What Happens if the Canadian Housing Market Crashes

It's rare that a week goes by without a foreboding headline about an imminent housing market crash making the rounds in Canada.

Even if you are someone who gets a certain amount of schadenfreude from watching housing speculators lose money, you probably know a huge housing crash is very, very bad. Canadians have been drowning themselves in debt to take advantage of the boom, and would have to face the reality that those investments may not earn them a baller retirement, and may even put them out of a home. Canada's government also relies on housing for tax revenue, GDP, and employment growth. But on the other hand, some are holding out hope that a price drop could mean a generation of renters (aka millennials) could finally enter the housing market, after the dust clears on the crash.

Now that international groups are calling for intervention and some economists are now predicting a 40 percent price drop, VICE reached out to experts to learn what a worst-case crash would actually look like. They told us a crash will probably hurt young people the most, and that many boomers who helped drive up prices will do just fine.

There won't likely be a "Big Short" moment for Canada's real estate industry with Steve Eismann and Michael Baum cashing in on the problem. Compared to the free-fall of the US stock market in 2008, Canada's crash will likely be a disaster in slow motion.

Steve Saretsky is a real estate agent working in Vancouver who says he sees red flags in different places, but there's no definitive warning sign of a crash right now, just that prices became too high too fast.

"Prices are up 50 percent in the last two years. That can't keep happening—when you have that kind of growth, it's followed by some sort of correction," says Saretsky.

Because the housing market has been such a reliable investment for so long, Canadians will probably continue spending every penny of their earnings and taking out risky loans just to get in the market. Saretsky says he's worked with many clients who are getting creative with their finances just to make a down payment—all with the belief that values will rise.

As fewer and fewer people have the means to buy in, prices will start to flatten out and we'll start to see fewer transactions. In the lead-up to a crash housing assessments will likely chug upward like the slow ascent of a roller coaster, then fall as sellers try to offload their homes before the values become too low to make a profit.

"That establishes a new level of prices for the neighbourhood, below what it would otherwise be," says Davidoff.

As prices drop, those who took risks to buy in last will be the first to feel the economic shock, according to Saretsky. Millennials who finally found the capital to enter the market will almost immediately suffer the effects of a crash.

People will start to lose their homes, or start renting out parts of them to cover the mortgage. Those who sell early and return to the rental market may find themselves stuck in another pricing crunch if no increase in rental supply occurs. "For a renter, a price crash doesn't do much for your affordability," says Davidoff, who pointed out homebuyers also fled to the rental market during the housing crash in the US in 2008.

The 2008 crash hit different geographic areas than the crash in the 80s. Instead of coastal cities such as New York and LA getting hit, it was mostly inland areas like Phoenix and Bakersfield. In Canada, the fallout would similarly depend on the source of the crash and may not necessarily be limited to the two hottest markets of Toronto and Vancouver.

"It depends on what's driving things," says Davidoff. "If it's a credit crunch it could certainly be in the lower end markets."

Finding affordability would be further complicated by job loss as the effect of the price crash moved outward. The construction industry and real estate agents themselves are an obvious first hit, but job losses would extend outward to lawyers involved in the paperwork, to contract labourers and security guards working on property developments.

"If prices come down even 20 percent, a lot of those people are going to be out of jobs," says Saretsky. "You end up with a very polarizing downturn."

Mortgage lenders would start to make less money and available credit would shrink. People who use their mortgage to leverage large commercial purchases like cars, jewelry and vacation timeshares would stop.

Davidoff and Saretsky both say the fallout would not be immediate, though it depends on the source of the price crash, but the effects would grow outward to the whole of the economy.

With the fall in oil prices and slowdown in the energy industry, real estate has grown to take its place as an economic driver. Between 2014 and 2016 the sector grew 6.8 per cent and the real estate industry currently contributes 12 per cent to the national GDP. "Canada's economy generally has become reliant on housing," says Davidoff.

Both Davidoff and Saretsky both point out that while the country's economy as a whole will take a hit, each residential market may not necessarily break.

Davidoff says pre-sold condos could create another mess. Properties bought and flipped before they're finished have been driving housing prices ever higher—which could go bust if international investment ever dries up. The future landscape could be filled with skeletal condo structures unfinished with graffitied advertising out front.

If there are winners in this equation, it's boomers—it's always the boomers, isn't it?—who may get away untouched.

Davidoff says it's hard to see a homeowner in Vancouver's West Side losing a damaging amount of home equity in a crash.

Banks could potentially be OK, too. Canada's housing market does not mirror the US despite the similar warning signs. Most banks hold insured mortgages or mortgage loans that don't have high loan to value ratios.

Regardless of the fall out the housing market has changed so dramatically that dream of owning a home will remain in a state of unreality for most Canadians.

"I have a vague feeling that up to about my generation, Gen X, we had it pretty good," says Davidoff. "Someone with a decent education and works hard could have a detached home in Vancouver. That's not the reality and that's a disappointment going forward."

Davidoff says we may not know when we hit bottom. The only sign may be when sales start back up again. And that's the potential upside for those who have been locked out of an unattainable market.

"Millennials will be able to get in eventually assuming they don't lose their job," says Davidoff.

As inventory builds up and the sales drop it will become more of a buyer's market.
In the end despite the growing trepidation over home prices that consistently and rapidly increase, it's difficult to say just when a price drop might occur, or how.

Davidoff says the policy environment is a bit confused at the moment. Governments have been warned to try and find a way to cool the market, but there's a conflicting desire to continue real estate's contribution to economic growth.

"No one wants to pull the punch bowl away from the party," says Davidoff. But eventually the party has to end.

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