The decline in Canadian home prices this year will not turn into a prolonged downfall like the one that happened in the early 1990s.
Back then, home prices kept declining for several years. In the case of Toronto, prices fell for seven long years following the 1989 peak and eventually lost roughly 30% of their value. What is different this year is that price declines are happening in a unique economic and demographic environment. Four main elements of that changed environment are discussed below.
Mortgage rates vs. inflation
In the late 1980s, mortgage rates were at double-digit levels, peaking at nearly 14% in 1990 for both variable rates and the benchmark 5-year mortgage rate.
As inflation was running at 6% annualized growth at that time, the real rate (the nominal rate minus the inflation rate) was at a hefty 8% level. This seems like an extremely tight monetary policy.
In retrospect, it seems clear that at that time the Bank of Canada’s determination to prevent inflation with extremely high real interest rates had contributed to the outbreak of a recession of the early 1990s, and a consequential prolonged decline in home prices.