Canada: The beginning of a house price supercycle?
Various articles recently declared the start of a global house-price supercycle, raising the question: Does this trend apply to Canada as well?
Are we at the start of a property 'supercycle'? – Mortgage Introducer
The house-price supercycle is just getting going – The Economist
Housing market ‘supercycle’ tipped to surge values by 30pct – The West Australian
House prices have defied gravity for years in Canada, consistently rising even as global economic shocks upended other industries. In the aftermath of the 2008 financial crisis and the recent global pandemic, the Canadian housing market has proven remarkably resilient. More resilient than the United States and the United Kingdom, which have similarly structured property markets. But, after prices have risen so much, is Canada entering a housing price supercycle, or is Canada’s market now dangerously overvalued due to dodging a significant correction during the 2008 downturn?
What is a Housing Price Supercycle?
A housing price supercycle is an extended period of rising property values driven by broad macroeconomic forces. Unlike shorter boom-bust cycles, supercycles are driven by structural factors, such as long-term demographic changes, global capital flows, and restrictive land-use policies, that lead to sustained price growth.
Post-World War II policies initiated this trend, particularly in the developed world. Governments began subsidizing mortgages, and increased urbanization led to a sharp demand for housing. The ability to build new infrastructure slowed, and cities imposed regulations that limited housing supply. This convergence of factors resulted in a prolonged upward trajectory for property values that has persisted for decades.
How Does This Apply to Canada?
Since 2008, Canada’s housing market has behaved differently from those in the U.S., Europe, and elsewhere. When global real estate prices fell by 6% in real terms during the financial crisis, Canada saw only a modest slowdown. The country never experienced the sharp correction other nations faced, which set it apart as a unique case.
Then, during the pandemic, many predicted a housing crash, but prices in most Canadian cities surged. Low interest rates, combined with a new demand for larger living spaces driven by remote work, led to bidding wars across the country. But even as central banks raised interest rates in 2021 to fight inflation, Canada’s house prices remained remarkably stable, only falling by 5.6% in real terms before beginning to rise again.
Demographic Pressures
Demographics are a key driver of Canada’s housing price growth. Immigration, a cornerstone of Canadian economic policy, has been growing steadily. Studies show that a 1% increase in immigration can lead to a 3.3% rise in house prices. With Canada accepting record numbers of immigrants each year, this surge in demand for housing is unlikely to abate soon.
However, in response to political pressure, Prime Minister Justin Trudeau has said he plans to lower the number of low-wage, temporary foreign workers and permanent residents being let into Canada. This is after a policy change in Spring 2024 that limits international student numbers. So, potentially, demographic pressures will ease.
Urbanization
Moreover, the concentration of economic activity in urban centres amplifies price pressures. Despite the rise of remote work, cities like Toronto and Vancouver remain magnets for jobs and entertainment. As long as people flock to these urban hubs, demand will outstrip the limited housing supply, driving higher prices.
However, telecommuting and remote work appear to ease the intensity of urbanization in Canada. Shifting workers and their families away from Toronto and Vancouver toward places like Ottawa, Oshawa, Halifax, and Hamilton. In most Canadian cities, 20 percent or more of the workforce are telecommuting. Ottawa-Gatineau is the highest where 34 percent of workers telecommute.
Why Hasn’t Canada Corrected?
Canada’s resilience has raised questions about whether its housing market is overvalued. Despite the supercycle theory, some experts argue that the lack of a significant correction in 2008 has left Canadian real estate vulnerable to overheating. In contrast to the U.S. market, where prices plunged during the financial crisis and took years to recover, Canada’s property sector has avoided a major reset, continually building on gains year after year.
Several signs point to overvaluation. In certain cities, the price-to-income ratio—the measure of house prices relative to household earnings—has reached unsustainable levels. While wages have grown, they haven’t kept pace with the meteoric rise in property values. This disparity suggests that the market may be overextended, particularly if borrowing costs rise further.
The Future of Canada’s Property Market
It appears that Canada’s housing market is still in a supercycle. Factors like falling mortgage rates, growing urbanization, and record immigration will likely support price growth in the near term. However, risks remain. Canada’s high household debt levels and strained affordability could eventually force a correction, particularly if mortgage rates stay high.
Canada’s property market has been a global outlier, insulated from the worst of past economic crises. Whether the country can continue to defy the odds or if a reckoning is on the horizon remains to be seen. As long as the structural drivers of housing demand remain in place, the market will likely stay buoyant—but caution is warranted.
Conclusion
Canada’s housing price supercycle theory suggests that long-term demographic and economic trends will sustain price growth for years. However, the lack of a pronounced correction in 2008 raises concerns about overvaluation. While Canada’s real estate market remains robust, balancing the risks and opportunities will be key to navigating the next phase of its housing journey.
