Canadian real estate is perfectly efficient, and households never display signs of exuberance. That or it’s a ticking time bomb, waiting to go off. This year marks the 24th year of expanding home prices in Canada, and we’re two quarters into it. This isn’t just the longest expansion in Canadian history, it’s one of the longest in the world. The current expansion has lasted almost twice as long as the next G7 country. This one is going to take a little unpacking, so let’s get to it.
Duration Dependence
Duration dependence is a belief in economics that a trend is more likely to end the longer it persists. It’s common when discussing risk, especially around the business cycle. Longer periods of expansion are more likely to correct than brief ones. Similarly, longer periods of contractions are more likely to end and show growth.
Why? Human nature. The longer a trend occurs, the more likely it is to be overextended from a fundamental driver. Trends will often persist just because everyone thinks that’s what it does. Have you ever heard someone say, “real estate prices will rise,” without a reason other than “they always do”? That’s someone who now thinks growth will occur for the sake of growth. They believe the market is running solely on the same philosophy as cancer.
The further a trend extends from fundamentals, the higher the risk to shock. One wrong earnings report, too few sales, or everyone changing their mind can blow it up. Correcting inefficiencies can be delayed, but that only makes a market more inefficient. Inefficient markets result in toxic spillover. Ultimately, this creates a larger and more destructive market inefficiency.
Think of it like eating Oreos. If you need calories, you can live off Oreos for a long time, but you need real food at some point. The longer you put it off, the worse the consequences of your All-Oreos-Diet. It might have tasted great while you did it, but in the end you may have some regrets.
What does this have to do with real estate? Housing is a major part of the business cycle, and is subject to the same issues. The longer a correction doesn’t occur, the more likely the market has become inefficient. A correction can be delayed, but then the health of the economy begins to suffer. That’s when you get things like a misallocation of capital, both human and monetary. Now, let’s look at how long this expansion has been occurring.
The Canadian Property Bubble Has Expanded Over 24 Years
Canada is in the longest expansion of home prices without a correction ever. After Q2 2021, prices have logged 97 quarters without a technical correction (a drop of 10% or more). For you weirdos that don’t track the age of your kids by quarterly earnings reports, that’s 24.25 years. The previous bubble only took 5.25 years to go from trough to peak. Literally, a whole generation hasn’t seen home prices fall at the national level in Canada. Lil Nas X wasn’t even born when this expansion started.
To clarify, Canada has seen regional corrections over this period, especially segments. Toronto and Vancouver detached home prices dropped more than 10% in the past 5 years. The oil patch has also seen a general decline in home prices (even a crash) in the past decade. At the national level, it hasn’t occurred though. That means markets may be extremely inefficient in relation to productivity.
Canada’s Current Home Price Expansion Is The Longest In The G7
Canada’s expansion isn’t just unusual for Canada, it’s unusual for any advanced economy. The next closest country is Germany, where it is currently 12.5 years without a correction. Despite Germany having half the expansion, Canadian home prices have grown 3x faster. Compounding inefficiencies. The magic of math, eh?
Length of Home Price Expansion Across The G7
The length of time home prices in G7 countries have expanded with a correction (10% or more). Measured at the trough of the previous housing cycle correction or crash.
Source: US Federal Reserve; Better Dwelling.
The United States and the UK look tame in comparison. The US has seen home prices expand for 9 years without a correction now. In the UK, home prices have expanded 8 years since the previous trough. Canada’s expansion of home prices has lasted almost 3x as long as these two global powerhouses.
The length of time doesn’t mean Canadian real estate will crash soon. It means the risk of a correction gets stronger by the day. Maybe the market is perfectly efficient, and Canadians aren’t emotional about real estate? Perhaps they never overpay for a home, and calculate its cost with laser precision? Who knows.
What we do know is the expansion has been a very long time. It’s unusual for an advanced economy, and economists are mentioning the duration effect. They don’t see politicians extending the inefficiencies when a whole generation is priced out of shelter. But I’m guessing they haven’t heard a Canadian politician explain housing isn’t great for locals, but attractive to foreign buyers.
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We’re just a tiny island though, with over 100 million people. Not like England.
A perceived shortage is always at the root of every bubble.
It’s definitely because of the weather. Is today a smog or snow day?
It is controlled market – one way or another. The buble will burst when the people are pushed to the corner , realised the type of slavery they are in and start leaving Canada.
already did that. looking at lots of other countries to buy within. When you start looking abroad you really realize how messed up Canada is.
maybe we festerd longer coming out of the last contraction?
