Clichés such as “what comes up, must go down” and “the bubble is going to burst” are only a couple of ominous phrases that can be applied to Canada’s housing market. Homes are oft considered a stalwart, secure investment, but the overvaluation of homes in the Great White North is growing in reasons for concern as much as it’s growing in cost.

Rating Housing Market

According to a study from Oxford Economics, Canada is only trumped by Australia and Sweden as countries where the housing market dangles precariously.

Inflated Cost = Inflated Debt

Canada’s sustained housing boom has been a catalyst to an influx in debt levels. Much of this debt is at a floating rate:  usually a debt instrument such as a loan, bond, mortgage, or credit, without a fixed interest rate throughout the duration of the instrument.

At 173 per cent of its long run average, Canada’s housing market overvaluation is only eclipsed by Hong Kong and New Zealand in comparison to the rest of the world. Adam Slater, a lead economist explains that too large of home valuations are strongly linked with eventual price declines.

The Oxford Economic study examined valuations in all OECD nations between 1970 and 2013. The results showed a 75 per cent chance of prices taking a downturn within five years after elevating more than 35 per cent over the long-run average.

When decreases came to fruition, the study found a median 14 per cent price drop. It should also be noted that prices did plummet over 20 per cent on a third of these occasions.

History’s Nagging Trend of Repeating Itself

History Housing Market

The last major housing devaluation in Canada occurred when many young adults hadn’t even entered Kindergarten, when in the 1990s, Toronto house prices free-fell seven years in a row. It would have taken until 2008 to break even (adjusted for inflation) if you had bought a home in 1990, when the market reached its peak.

Forebodingly, over the last fifty years, Toronto’s housing prices have actually been on the downturn for a whopping third of the time.

Could Canada Side Step the Downward Trend?

TD Bank economists, Derek Burleton and Rishi Sondhi don’t necessarily think the cyclical trend of the nation’s housing prices is doomed to repeat itself. Nationwide sales have bounced back and many seem to think it could be the end of the downturn.

Burleton and Sondhi do warn that stabilization doesn’t mean growth—especially given rapidly increasing mortgage rates, and homes becoming alarmingly less affordable. However, “sales and prices should gain traction across most major markets as the year continues to roll forward, as the effects of the (new mortgage rules) fade away and economic growth bolsters demand,” explain the two economists in a written report.

Furthermore, Burleton and Sondhi claim that the level of sales in 2018 won’t successfully recover the losses in the majority of markets.

There is sure to be a change in the housing market, and it will most certainly trend down. The only thing unsure is the significance of the damage done.