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Real Estate

1989-1996 Canadian Housing Collapse Looks Eerily Similar to Today

Canadian home prices fell from 1989-1996 taking 13 years to recover.

I recently wrote a couple articles proposing that Canadian real estate might be on a downward spiral. So far it has declined 10% on average since February. Some parts of the GTA have already experienced declines of up to 18%.

Hundreds of thousands of Canadians have deferred their mortgages. While some may have done so fraudulently most were in genuine financial distress, as millions of Canadians suddenly lost their jobs.

Unfortunately, these deferrals simply kick the can down the road – payments are piling up as is the interest on the deferred interest. Many of these mortgages will enter default. Many people who can no longer afford their homes will sell. Overall, the supply-demand dynamic is changing for the worse.

CMHC recently issued a report saying Canadian home prices could decline by up to 25% by the end of 2020. Others researchers have argued for larger declines.

As expected, those with a vested interest have cast the CMHC report as inflammatory. Many Canadians simply are in denial that a significant housing decline could happen.

Very smart people are sometimes unable to see breaks from normality. Remember when Federal Reserve Chairman Ben Bernanke was in denial about the US housing collapse?

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

Ben Bernanke, February 15 2006.

Bernanke said this (and many other similar quotes suggesting housing market stability) right when the US housing market was collapsing.

Nobody has a crystal ball, but frankly I find it appalling – but not surprising – that people are so quick to dismiss the possibility of a similar significant decline in Canada. Especially given the weak economic and consumer fundamentals. The fact is it is very difficult for people to accept discontinuous breaks in their reality, just as many couldn’t in February when it was clear that Covid-19 was growing into a global pandemic.

None of this is new. Canada experienced a very similar situation 30 years ago when home prices declined between 1989 and 1996, taking 13 years to recover. At that time immigration didn’t help, falling rates didn’t help and reduced housing inventory didn’t help.

Today, I came across a great thread on Twitter by @ExtraGuac4Me. The thread showed that the same denials were happening in 1989 – right before housing fell by 28% on average.

I’ve pasted the thread in its entirety below:

Before dismissing CMHC’s report, consider this: in 1989, pre-recession, Wood Gundy suggested Toronto home prices would drop by 25%. TREB called the report “inflammatory” & OREA stated “a large price decline is unlikely because the real-estate market doesn’t work like that”

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Mortgage rates then fell dramatically by over 500bps (5%!!) over the next few years. This was a significant drop in borrowing costs that cannot be understated.

And no, immigration did not fall in 1989. It went from about 191k in 1989 to 256k by 1993. Also, more immigrants chose major city centres in the 1990s compared to the 1980s. Yes, more immigrants came to Canada and even more went to the Toronto area.

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In the end, despite increased immigration to Canada with more people moving to the Toronto area and a substantial reduction in interest rates, prices fell 25% with many condos facing 35%+ declines.

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5 replies on “1989-1996 Canadian Housing Collapse Looks Eerily Similar to Today”

Your First paragraph is a lie to readers face. Today is Nov 2020..and housing prices are 20% up compared to Jan 2020….I am not sure how in May 2020, you were saying that prices had reduced by 20%…If I would be you, and I see that market has done totally opposite of what I said in May, then I would prefer just to remove my article from web, which make me look fool.

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I think they have just been kicked further down the road. We’ve seen a complete monumental screw-up in a monetary policy that will end the Canadian housing bubble. Despite what anybody thinks this prediction was just early. Reminds me of in the big short. They all place their short positions in that film because everything looks like it’s about to crash. However, the market keeps going up. That reminds me of last year. Crashes always happen when people least expect them. Irrational exuberance has peaked. Stagnation is hitting just like in the 80s. Interest rates have to go up otherwise inflation will bankrupt most people in this country. There’s no good ending. Inflation forces people into bankruptcy or interest rates will because of high debt levels in Canada. The deferral was key information that even though many resumed their payments. We know-how on the edge and unable to whether a crisis most people are. One is coming.

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Overall, I agree with your analysis; however, the situation in the early 1990’s was significantly different in one important way; the “Collapse of the Old Soviet Block”, which attracted foreign direct investments to the old communists states; like Poland, Hungry, the Baltic states etc. traditionally, these foreign investments would have come to Canada, USA, Australia, and to some lesser extent to Brazil and Argentina; but in the early 1990’s, those investments have been diverted to the newly freed old communist states in Eastern Europe which certainly contributed to the Recession in early 1990’s and the collapse of the Real Estates market in Canada and the USA.

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