Real Estate #Home Buying #Mortgage Basics

What is a Housing Bubble and are We in One?

Defined as a thin sphere of liquid enclosing air or another gas, a bubble is also used to describe a good or fortunate situation that’s isolated from reality or unlikely to last – say, for example, Canada’s red hot real estate market being referred to as a potential housing bubble.

Canadian housing has been accelerating at a breakneck pace for much of the past year but, with sustainability unlikely, many are left wondering whether a housing bubble is inevitable. While the answer is anything but straightforward, as we’ve witnessed during COVID-19, Canada’s housing market is resilient and appears to be defying the probability of an impending crash, heading for more of a soft landing instead.

Key Takeaways

  • A housing bubble occurs when property prices, fueled by demand far surpassing supply, rise sharply to the point where they reach unsustainable levels relative to incomes and other economic indicators
  • Canada’s housing market has escaped periods of significant collapse relatively well, although we’ve faced a few dark and difficult times
  • The Canadian housing market has been marching to its own drum, making bubble probability predictions a bit tricky, but many would agree there’s little risk of an impending collapse

What is a housing bubble?

A housing bubble occurs when property prices, fueled by demand far surpassing supply, rise sharply to the point where they reach unsustainable levels relative to incomes and other economic indicators. Speculation of prices rising indefinitely also drives some homebuyers to make a purchase in anticipation of values going even higher, adding further pressure to the market. Similar to the concept of an inflating balloon, growing demand and high prices cause a bubble to expand and grow. At some point, growth becomes unmanageable and demand runs out of steam, causing a dramatic drop in prices. 

What causes a housing bubble?

Housing bubbles follow the law of supply and demand – excessive demand relative to supply results in steep price growth and overvalued real estate. This relationship imbalance can be caused by a number of factors such as a change in economic activity, an increase in disposable income, low interest rates, excessive borrower risk-taking or an influx of a particular demographic entering the housing market. Any combination of these factors may further exacerbate the bubble swell. 

What happens when a housing bubble bursts?

When homes become overvalued and supply of available housing starts to outpace demand, the bubble eventually bursts and property prices come crashing down with negative repercussions. Homebuyers who purchase property during a bubble will likely pay considerably more than the house is worth, leaving many with a larger mortgage than the property’s market value. The danger comes for those wanting or needing to sell, as the sale price of their home turns out to be less than the amount still owed on the mortgage. For those staying put, the impact of a burst bubble is relatively low.

Furthermore, high prices and extreme bidding wars can result in stretched borrowing, leaving some households more vulnerable to an economic downturn, especially as interest rates rise. This could lead to payment delinquencies, increased household debt, reduced access to housing and an overall decline in economic activity.👆

Tip: Homebuyers need to uphold responsible financial decisions (ie, don’t buy what you can’t afford) and seek advice from a mortgage professional who understands current market conditions.

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Canadian housing turbulence throughout the decades 

Aside from history’s more dramatic events such as the Great Crash of 1929, the Great Depression and the Dirty 30s, Canada’s housing market has escaped periods of significant collapse relatively well. There were, however, a few dark and difficult times. 


Canada’s housing bubble burst during the early 1990s.The country was experiencing large and unmanageable national debt levels while interest rates reached an unprecedented 12-14%, leaving many homeowners unable to afford payments. The Bank of Canada was trying to curb inflation of more than 6%, growth in GDP plunged while unemployment jumped, leading Canada into one of the worse recessions since the 1930s.

With consumer confidence staggering, fewer people were buying homes, spending stifled and residential building construction decreased, which further depressed the economy. An elevated national deficit, weakening Canadian dollar and a recession south of the border all contributed to the turmoil. Canadian home prices suffered double-digit declines that took more than a decade to reverse.


It’s hard for anyone to forget the global financial crisis of the late 2000s. The US subprime mortgage market, which had begun in 1999, eventually reached unprecedented growth and caused a housing crash that culminated in 2008. When home prices declined steeply in the US after peaking in mid-2006, it became difficult for borrowers to pay or refinance their subprime loans. This led to a large decline in home prices, and the collapse of a housing bubble that resulted in widespread mortgage delinquencies and foreclosures not to mention personal bankruptcies and business collapse.

The effects of the meltdown were felt on a global scale and Canada was no exception. The country’s housing activity dropped sharply during 2008 and early 2009 as a result of the global recession and turnover in resale markets dropped by about 40% while housing starts declined to well below their estimated sustainable amounts. Canada was spared only slightly given that the rise in housing prices prior to the crisis was not as severe as other countries, particularly the US. 


2016 was a record-setting year for Canada’s housing market in terms of both price and sales, and consequently on the radar of policymakers. The arrival of 2017 brought year-over-year price gains of more than 30%, semi-detached homes in the Greater Toronto Area surpassed $1 million and condo prices were growing consistently, while run of the mill homes were selling well over asking. By 2018, homeowning costs were above 1990 levels. 

In an effort to slow growth, cool the market and gradually bring down prices, the federal government implemented tougher mortgage requirements. The stress test emerged as a tool for gauging a buyer’s ability to handle an eventual increase in mortgage rates and, although not entirely popular with potential homebuyers, the mandated requirement helped to avoid the possibility of history repeating itself. 

Present day

That brings us to 2020, when average home prices increased at a pace not seen since the aforementioned housing boom. As we enter the second half of 2021, Canada’s housing market is in relatively good shape, thanks in part to prudent measures implemented to support housing market stability. 

Are we in a housing bubble? 

Defying the odds, the Canadian housing market has experienced a surprising upward turn despite the financial turmoil caused by the pandemic, as a spike in demand for homes has been met by a shortage of supply. Most economists suggest the market is a little overheated, and that market cooling is necessary, but that a rapid and dramatic decline isn’t anticipated.✋

Important: Canadian real estate remains a driving force behind our economic recovery and, as such, policymakers are no doubt watching its evolution closely and will step in as necessary.

Is a crash likely in 2021?

The coronavirus outbreak has stirred up fears of widespread market uncertainty. A collapse, however, would require a steep incline in existing inventory and new listings as well as a decline in demand, which aren’t likely to happen anytime soon. Demand is expected to continue surpassing supply, rates should remain low and the return of consumer confidence will help drive housing activity to record highs this year. 

Under normal circumstances, if inventory suddenly skyrockets and the number of buyers plummets, home prices would get slashed and a crash may be inevitable. But, life as we know it is far from normal. Many homebuyers have delayed their home purchase plans due to pandemic-related uncertainties, resulting in pent up demand. Any surge in homes for sale will, therefore, undoubtedly be absorbed by new buyers entering the market. A reopening of the economy, high savings from stay-at-home rules and the return of immigration are also having a positive impact on housing forecasts. 

Lately, the Canadian housing market has been marching to its own drum, making bubble probability predictions a bit tricky, but many would agree there’s little risk of an impending collapse. We’ve learned from the past and measures are working but, as the only constant in life, change is on the horizon.

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