Why House Prices in Canada Will Keep Going Up
A recent report from the Canadian Real Estate Association signalled that housing prices in the Greater Toronto Area through July 2017 fell 0.3 per cent from the same time last year. The news was apparently enough to give new homeowners a bad case of buyer’s remorse, cause deals to fall through, and induce hesitancy among those eager to enter the housing market. There’s speculation that Vancouver and Victoria could be next, and at long last, the Great Canadian Housing Crash could be upon us.
Don’t bet on it — now, and certainly not in the long term.
Housing, like almost every investment, is a waiting game. Data shows that investing in the stock market or housing any number of years ago — 10, 20, 30, 40 — would generally provide positive returns over the long term. And that considers the numerous shocks, drips, drops, recessions, and asset bubble bursts we’ve seen in the past several decades, including the 2008–09 global financial crisis that was sparked by the crash in the U.S. housing market.
In 2007, right before the global financial crisis, an investment of $10,000 in stocks that followed the S&P 500 Index, would now be worth approximately $17,500 — a 75 per cent increase. A house purchased in Canada in 2008, during the height of the crisis, at an average value of $300,000, would now, on average, be worth $475,000 — a 58 per cent increase.

Of course, during that time, and particularly through 2008 and 2009, the value of both the S&P 500 Index and a house in Canada would have dropped precipitously and for an extended period, as shown in the graph above. After the housing market crash, it was common to see reports of homeowners being unable to sell their homes in both Canada and the U.S. — no matter how low prices fell. For all intents and purposes, it was a buyer’s market, but nobody was buying. The market was abundant with fear, many lost their jobs, and the last idea on anyone’s mind was to invest in property — the very asset at the centre of the crisis.
Ask those same people who didn’t buy then how they feel now.
Investing is a risky and calculated game; only those who are dedicated to the craft can play it in the short term and win — and even then, it’s dicey. For the rest of us, patience is truly the most important virtue. Look at the long-term trend of a stock exchange index, like the S&P 500 or the TSX Composite Index, or a mutual fund, and you’ll see that generally speaking, they follow an ascending path over the long run. Yes, there are declines that can be sharp and unexpected, and linger for a few months, or even years, but in the end, the value of the investment keeps growing, because over time, markets move towards stability. For every correction, there is an eventual reaction that brings the price of an asset or investment back to equilibrium — where supply meets demand, and the market keeps rolling.
Take for example a scenario in which house prices in Canada fall significantly in the next year or two. In this case, the reaction that would lead the housing market back to stability would be the awakening of all those who have waited for the decline. It may take some time, but everyone who was waiting for prices to drop would now have their chance to enter the market, and as more and more people hired realtors and put in offers, eventually, we’d be right where we are today — with another hot housing market. If prices drop again after that, the same scenario would play out again. This is the reality of a boom and bust, capitalist economy. Housing is not immune to it.

In the long term, housing has proven to be a safe investment. You’ve undoubtedly heard economists declare that the cause of this housing crisis is the result of demand outpacing supply, and they’re correct: there are more people that want to purchase property than there are available units, particularly in markets like Toronto, Vancouver, and Victoria. The market is currently out of centre; demand has has left supply in its proverbial dust.
The thing about markets though, is that they eventually move back to stability. We’re already seeing the actions that will help push the market back to “normal” prices from governments at all levels. These initiatives include allowing for creative uses of properties to accommodate growing populations, such as permitting flexibility in the creation of secondary suites, being more lenient in rezoning applications, approving more high-rise buildings (because building vertically may be the most efficient and realistic solution to growing housing supply), creating more affordable living units, and tightening rules around speculation, rent increases, and down payment requirements. These policy decisions are welcome news for those who want to enter the housing market soon, but can’t afford to buy at current prices.
It’s also potentially bad news for current homeowners — but as noted above, likely only in the short term. As more housing units become available there will be more supply to fill demand, and current houses prices may dip. Presumably this will lead to more buyer’s remorse, broken deals, and declarations that finally, housing prices may come down, and stay down.
Only, even if prices dip for a few months, or even a few years, you can bet that they are going to climb right back up, and before you know it we’ll have another seller’s market on our hands. Because no matter what initiatives government may take up, they can’t build housing units faster than people want to buy properties. New homeowners who avoid panicking, and can afford to weather the potential storm, will likely come out with the return on investment they were hoping for, and potential buyers will have to live through another round of hot housing prices.
Ultimately, house prices in Canada will fluctuate. Government is slowly but surely realizing that increasing supply is the best solution they have, and their actions will produce slowdowns in the housing market. However, given that land is finite, supply-side policies are unlikely to change the long-term trajectory of housing prices, for good or ill.
Disclaimer: No part of this article should be construed as investment advice. For investment advice please consult a financial adviser.
