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When will the housing bubble burst in Canada in 2022?

by Corben Grant on 10 May 2022

There are two things that have seemingly been constant fixtures in Canadian real estate for at least the last decade: the rising cost of homes, and the supposed Canadian housing bubble. It seems every month a new statistic release indicates rising prices, and right along with it, someone starts to call for the beginning of the end. Ok, this time it's really gonna happen!

Fortunately or unfortunately, that day has yet to come. This doesn't mean that the bubble isn't real or that we shouldn't be concerned, but it at least has proven that bubbles are incredibly hard to accurately predict until it is too late. After all, that is the very nature of speculative bubbles.

So, the years go on and prices go up and the apocalyptic bubble watchers proclaim their warnings and nothing changes. Investors continue to gamble and bet against the bubble, while Canadians who have been priced out of homeownership secretly (or not so secretly) hope this is the year.

The thing is, there is a pretty good case to be made that in 2022, things may actually be different. Naturally, the last few years were unprecedented on a global scale, but the conditions in the real estate market also were unlike anyone had ever seen. If there were ever a time to be calling for the potential crash of the Canadian housing bubble, this is it.

Of course, I know well enough that predicting the Canadian housing market crash is futile, and even just by writing such a prediction, I may just delay the event by another few years. However, it is only the most foolish of investors who believe that everything will go peachy all the time and those who refuse to understand where the bubble-believers are coming from are only setting themselves up for huge failure should the event actually come about.

In this article, we are going to look at the state of the Canadian housing bubble in 2022, factors that may contribute to a crash coming soon, and some reasons why it may not happen just yet.

Just what is the housing bubble?

A bubble is something that can occur in many different fields of investing and finance, not just in real estate. Essentially, due to any number of factors, investors begin to buy with far more exuberance than before. Prices are pushed ever higher as investors bet on the continued growth in value.

As prices rise, the perceived values become detached from the intrinsic values of the assets themselves. At some point, something triggers the start of a sell-off and investors rush to get out before things hit bottom. A panic ensues where prices can fall rapidly, sometimes double digits over just days. Those who bought at the top and those who are unable to sell can incur huge losses nearly overnight.

Bubbles are not purely hypothetical. There have been numerous cases of financial bubbles in history, dating as far back as the original Tulip Mania in 17th century Europe up to the more recent U.S. housing bubble.

The trouble with bubbles is that they are tough to prove while they are happening and it’s only in retrospect, after the bubble bursts, that economists and analysts can pick up the pieces of the situation and really see what happened.

Bubbles are catastrophic for those who are invested and a housing bubble would be even more so. In Canada, almost two-thirds of people own their homes or are paying off mortgages. Many of these homeowners bought at currently inflated prices, or rely on their homes for retirement, for example. The impact on a crash in Canada's housing market would be far more than just a decrease in an asset's price and could have huge affects on many other segments of the Canadian economy.

Is Canada in a bubble?

The biggest reason people point to a housing bubble in Canada is the increasing growth in prices, the way it has made homeownership less affordable for average people, and more attractive to investors and speculators who see real estate as a great way to make money. Even as deteriorating affordability sends buyers away from the market, prices still continue to rise.

Prices have consistently been on the rise since the millennium, even while the U.S. housing market crashed during the global financial crisis of 2008. According to the Canadian Real Estate Association, the Canadian average home price hit a peak in February of 2022 at around $816,000. Simply put, a large number of Canadians feel that the house prices are far beyond reasonable and many economists have agreed.

Why 2022 may be the year things turn around

Rapid expansion over the last two years

One of the biggest reasons that people see the Canadian housing bubble as an imminent threat right now is simply due to the pace of the market over the last two years. While prices have been climbing for decades, we saw the pace pick up to an unprecedented degree in 2020 and 2021. At the same time, interest rates were low enough to allow Canadian consumer debt to also hit new highs, meaning we are that much more vulnerable to potential economic shocks.

There is the psychological aspect observed in the last couple of years of people rushing to buy for fear of missing out. Not only were prices high, but so were sales, meaning an even greater number of people bought at elevated prices. While we have things like the mortgage stress test, there are ways that people can get around them and these risky loans paired with incredible high-value debts could spell trouble when rates rise.

Prices have room to fall

One of the things that have been commonly predicted for the coming year or two is a decline in home prices. RBC economics, for example, recently predicted home price growth to slow through 2022 and for home prices to actually fall in 2023. Already, we are seeing the impact of higher interest rates on cities like Toronto where prices are coming down from a peak.

A decrease in home prices is not the same thing as a bubble bursting. In fact, a slow decline is better news than prices continuing to rise. What this does indicate, however, is that there is a very real capacity for the market to falter. If the decline in prices is managed well and decreases gradually, things will not be so bad.

However, if other circumstances push homeowners to sell much more rapidly such as interest rates going too high or a recession causing mass layoffs, this could cause price declines to happen much faster. As panic sets in, that is when the bubble can burst.

Inflation and interest rates

With such low-interest rates over the last two years, the Canadian economy was able to make it through the pandemic relatively unscathed. However, it also caused inflation to rise and now we are dealing with the consequences.

Now that the central Bank of Canada is raising interest rates, house prices are already starting to react, though, plenty of unmet demand remains to keep prices elevated for now. As interest rates rise to combat inflation, there is the possibility of a recession that could greatly reduce activity in the Canadian market and push many to sell, causing the market to fall. Again, it all comes down to a question of how fast the changes may come.

Government regulations

One of the last times we saw a notable slow down in Canadian home prices was around 2016 and 2017 when governments introduced a slew of new housing regulations designed to help cool the market. The new changes actually worked, for a time, until housing prices continued to rise again. What this proves at least is that government regulation can make a difference, if at least in buyers' sentiment.

Once again, housing has become a top political issue. With a federal election just behind us, provincial elections coming up in Ontario and Quebec, and the ongoing conservative leadership race, there has been lots of talk about how politicians plan to tackle housing issues. The federal government has expressed plans to tax house flippers and ban foreign buyers, among other changes. It seems certain that by the end of the year, we may have a whole new set of initiatives to help control our housing market.

The question is how fast they are implemented and how strong the effects are. While the governments naturally want to avoid bursting the bubble, they must be careful. Laws that are too strict or implemented too fast could help in toppling the market unintentionally.

The bottom line

While there is a possibility of the Canadian bubble bursting this year, it seems like a less likely scenario overall. That being said, no one can tell you if the market is going to crash and you should not trust those who claim to be able to.

However, as an investor, it’s important to understand the potential paths we may go down, so you can prepare and make the most of your opportunities while protecting yourself from disaster.



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