The Effects of Canada’s Housing Correction on the Economy

Canada’s housing downturn has several major knock-on effects for the country’s economy, including some that you may not have considered before.

By Josh Sherman | 3 minute read

A new report from CIBC Economics lists several major implications of a sluggish real estate market for the Canadian economy.

It’s no secret that the slowdown is impacting homebuilding — as well as employment within that sector and others — but the CIBC report, entitled “Canadian housing — Anatomy of a correction,” also notes harder-to-pin-down economic symptoms of a housing downturn.

For instance, there’s the so-called negative wealth effect. Put simply, the negative wealth effect is the idea that, when home values are declining, households spend less because they have less wealth — at least on paper. How much less they spend is tough to say, though CIBC, citing two separate research papers, suggests the average Canadian household will spend between $3,600 and $5,000 less annually in response to plunging home prices. 

“While the economic impact of rising prices is behind us, the impact of falling prices has started to show up, and will be more apparent in the future,” write Benjamin Tal, CIBC’s deputy chief economist, and his colleague, Senior Economist Katherine Judge. “The negative wealth effect, although hard to quantify, is hurting consumer sentiment.”

Fast-rising Canadian real estate values had previously encouraged homeowners to borrow more against their existing equity. As a result, “it is reasonable to expect a further increase in delinquency rates in the coming quarters,” note the CIBC economists (though neither is raising the alarm on this posing a major threat to the economy). 

Although the knock-on economic effects of a weaker housing market are often negative, there are some potentially beneficial implications, too. “Lower home prices means improved affordability for homebuyers — mostly first-time buyers,” the report reads.

Since cresting in early 2022, the average price of a Canadian home has fallen by about $110,000, which trims $22,000 off of a 20% downpayment on a typical house, according to the report’s estimate. Over that time period, the overall average downpayment has already decreased by $37,000, and that may partly negate the reduced spending resulting from the negative wealth effect.

Although an uptick in homebuying won’t entirely make up for reduced consumer spending, the housing downturn could also give the country the chance to work on long-term affordability solutions. “The current soft patch in housing activity should be viewed as an opportunity to deal with the main reason for high shelter prices in Canada — the unsustainably high cost of homebuilding,” the report concludes.