Well, by this logic housing bubble in HongKong Tokyo have lasted more than 50 years now. Housing bubble in Beijing, Shanghai, Guangzhou for more than 30 yrs. Yet their prices are still going up. Once the government decides to prop up housing you really cant naively assume just because its unaffordable and its been a long time its going to pop.
If you study economic history of the world you will find if its not a 3rd world country with ineffective government, its housing environment will be dictated by its government.
This isn’t true. I’m from Shanghai. The Mainland property bubble burst in 2011. The SAR like Hong Kong had a correction in 2015.
Stretching 10 and 6 years into 24 requires quite the imagination.
Housing in Tokyo is way less expensive than it was in the 1980s and ’90s. There was a point when the Imperial Palace was technically worth more than the entire State of California.
You are so wrong. Both places had corrections within 10 years!
In 1989, Japan represented a 50% of all the real estate value in the world. One suburb of Tokyo represented the value of all of California. Another suburb was equal to the entire value of Canada. The bubble burst, taking a number of banks with it and creating a decade-long-plus “balance sheet recession.”
Lol unfortunately prices always rise. There Will be periods of deflation but ultimately it will always be go up. That’s just how the world works. Buy the dips. I did. I’m a millionaire now.
“Millionaire,” just like 70% of the population.
My annual household salary is almost at 7-figures, and it feels only marginally better than what my parents had with a tenth of the income.
What the “property always goes up” crowd doesn’t get is opportunity cost of investing. If every middle class person is making 15% on their basic needs, you better be returning 3-4 times that in the public markets. Just buying a NASDAQ index would have tripled the return.
Remember the dot com bubble in 2000? The NASDAQ dropped like a stone. Went from a high of around 4800 and dropped to about 1380 in one year. People lost their shirts. In the 1950s the average 3 bedroom house was about $22,000-$25,000. People flocked to the suburbs. They realized it was a better lifestyle. Single-family home with a backyard. Fast forward to today that house is selling for $650,000.-$750,000. You need a roof over your head. Why pay someone else’s mortgage by renting? Sure prices of homes are linked to affordability. (How much you can afford to pay monthly.) With interests rates at historic lows, house prices have risen dramatically. Part of the problem is the red tape and 10 years of environmental reviews that need to happen before shovels go into the ground. They did not have those issues in the 1950s. But they actually had higher interest rates in the 1950s than today. No one has a crystal ball to say what will happen next to stock prices or home prices. But a house allows you a better lifestyle, possibilities of a home-based business, working from home is becoming more popular these days.
I don’t think this interface allows me to post images, but if it did, I would post the Case-Schiller index going back 100 years.
Really untrue comment. Very easy to say everything goes up because it requires no effort. There have been corrections and many of them in Asia and the US.
if you can buy the same or better property at 30-40% discount 3-4 years from now ( when this bubble bursts) why I should be bother.
Its wise to invest your own money in different segment now and rent for much less money.
Let’s say the “bubble” pops and prices fall by something extraordinary like 40%. Won’t people who made a ton of cash off of real estate just swoop in and buy up properties and eventually cause bidding wars a few years later, driving up prices once again?
No, because corrections reset the mindset for years. People are buying now because they don’t think the possibility of losing money exists. If they did, they wouldn’t lever up like this because they want diversified protection.
People don’t stop buying homes, but they stop spending as much as they possibly can to get them.
GTA Landlord, you’ve got it exactly. People think economics is all math and figures… its mostly about how the majority of folks collectively “feel”.
In this school of thought there is only the price and information. The exact meaning of “bubble” is sort of a side show. If prices are rising it means collectively we think they will continue to rise. Since if we didn’t you wouldn’t buy and the correction would be happening. Didn’t Mr. Eugene Fama get a Nobel for something like that? lol
And I’ve said this a few times for delusional people that think RE only goes up: Bought our first house in ’91 and sold in ’99 for 6% less than what he paid for it. It took until 2003 for prices to come back to 1990 levels. And now, the cost of buying is much higher based on average household incomes, even factoring in free money now (our 1st mortgage was at 12.5%).
Excuse typo. Should read: “sold in 2011”
Been there done that. Bought in 1989 GTA , sold in 2011. Lost money (interest rates, maintenance, etc). Properly was worth 50% more upon selling than I paid, and the cost of ownership far exceeded the minimal equity gain for such a long time period. It can happen again.