Canadian real estate has seen some positive growth but won’t recover to peak valuations for another half decade. That was the take from BMO Capital Markets, who sees demand getting a boost from a few factors including cheaper, easier credit. However, they don’t see home prices returning to their peak until 2029, as a combination of factors that occur once-in-a-generation are now behind us.
Canadian Real Estate Fell 19% Since Hitting A Record High
Canadian real estate prices have been on a wild roller coaster over the past few years. Home prices surged 65% from 2020 to the record high in March 2022, after the Bank of Canada (BoC) slashed rates to a historic low and piled on quantitative ease (QE) to stimulate record home sales. A year after hitting that high and rates began climbing, prices plunged 19% and remained 17% lower as of last month.
Rates are now coming down again, but BMO doesn’t expect anywhere near the same level of price growth. In fact, they expect it will take more than 7 years to recover—and that isn’t far off from historical norms.
“While resale prices have found a floor across most markets, it’s still a long way back to the 2022 highs—as we’ve often said, think years not months,” says Robert Kavcic, senior economist at BMO.
Canadian Real Estate Prices Won’t Recover Peak Until 2029
The bank acknowledges the upside factors that many real estate bulls cite. There’s falling interest rates, extended amortization, and the federal government intervening to introduce mortgage credit capacity—despite the post-pandemic BoC Deputy Governor Carolyn Rogers warning it would be a mistake and reduce affordability. That is factored into the recovery, and they even make generous assumptions in their modeling.
“Indeed, even our base-case view, which incorporates a stable economy, steady wage growth and neutral interest rates, home prices don’t push through 2022 levels until about 2029,” explains Kavcic.
The seven year return to peak may sound like a long time, but it isn’t in real estate terms. According to the bank’s math, the 1995 Vancouver real estate crash took nearly 9 years to recover. Then there was Ontario’s early 90s crash that took 15 years, though inflation-adjusted Toronto didn’t recover for a whopping 22 years.
“Seven years from peak back to peak is not all that uncommon. Such a duration would be in line with some of the more drawn out price corrections seen in the past, but not as long as the deep and prolonged 1990s bear market,” he explains.
Canadian Real Estate Has A Lot In Common With The 90s Bubble
The bank expects a prolonged recovery time due to the peak of the bullish forces that drove Canada’s long-term boom. Those forces include Millennials hitting their demographic cresting—with the youngest ones already 34, their family-forming years (and need for more space) is coming to an end. It coincidentally peaked along with international migration, which has already begun to lose steam before new limits were imposed. Interest rates are also unlikely to return to the period of low post-Great Recession, as global bond yields normalize.
“Suffice it to say that this was an extraordinarily bullish trio that won’t be repeated,” Kavcic explains.
He doesn’t see a 90s style correction fully repeating, since that involved a “deep and progrolonged,” fiscal and currency crisis, and a sudden jump in interest rates in the mid-90s. However, he does explain this market is more like the 90s real estate bubble than many realize.
“…that piece of history certainly rhymes: Housing valuations entered the 1990s at similarly stretched valuations; investors and “lack of supply’ drove the narrative; the peak of the Baby Boom turned 34 years old in 1993, just like their kids today; and robust international immigration flows were cut in half from 1989 to the mid-1990s. That’s a rhyme, alright,” he warns.