The Artisan Podcast: Canadian Housing: How Bad Will It Get?

Published: October 18, 2022  |  Updated: November 13, 2022  |  Listening time: 25 min

https://www.youtube.com/watch?v=SNgPws0g4BE

In this episode of The Artisan Podcast, Northland Wealth Management Co-CIO Joseph Abramson convenes two experts with complementary and rarely combined perspectives on the Canadian housing market: Harvinder Kalirai, Chief Global Fixed Income & Currency Strategist at Alpine Macro and one of the most respected macro strategists in Canadian fixed income, and Christopher Invidiata, whose Invidiata Team has sold over $5 billion in residential real estate since 1985 and has been named the number one RE/MAX team in Canada 15 times.

The conversation was recorded in October 2022, when Canadian housing prices were already falling sharply from their pandemic highs and the Bank of Canada was in the middle of its most aggressive rate-hiking cycle in a generation. RBC was calling it the steepest decline in half a century; TD was predicting 20–25% peak-to-trough declines. The panel assesses how bad it will actually get, whether Canada faces systemic risk comparable to the US in 2008, what distinguishes the luxury market from the mid-market, and what the long-term supply-demand fundamentals mean for investors once the cyclical downturn passes.

The Macro Case: Why Housing Is Falling and Whether Banks Are at Risk

Kalirai frames the downturn in straightforward macro terms: the combination of rapidly rising interest rates and a central bank likely to push the economy into recession creates the classic conditions for housing weakness. Higher rates increase mortgage payments, reduce purchasing power, and slow transactions. Job losses and rising unemployment compound the effect by reducing the pool of qualified buyers and forcing some existing owners to sell.

The critical question Kalirai addresses is whether this correction poses systemic risk to the Canadian financial system. His answer is firmly no, and the reasoning is structural. Canadian mortgage lending practices differ materially from those that produced the US housing crisis. Borrowers must put down 20% or obtain CMHC mortgage insurance. Income verification is mandatory (unlike the no-doc loans prevalent in the pre-2008 US). The mortgage stress test requires borrowers to qualify at rates above the posted rate, building in a buffer against exactly the kind of rate shock the market was experiencing.

On the banking side, Kalirai cites a Bank of Canada study showing that even under a severe stress scenario (a six-quarter recession with GDP contracting 5.8%, unemployment reaching 13.5%, and house prices plunging 29%), the major Canadian commercial banks would not come close to breaching their regulatory minimum capital requirements. This is a markedly different starting position from the US in 2007, where banks were undercapitalized, lending standards were non-existent, and the securitization chain amplified losses throughout the financial system. In Canada, the adjustment would be painful but contained: a cyclical downturn rather than a systemic crisis.

The View from the Ground: Luxury Versus Mid-Market Dynamics

Invidiata brings nearly four decades of transactional experience to the discussion, and his perspective on market segmentation is particularly valuable for UHNW families. He distinguishes sharply between the mid-market (where the majority of transactions occur and where rate sensitivity is highest) and the true luxury market (properties above $5 million), where the dynamics are fundamentally different.

In the luxury segment, most buyers are not using bank financing. They are cash buyers whose purchase decisions are driven by wealth effects (stock portfolio values, business performance) rather than mortgage rates. Invidiata notes that at the time of recording, Oakville lakefront properties (fewer than 300 exist) were still attracting multiple bids, with one lot selling for $10.75 million on a $10.5 million ask in a market where most segments were declining. This premium segment behaves more like a scarce asset class (analogous to fine art or trophy real estate in global cities) than a housing market.

The mid-market, by contrast, is where the real pain concentrates. These buyers are rate-sensitive, often stretching their finances to qualify, and most vulnerable to the one-two punch of higher rates and potential job losses. Invidiata’s base case for peak-to-trough decline is 20–30%, roughly the amount of equity homeowners typically have, meaning the correction erodes buyer equity but stops before banks begin absorbing losses on their mortgage books. This aligns with Kalirai’s systemic risk assessment: the correction is designed to destroy equity, not to create a banking crisis.

For luxury buyers, the risk is second-order: if business earnings or equity portfolios decline significantly, the willingness to deploy capital into trophy properties may soften. But the forced selling dynamic that devastates the mid-market (power of sale, inability to make payments) is largely absent from the luxury segment.

Bank of Canada Rate Outlook and the Currency Dynamic

Kalirai’s rate forecast provides the macro scaffolding for the housing outlook. His view is that both the Bank of Canada and the Fed will overshoot, raising rates beyond what the economy can absorb, because monetary policy operates with lags: you set policy today based on current data, but you don’t see the full impact for months. By the time the economic damage becomes visible, the economy is already in recession. His target for the Bank of Canada policy rate is 3.5–4%, with the expectation that the subsequent recession would force a reversal, potentially back toward zero to 1% within a year or two.

The long end of the yield curve, being market-determined and forward-looking, would likely rally before the policy rate peaks, as bond markets anticipate the recession and subsequent easing. This creates a specific implication for mortgage strategy: Invidiata notes that the most common client question is whether to lock into a two-year, three-year, or five-year term. Kalirai’s framework suggests that shorter-term renewals may be advantageous if the recession forces rates back down within 12–18 months.

