real estate crash coming in 2007.

A Canadian housing crash would also require a change in home buying sentiment, where buyers avoid the market because of the perceived financial risk rather than prioritizing home ownership. A shift like that would likely contribute to home prices staying lower for longer.

What is a housing market correction?

The difference between a housing crash and a housing correction comes down to severity, says Phil Soper, president of national real estate brokerage Royal LePage

“In America, the [last] real estate crash lasted about six years. A market correction should take somewhere between six and 18 months,” Soper says, adding that prices typically fall by double-digit percentages during a crash and by single digit percentages in a correction.

Housing corrections also differ from crashes in terms of their causes. Corrections tend to be the result of changes to the housing market: sharp increases in mortgage interest rates, for example, or new regulations that reduce buying power, like the mortgage stress test, have both kicked-off housing corrections.

Unlike housing crashes, corrections don’t require widespread job losses. Canada’s unemployment rate, for example, was at a record low when the market began cooling off in mid-2022.

Is Canada’s housing market crashing in 2023?

A few months into 2023, we can say that Canada’s housing market hasn’t crashed — yet.

Home prices haven’t fallen fast enough to be in crash territory. The national average home price in February 2023, $662,437, was down 18.9% year-over-year. That’s a frightening number, but it’s also $50,000 higher than the month before, which shows market resiliency.

It’s important to note that February 2022 set Canada’s all-time average price record. Mortgage rates were still at historic lows then, so a drastic fall-off in sales and home values is to be expected now that rates are much higher and buyers have less capital to work with. The decline in prices is a sign that the market’s working, not that it’s broken.

Let’s see how a few local and provincial markets fared in February 2023:

The benchmark price for homes sold in Vancouver was only 9.3% lower than it was a year before. British Columbia’s average sale price fell by 14.7% over the same period.
In Calgary, the overall average price was up 1.5% versus February 2022, while Alberta’s average price fell by 10.6%.
The average price of detached, condo and attached properties in Winnipeg were down 13%, 5% and 0.1%, respectively, year-over-year.
The average sale price in Halifax dipped by 8.7% versus February 2022. The average price in all of Nova Scotia was down by only 4.3% over the same period.

The numbers are a little uglier in Ontario, where the average price fell by more than 20% year-over-year in February 2023. But it’s important to keep some perspective when looking for a real estate crash.

The average home price for detached homes in Toronto, for example, was down 17.5% compared to last February, but still higher than it’s been since June 2022. And even though the provincial average price has fallen considerably since the market peak, it’s still higher than it’s been in eight months.

Things can always take a turn for the worse. Remember that high inflation and interest rates, two factors weighing on Canadian housing today, both played a role in Canada’s last crash. But there are reasons to believe a housing crash may not be in the country’s future.

3 reasons why Canada should avoid a housing crash

First, Canada’s economy is diversified and generally strong — and supported by government stimulus when it isn’t, like during the COVID-19 pandemic. These characteristics help prevent mass job losses among Canadian homeowners in times of economic stress. If people can afford to pay their mortgages, they shouldn’t need to sell their homes for far less than they paid for them, which is typical behaviour in a housing crash.

Second, Canada’s mortgage lenders are careful when evaluating borrowers. Their increasingly strict lending standards help prevent the delinquencies and foreclosures that feed a housing crash. There’s also the mortgage stress test and mandatory mortgage default insurance for buyers putting down less than 20%. The former is designed to give borrowers breathing room in case mortgage rates rise during their mortgage terms; the latter ensures lenders get paid so they can keep financing new buyers.

Third, strong population growth should continue supporting housing demand. Canada’s population grew by 1.8 million people between 2016 and 2021, faster than any other G7 nation. The government’s ambitious immigration targets could add another 1.3 million new arrivals by 2024. With Canada’s population growing so quickly, demand for housing won’t be falling off anytime soon — among end-use buyers or investors. High demand generally prevents sales and prices from bottoming out for an extended period of time.

There’s no fixed definition for a real estate crash, but recent crashes in Canada and the U.S. have seen home prices drop by double-digits and remain suppressed for several years as buyers avoid what they see as a risky market.

Canada’s housing market is correcting in 2023, as buyers readjust to higher mortgage interest rates. Sales and price declines should flatten out, and eventually reverse, once interest rates come back down. High demand for housing and a low supply of homes for sale should keep the market from an all-out crash.