May 1, 2023 Housing Market Crunch: Canada's Early Adjuster Advantage

In countries all around the world, housing sales have cratered as central banks applied some of the harshest monetary policy tightening seen in decades. The Vancouver market was no exception – with resales falling over 34% year-over-year and only stabilizing in recent months as interest rates have steadied. On paper, this has already been one of Canada’s most significant housing declines in history. Yet a recent Economist article declares that the “rich world's housing crunch is far from over” and that the ultimate severity of this crunch will depend greatly on the type of market experiencing it. The reasoning is sound – interest rates often take over twelve months to filter through an economy, and different kinds of real estate markets can have differing responses to the same kinds of macroeconomic pressures greatly. 

From a Canadian perspective, we find ourselves in a unique and perhaps surprisingly strong position. In this article, we will explore how our market differs from other developed markets and what our “early adjuster advantage” means for sales volume and price appreciation in the near-to-mid term. 

Not all real estate markets are created equal 

While no two markets are entirely the same, Real Estate professionals often refer to different classifications of markets based on recognized sets of common behaviours and features to support their analysis. An example of one useful distinction commonly used in this regard is cyclical vs linear markets. Cyclical markets, like Vancouver, typically experience larger and more volatile price movements over the short term. They have much higher periods of appreciation but also suffer from dramatic declines. These markets' peaks and troughs are more pronounced, resembling a roller coaster ride of sorts, and provide significant risks but also opportunities. In the long run, investors and homeowners can potentially find substantial gains in this type of market if they can stomach the ups and downs. Linear markets, in contrast, tend to have relatively lower-priced housing and exhibit moderate, steady price movement over time. Prices in these markets are less reactive and more stable.  

For our industry, this means that if the market is indeed approaching the bottom as many suspect – the subsequent gains and rebound can be expected to be dramatic relative to linear markets. And while this is only one type of classification and not a perfect predictor of things to come, it is certainly a useful tool to gauge what a typical recovery in our market might look like. 

Early adjusters, bullet-dodgers, and slow movers 

Another useful distinction, as the Economist asserts, is to split the rich world markets into three camps: early adjusters, bullet-dodgers, and slow movers.  

Early adjusters responded quickly to the housing decline by implementing measures such as lowering interest rates early in the inflation cycle. This proactive approach positions early adjusters for a faster and stronger recovery compared to other countries.  

Bullet-dodgers have managed to avoid the worst effects of the housing crunch, either due to unique market conditions or timely policy interventions. These countries may still face challenges, but they have so far navigated the crisis with relative success. Examples of bullet dodgers include Germany and Japan, where housing markets have remained relatively stable despite global turbulence.  

Slow movers, on the other hand, are countries that have been slow to react to the housing decline or have implemented insufficient policy measures to address the crisis. These countries are likely to face a more extended period of decline and a slower recovery process. Australia and the United Kingdom fall in this category, where housing markets have experienced significant declines and governments have been slow to implement effective policy responses. 

Early Adjuster Advantage 

Within this framework, Canada falls into the early adjuster category - a positive designation that bodes well for a recovery in the near future. The Bank of Canada (BOC) was among the first central banks to raise interest rates in response to inflation, and Canada was also among the first to experience a housing decline. This suggests that we are likely poised also to be the first country to witness a market rebound.  

This effect is also evident in interest rate paths, as the BOC has paused hikes, whereas the Federal Reserve in the United States appears to be planning at least one more rate increase. Furthermore, there are already encouraging signs of recovery in the Canadian market, with prices firming up even as other countries are just beginning to experience the beginning of their respective declines.  

Canada’s future promise and Vancouver’s Upside 

The classification of a market inevitably factors into the timing and strength of its recovery. In this article, we have seen how two classifications of the Vancouver market bode well for our outlook. Canada’s early adjuster status, combined with the cyclical nature of our market, suggests that we are likely to be among the first to recover – and that the recovery will be the strongest, with continued potential for significant growth in the long run.  

That unique pairing of characteristics means that anyone looking to get into the B.C. market should consider acting sooner rather than later. It is not enough to wait and watch the rest of the world for signs of a recovery – the nature of our market dynamics means that we will necessarily be the ones to lead this charge.