A distinctive element of Kalirai’s analysis is the Canadian dollar dimension. Canada operates as a small open economy where the exchange rate functions as an additional policy lever. At the time of recording, the Canadian dollar was significantly undervalued relative to Alpine Macro’s models (which weight interest rate differentials and the terms of trade, particularly commodity prices). The weak currency was providing economic stimulus that worked against the Bank of Canada’s tightening efforts, meaning the Bank potentially needed to raise rates even higher to offset the stimulative effect of a cheap loonie. The current account surplus, driven by elevated commodity prices, confirmed that the currency was undervalued relative to fundamentals.

The Structural Supply Deficit: Why the Long-Term Outlook Remains Positive

Both panelists agree that the cyclical downturn is occurring against a backdrop of structural undersupply that will reassert itself once the rate cycle turns. Kalirai cites Scotiabank research showing Canada would need an additional 1.8 million dwellings to reach the G7 average on a per-capita basis. With normal annual housing starts of approximately 200,000 units, closing the existing deficit alone would take nearly a decade, and the deficit continues to grow because Canada has the strongest population growth in the G7, driven primarily by immigration.

Invidiata proposes a supply-side solution modeled on English village development programs: governments designating 100-acre tracts near small towns for new communities of approximately 100,000 people, with land provided at subsidized cost. The logic is that urban infill is constrained by zoning, environmental restrictions, and NIMBYism, while rural and exurban development on greenfield sites can scale faster and deliver lower price points. The pandemic demonstrated that remote work makes non-urban living viable for a larger segment of the workforce than previously assumed.

Abramson adds a geopolitical dimension: in a post-Trump immigration environment, Canada is becoming the preferred destination for highly skilled tech immigrants who would previously have targeted Silicon Valley. This talent flow supports both housing demand and long-term economic growth, particularly in the Greater Toronto Area and Vancouver. The combination of immigration-driven population growth, an existing 1.8 million unit deficit, and rate-hike-induced construction slowdowns (new development effectively paused as financing costs spiked) creates a setup where the supply shortage will be even more acute once the cyclical correction ends.

Buyer and Seller Strategies in a Declining Market

Invidiata shares practical strategies drawn from navigating the 1990s housing downturn, which lasted approximately seven years in the Greater Toronto Area. For sellers in a declining market who are also buying, he recommends structuring purchase offers with conditions that the deal is contingent on the seller finding a replacement property, effectively transferring the market timing risk to the buyer. The key questions for any seller are: how much cash do you want to retain after the transaction, and are you buying up or buying down? In a declining market, buying up is advantageous (the more expensive home is falling by more in dollar terms), while buying down requires geographic flexibility.

For buyers, Invidiata observes increasing aggression in the form of lowball offers, as buyer psychology shifts from FOMO to opportunism. He describes a creative financing structure where sellers hold a second or third mortgage at 0% interest for two to three years to bridge the gap between what the buyer can currently afford and the seller’s asking price, allowing both parties to bet on economic recovery normalizing the financing environment. This type of vendor take-back financing was common in the 1990s downturn and was beginning to re-emerge in late 2022.

Emerging Trends: Single-Family Rental, Extended Amortization, and the Stress Test Debate

The panel addresses several structural trends that are reshaping the Canadian housing landscape. The single-family rental model, where institutional investors acquire portfolios of houses to rent rather than sell, has started in Canada but remains much more nascent than in the United States. Invidiata sees this evolving toward crowdfunded pools where smaller investors buy fractional interests in residential portfolios, potentially changing the relationship between homeownership and housing participation for younger Canadians who cannot afford to buy outright.

Invidiata floats the concept of extending mortgage amortization periods (potentially to 50 years, referencing Japan’s 100-year ‘century mortgages’) as a way to maintain affordability in a higher-rate environment. Kalirai pushes back, arguing that longer amortizations stimulate demand in an already overheated market and delay the structural solution, which must come from the supply side. The same logic applies to removing the stress test: while it would provide immediate relief to borrowers, it would keep the economy hotter than the Bank of Canada wants, requiring even higher rates to compensate. Both agree that the sustainable solution requires government coordination on supply (zoning reform, greenfield development, immigration-linked housing planning) rather than demand-side interventions that ultimately inflate prices further.

Transcript

About the Panelists

Joseph Abramson (moderator)

Co-CIO of Northland Wealth Management Inc., an OSC-registered Portfolio Manager serving ultra-high-net-worth Canadian families.

Harvinder Kalirai

Chief Global Fixed Income & Currency Strategist at Alpine Macro, one of the world’s leading independent macro research firms. Past positions include Head of Currency Management at CIBC, Head of Currency Research at State Street in Australia, and Analyst at the Bank of Canada.

Christopher Invidiata

One of Canada’s leading residential realtors, operating via The Real Brokerage platform. The Invidiata Team has sold over $5 billion in residential real estate since 1985, has been named the number one RE/MAX team in Canada 15 times, and was the number one RE/MAX team worldwide in 2007 and 2012.