Canada's housing downturn rivals U.S. bust but economy avoids recession, BMO says

Canada's housing market correction is close to rivalling the early 2000s crash in the United States, but the Canadian economy has so far avoided a comparable recession, according to a new analysis from BMO. Home prices in Canada have dropped 20.5 percent from the early 2022 peak, compared with a 26 percent decline during the U.S. housing bust. Despite this deep price decline in a housing-dependent economy, Canada's real GDP grew at an annualized pace of 1.7 percent over the four years since prices started falling, only slightly below the 2.0 percent average for this century. "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," said BMO Chief Economist Douglas Porter. He notes Canada has seen only one "traditional" recession in the past 35 years, which was the Global Financial Crisis, with 2020 being a policy-induced shutdown. Porter said it now takes "a near cataclysm to cause a full-scale downturn."

The bank's report points to several factors that helped mitigate the worst fallout. Porter notes that home prices surged 50 percent over the final two years before the peak, which contained the damage of the subsequent drop to a relatively small pool of recent buyers. The correction has also been largely contained to two provinces, leaving prices relatively unscathed for almost half the country. A substantial wealth cushion from earlier price gains helped limit spending cutbacks, while an aging population increasingly supports consumption through non-employment income like pensions.

Seniors aged 65 and over represented over one in five dollars of consumption in 2025, according to the report which cites Statistics Canada data. The bank also notes that stronger finances, including mortgage qualification hurdles like the stress test, helped minimize the volume of overextended borrowers. Interest rate cuts began less than a year after rates peaked, softening the normalization shock. Porter said the headline data reveals an economy that's "darn near invincible."

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However, Porter believes Canada's apparent escape from pain is partly an "illusion." He points to rapid population growth, which expanded at an annualized pace of 2.8 percent over the two years to early 2024, generally faster than GDP growth averaged. This helped to offset, and 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," the report states.

Measured per person, real GDP per capita fell in four of five quarters during the 2022-23 stretch, declining more than 2 percent 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," said Porter.

With files from Better Dwelling