Canada’s real estate market is slumping, but experts say it won’t crash — here’s why

Canada's housing market is slumping - and fast.

In Toronto, the number of home resales was down about 47 per cent in July compared to the previous year, while new listings fell by about four per cent.

New data released Monday by Statistics Canada found home prices increased by a mere 0.1 per in July compared with June - the smallest increase in more than two years and well below the average annual inflation rate of 7.6 per cent for that month.

But while experts are predicting the housing downturn could be the largest in four decades, they say two factors will protect the market from a full-blown crash: immigration and additional households as a result of Canadians choosing to live alone or in smaller groups.

If the rate of immigration and current changes in household formation behaviour persists, we would likely not have a housing crash over the mid- to long-term," said Kate Choi, an associate professor of sociology at Western University and director of the Centre for Research on Social Inequality.

A crash refers to a scenario where prices fall by about 30 per cent and housing demand completely erodes, said Carrie Freestone, an economist at RBC and the report co-author.

The bank forecasts benchmark prices to fall by 13 per cent during this correction period - significantly less than the 30 per cent threshold for a crash.

It won't even make up, or fully offset, the gains we saw during the pandemic," said Freestone.

Between 2016 and 2021, the average Canadian household size declined by 0.02 people, according to a new RBC report released Aug. 17. There were about 140,000 new households nationwide between 2016 and 2021 as a result of Canadians, especially young adults, starting new - often smaller - households and forgoing multi-generational living.

A greater number of households overall means that those households will need more housing," said Choi. So that, in turn, will exert an upward pressure on housing prices."

That, paired with the federal government's targets to bring in a record 1.3 million new permanent residents by 2024 - adding about 555,000 new households - will help drive housing demand and contain a housing spiral."

Phil Soper, CEO and president of Royal LePage, expects to see a housing market uptick in the spring of 2023, as people begin to adjust to new interest rate levels. The market will recover soon, Soper said, because there is still pent-up demand from early in the pandemic.

Between 2017 and 2019, there was a pretty significant" housing correction because of Ontario's Fair Housing Plan and the new federal mortgage stress test, he noted. That led to the first wave of demand, which was unleashed during the pandemic amid low-interest rates and households sitting on a significant amount of money.

However, when this housing correction period began in February, largely due to rising interest rates, the market never got a chance to fully catch up or satisfy all the organic demand that was coming through" from that first correction, said Soper.

A caveat to the report's findings, Choi noted, was demand and housing prices could dampen further if household size trends reverse and more young adults choose to live with their parents longer due to the rising cost of living, thus leading to fewer new households.

Young adults, who are living in tight housing markets, tend to remain in their parents' homes for longer periods, or if living alone, move back when they are experiencing housing affordability issues," said Choi.

Despite this housing correction, there is still a severe lack of housing supply to meet the demands of the market when this correction is over, said Aled ab Iorwerth, deputy chief economist at the Canada Mortgage and Housing Corporation.

Immigration and smaller household sizes are all pointing to greater housing demand over the long term," he said. We need the housing supply to meet that demand."

Ab Iorwerth believes Toronto faces a lack of multi-unit housing, largely because much of the city is zoned for single, detached houses.

The need is to try and redevelop these areas and bring in greater density to accommodate younger households," he said.

Joshua Chong is a Toronto-based staff reporter for the Star. Reach Joshua via email: jchong@torstar.ca