Real Estate Prices Typically Contract For Years After Bubbles Burst

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In the first quarter of 2021, residential ‘investment’ in Canada (real estate commissions, construction of homes, significant renovations, and ownership transfer costs) comprised some 9% of Canada’s GDP, while business investment plunged. US residential investment peaked at 6.7% in

Since 2022, a rapid normalization in interest rates after years of ultra-low has understandably zapped ability and appetite to buy grossly inflated housing. Prices (in red below) are finally following buying activity lower (in black as a percentage of GDP since 1980) and history suggests that prices should follow for a period of years.

A 2018 Bank of International Settlements (BIS) study found that contracting real estate investment typically brings a recession within two years, and falling property prices for an average of 4 years.

As pointed out by Better Dwelling, the last two major Canadian real estate bubbles in the early 1980s and early 1990s saw average and worse outcomes:

The early ’80s bubble saw residential investment peak in Q2 ’81, and home prices a quarter after. The correction lasted peak to trough for nearly 4 years, close to the average.

The ’90s real estate bubble saw residential investment peak in Q4 1989. Real home prices followed two quarters later, before a correction in ’96. Nearly 7 years of sliding prices until the market returned to growth.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.