The Canadian real estate market has undergone significant fluctuations in recent years, with home prices soaring to unprecedented heights before experiencing a sharp decline. According to BMO Capital Markets, while the market has shown some positive growth, it is unlikely to recover to its peak levels until 2029.

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A Surge and a Fall

Between 2020 and March 2022, Canadian home prices surged by an astonishing 65%. This rapid increase was driven by the Bank of Canada’s decision to cut interest rates to historically low levels and implement quantitative easing (QE) to stimulate the housing market. However, after reaching a record high, prices began to tumble as interest rates started to rise. By the following year, prices had dropped by 19%, and they remained 17% lower as of the latest data.

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BMO’s Outlook

While the Bank of Canada is now lowering interest rates again, BMO does not foresee the same level of price growth that characterized the previous boom. Robert Kavcic, Senior Economist at BMO, stated that although resale prices have found a floor in many markets, it will take several years before home prices return to their 2022 highs. BMO's base-case scenario assumes a stable economy, steady wage growth, and neutral interest rates, with home prices not expected to surpass the 2022 levels until around 2029.

This seven-year timeline may seem lengthy, but in real estate terms, it is relatively typical. Historical data shows that it took nearly nine years for Vancouver’s real estate market to recover from the 1995 crash. Similarly, Ontario’s early 90s crash took 15 years to recover, with inflation-adjusted Toronto prices not reaching pre-crash levels for 22 years.

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Factors Driving the Slow Recovery

Several factors contribute to the slow recovery of Canadian real estate prices. One major factor is the demographic shift of Millennials, whose family-forming years are coming to an end. With many Millennials already in their mid-30s, the demand for larger homes is starting to taper off. Additionally, international migration, which played a significant role in the housing market's growth, has begun to lose momentum. Restrictions on immigration are also expected to limit this factor’s impact in the coming years.

Moreover, interest rates are unlikely to return to the ultra-low levels experienced during the post-Great Recession period, as global bond yields continue to normalize. The combination of these factors—demographic changes, reduced international migration, and more normalized interest rates—means the exceptional conditions that led to Canada’s real estate boom are unlikely to be replicated.

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A Historical Parallel

While BMO doesn’t predict a deep, prolonged correction similar to the one seen in the 1990s, the current market shares some similarities with that era. Housing valuations in the late 1980s and early 1990s were similarly stretched, driven by investor speculation and a shortage of supply. Additionally, the demographic factors and changes in international migration flows mirror the conditions leading up to the 1990s crash.

Despite these parallels, the 1990s crisis was driven by a fiscal and currency crisis, coupled with a dramatic rise in interest rates. While the current market does not share these same extreme conditions, the resemblance in terms of stretched valuations and demographic shifts is noteworthy.

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Conclusion

In summary, while Canadian real estate prices have experienced significant declines since their peak in 2022, a full recovery to those levels is not expected until 2029. The factors that fueled the rapid price growth, such as low interest rates, strong immigration, and Millennial demand, are unlikely to return in the same way. Homebuyers and investors should prepare for a prolonged period of market stabilization, with steady but gradual price increases over the next few years.