The Global Risk Institute is a Toronto-based outfit preoccupied with keeping the financial system from blowing up in our faces. Last month, it invited BMO economist Robert Kavcic to talk to its community about the Canadian housing market. He left his audience of risk managers with lots to consider. 

Kavcic presented a slide that traced three notable home-price cycles from recent history: the Ontario real-estate slump of the early 1990s; the Calgary market’s downturn in 2007; and the U.S. housing apocalypse, also from 2007. The U.S. bust was deeper than the others, but all followed a similar pattern: a condensed boom-bust period followed by a slow recovery.

Atop those calamitous lines, Kavcic overlaid the path that Ontario home prices have followed since 2022, when a once-in-a-lifetime combination of millennials aging out of their parents’ nest; unrestrained immigration; unusually low interest rates; and already high valuations combined to drive prices to unsustainable heights. 

Ontario’s path up, and now down, matches those other boom-bust cycles rather neatly. In case you were looking for something else to keep you up at night, the province’s current housing cycle adheres especially closely to the U.S. collapse—the one that unspooled into a global financial crisis and the Great Recession. “It didn’t really leave anywhere to go except down, and that’s where we are,” Kavcic said. 

Canada’s housing odyssey—a tragic story of how greed and lower-for-longer interest rates turned the dream of owning a home into a nightmare—could be entering its final phase. Canada’s population has declined for two consecutive quarters, and lots of rental units are hitting the market thanks in part to government incentives that encouraged developers to build for renters rather than buyers. The Canadian Real Estate Association’s national home price index has dropped some 20 per cent since its peak in 2022, as sky-high prices killed demand. Supply and demand are starting to rebalance, even in Toronto, where the crisis is most acute. “There’s going to be a tipping point where households get formed, and all of a sudden it’s going to be ‘Hurry up, buy a place,’” said Dan Dixon, principal at housing advisory firm Budson Consulting. 

The story isn’t over. Anything that resembles the prelude to the Great Recession demands attention. Tension in this final chapter will also come from politics. Abacus Data published a poll Friday that suggests that almost 70 per cent of Canadians think the federal government is doing too little to make houses more affordable. The Canadian Home Builders’ Association paid for the survey. That might explain why Abacus asked some rather specific questions about the unfairness of development fees and whether tax breaks for first-time buyers should be given to all buyers of newly built homes. Builders appear to want Prime Minister Mark Carney’s hand to guide the market’s correction, not the invisible one from Adam Smith’s The Wealth of Nations. 

Carney’s mandate letter to his newly appointed cabinet listed affordable housing as one of seven priorities. He created a new agency to lead that mission, and seeded it with $13 billion to build and finance affordable housing, a segment of the market that the private sector tends to ignore because the profit margins are lower. During his ascent to the Prime Minister’s Office, Carney also said his government would double the pace of annual housing starts to nearly 500,000. 

The prime minister has put less emphasis on housing lately. Maybe that’s because there’s only so much one person can do at once, and Carney has been busy. With the annual pace of housing starts at around 256,000 units, the prime minister might prefer that we forget that overpromise from the campaign. It’s probably a combination of those things, along with something else: the housing crisis is no longer the federal government’s problem to solve, and trying to do too much only risks making things worse. 

We talk about the housing crisis as a national problem; in fact, it has separated into dozens of local problems that can’t be solved by pulling levers in Ottawa. Another slide in Kavcic’s presentation shows that the Greater Toronto Area, the Greater Vancouver area and some of their environs have become buyer’s markets. Cities ranging from Edmonton to Montreal to Fredericton are seller’s markets, while markets such as Calgary, Ottawa and Hamilton, Ont. appeared to have found an equilibrium, based on sales-to-new listings ratios. 

The ultra-low interest rates that followed the financial crisis created the illusion of a national housing market because the cheap loans fuelled demand everywhere all at once. Our current situation should be a warning against relying too heavily on one-size-fits-all policies in an economy as diverse as Canada. The buying frenzy was fun at first, but that mania set the stage for the affordability crisis.  

On their own, near-zero interest rates weren’t the problem. They were a necessary response to the disinflationary pressures that came with the economic collapse in 2009, and then again during the pandemic. The problem was the government often failed to offset the negative spillovers from monetary policy with tighter lending rules. For example, with an election coming, then-prime minister Stephen Harper in 2015 rejected the advice of regulators that something be done to cool housing demand. 

They failed, I assume, because too many of their supporters were becoming (or had become) paper millionaires, and because the real estate industry emerged as a powerful lobby for demand-side subsidies aimed at keeping the party going. The politicization of financial regulation was why, in 2012, retired central bankers Paul Jenkins and Gordon Thiessen called for a new committee of regulators to oversee the financial system, in much the same way the central bank manages inflation. “Canada needs to act soon,” they wrote. 

Canada didn’t act at all. In 2016, then-finance minister Bill Morneau said broad oversight of the financial system would rest with him, as it had with his Conservative predecessors. The issue isn’t that elected officials were incapable of coming up with good policy. The mortgage stress test that the Office of the Superintendent of Financial Institutions imposed on banks is probably the reason the interest-rate spike that followed the pandemic didn’t trigger a wave of defaults and bankruptcies. The problem is that Ottawa waited until 2016 to do it. By then, it was too late. The housing bubble was fully inflated. 

The time to fix crises is before they start. The best thing Carney could do at this stage is overhaul the federal regulatory apparatus to make sure housing policy responds to market conditions, not political ones. Polls like the one from Abacus will make that hard, but when it comes to housing, Ottawa has already done quite enough. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.