General Interest - Personal
What Happens During a Housing Market Crash?
August 05, 2022
Housing has been dominating Canadian headlines in some way, shape, or form for months upon months now. From skyrocketing real estate prices to bidding wars to rising mortgage interest rates to, more recently, a potential downturn in the market (or ‘market correction’ for those who prefer their glass to be half full). Housing bubble burst and housing market crash are a couple more less-glass-half-full terms that have also been thrown around with increasing regularity in recent months. So, what exactly is a housing market crash, and how have these crashes played out historically in Canada?
What is a housing market crash?
A housing market crash is a complex event with many factors at play. Simply put, a housing market crash is when the prices of houses start to decrease rapidly, often leading to a decrease in the number of homes being bought and sold. This usually happens when there is an oversupply of homes on the market and not enough buyers, which drives real estate prices down. Another reason is that, in part due to increasing interest rates, homeowners are defaulting on their mortgages more often, which reduces the value of houses.
What are the potential impacts from a housing market crash?
A housing market crash can have ripple effects throughout the economy. For example, construction activity will slow down as builders cut back on new projects. And banks may become more cautious about lending, which can make it harder for consumers to get loans for big-ticket items like cars and appliances. This, in turn, can lead to a decrease in consumer spending, which equates to a decrease in economic activity. This may lead to job losses. Additionally, a housing market crash could lead to an increase in foreclosures, from homeowners being unable to make their mortgage payments.
A brief look at historic Canadian housing market crashes
With Canada being as large and diverse as it is, there really isn’t a Canadian housing market – the housing market tends to be more regionally focused, and what may be happening in one province isn’t necessarily happening in another one. But while recent headlines may be causing some anxiety for homeowners, it's worth remembering that this isn't the first time the housing market here has taken a hit. In fact, there have been several significant crashes in the past century.
The most notable of these was during the Great Depression of the 1930s, when housing prices across the country plummeted. Many families were forced to sell their homes at a loss, and many more were unable to afford to keep up with their mortgage payments. As a result, foreclosures became widespread. It wasn't until the postwar boom of the 1950s that the housing market began to recover.
More recently, there was another notable housing market crash in the early 1990s. House prices plummeted, and again, foreclosures rose sharply. There are a few theories as to the root cause for this crash. Some say that it was due to a combination of interest rate hikes and an over-inflated market. Others blame the deregulation of the banking industry, which led to excessive lending and speculation. Whatever the cause, the 1990s housing market crash had a profound impact on the Canadian economy.
Fast forward another decade or so and we had the 2008 housing market crash. After years of steady growth, prices began to tumble, yet again. The crash was caused by a number of factors, including soaring oil prices, mounting consumer debt, and tighter lending standards. As a result, many homebuyers were forced to abandon their plans to purchase a property. It would take years for the market to recover, but ultimately it emerged stronger than ever before.
While each housing market crash is different (and scary), they all have one thing in common: they eventually end.
The best way to mitigate against a housing market crash
While a housing crash is by no means a foregone conclusion, it’s always prudent to consider steps that can be taken to mitigate the effects.
For starters, it's important to remember that the housing market is cyclical, so what goes up will eventually come down.
Secondly, take this opportunity to consult with your accountant to get professional guidance on how to best protect your assets during turbulent times. As your trusted advisor, your accountant is your best resource to help navigate financial waters in turbulent times.
Finally, a well-diversified portfolio is the best buffer for any market fluctuations.
Interested in a portfolio review to determine whether you are well-diversified enough? Reach out today!
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