Canada's housing correction rivals U.S. bust but economy avoids collapse, BMO says
Home prices have fallen 20.5% from their peak, but real GDP has grown, partly due to high immigration, the bank's chief economist notes.
Canada's housing correction is close to rivalling the U.S. crash of the early 2000s, but the economy has avoided a similar collapse, according to a new analysis from BMO.
Home prices in Canada have dropped 20.5% from the early-2022 peak, compared with a 26% decline during the U.S. housing bust, BMO Chief Economist Douglas Porter explained.
"This is arguably the most significant home price correction ever for Canada, and yet the economy has managed to avoid serious collateral damage from the deep decline," Porter said.
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Canada's real GDP grew at an annualized pace of 1.7% over the four years since prices started falling, which is only slightly below the 2.0% average for this century.
Porter noted Canada has seen only one "traditional" recession in the past 35 years. That was the Global Financial Crisis, with 2020 being a very different policy-induced shutdown.
He clarified, "... it's not as if recessions never happen, they are now just extremely rare events, and it takes a near cataclysm to cause a full-scale downturn."
The bank sees the brief period of peak home prices as one of the key differentiators. Porter notes prices surged 50% over the final two years, containing the damage to a relatively small pool.
The correction is also largely contained in two provinces, leaving prices relatively unscathed for almost half the country.
A substantial wealth cushion also helps limit spending cutbacks, while an aging population increasingly supports consumption through non-employment income such as pensions.
In fact, seniors (aged 65+) represented over 1 in 5 (22.4%) dollars of consumption in 2025, according to Statistics Canada.
The bank also notes that the finances were stronger. Mortgage qualification hurdles, like the stress test, helped minimize the volume of overextended borrowers.
Rate cuts began less than a year after rates peaked, softening the normalization shock. Overall, the headline data reveals an economy that's darn near invincible.
However, Porter believes Canada avoided the financial crisis, but avoiding the pain is partly an "illusion."
The population grew at an annualized pace of 2.8% over two years to early 2024, generally faster than GDP averaged. This helped to offset, possibly more than offset, any pullback in GDP.
The economy grew, but the population grew faster, meaning less economic output per person, despite headline gains.
Measured per person, real GDP per capita fell in four of five quarters during the 2022-23 stretch, falling more than 2% peak-to-trough.
Unemployment also climbed more than 2 percentage points over that period, a rare combination.
Porter says this has only occurred a handful of times in the past 60 years, and only during official recessions.
"In other words, some of Canada's Housing Houdini may have in fact been an illusion, not unlike the original act," says Porter.
With files from Better Dwelling