Key Takeaways
- Canada’s housing market has endured its longest slump in recent decades, with nominal home prices down about 20 % since the February 2022 peak.
- Despite a record‑high TSX that lifted household net worth by over $1 trillion in 2025, the wealth effect from equities is weak because housing dominates consumers’ sense of financial security.
- Lower home values are curbing mortgage‑based borrowing (HELOCs, refinancing) and consequently dampening spending on big‑ticket items, contributing to a sluggish consumption outlook.
- Consumer sentiment remains fragile: the savings rate stays near historic highs, retail sales show only tentative resilience, and a majority of Canadians want the government to do more on cost‑of‑living pressures.
- The Bank of Canada expects consumption to add just 0.7 percentage point to GDP growth in 2026, down from 1.2 points in the prior two years, highlighting the drag from the housing correction.
Overview of Canada’s Divergent Asset Markets
Canada is experiencing a stark split between its housing and equity markets. While the Toronto Stock Exchange (TSX) surged to a record high in March 2026 and posted a 28.2 % gain for 2025—outpacing the S&P 500’s 16.4 % rise—home prices have moved in the opposite direction. According to the Bank for International Settlements and Reuters calculations, Canada was the sole G‑7 advanced economy to record a nominal decline in house prices last year. This divergence has left many households feeling richer on paper through rising financial assets, yet poorer in the tangible asset that most Canadians rely on for stability and credit access.
Housing Market Slump and Its Drivers
Since the February 2022 peak, Canadian home prices have fallen roughly 20 %. The downturn has been prolonged by a combination of higher mortgage rates—resulting from renewed borrowing at levels well above pandemic‑era lows—and slower immigration growth, which trimmed demand. External shocks, notably the Iran‑related oil price spike and ensuing inflation fears, pushed bond yields upward, further lifting borrowing costs. The Canadian Real Estate Association recently revised its 2026‑2027 housing forecast downward, reflecting expectations that the correction will persist.
Impact on Consumption and GDP Growth
The housing slump is weighing on household spending, a key component of GDP. Prime Minister Mark Carney’s efforts to revive the economy are being tested as consumption growth slows; Canada’s GDP rose only 1.7 % in 2025, the weakest pace in five years. Analysts note that a decline in home values reduces the “wealth effect” that typically spurs spending, because most Canadians view their house—not their stock portfolio—as the cornerstone of their financial well‑being. Consequently, the savings rate, though down slightly to 4.4 % in Q4 2025 from 5.2 % the prior quarter, remains near the top of its historical range, indicating a cautious stance toward discretionary purchases.
Stock Market Gains and Wealth Concentration
Despite the housing drag, Canadian household net worth climbed by more than $1 trillion in 2025 to reach $18.6 trillion, driven largely by appreciating financial assets. The TSX’s strong performance—up about 7 % year‑to‑date and boasting a market capitalization of $4.9 trillion—has boosted the ratio of financial to non‑financial assets to 121 %, the highest level in over two decades. However, the gains are highly skewed: roughly 70 % of financial assets are held by the wealthiest 20 % of Canadians, per Statistics Canada. This concentration limits the broad‑based spending boost that a more egalitarian wealth rise might generate.
Why Housing Outweighs Stocks in Consumer Psyche
Economists stress that housing exerts a stronger psychological impact than equities. David Rosenberg of Rosenberg Research observes, “Equity market cycles come and go and are short‑lived but in housing the downturn tends to be more prolonged. When it comes to the impact on the consumer psyche, housing is more important.” Karl Schamotta of Corpay adds that households treat equity portfolios as “ephemeral paper wealth,” whereas the family home anchors financial plans and underpins the credit cycle. As a result, falling house prices erode confidence and curb borrowing capacity more sharply than a comparable dip in stock values would.
HELOCs, Borrowing Constraints, and Spillover Effects
Home equity lines of credit (HELOCs) and similar products let Canadians tap the equity in their properties to finance renovations, vehicle purchases, and other major outlays. When home values drop, the collateral base shrinks, reducing the amount households can borrow and increasing the risk of delinquency. CIBC Capital Markets economists Benjamin Tal and Katherine Judge estimate that the negative wealth effect from the housing correction could shave over $5,000 in total spending per household. They warn that “increased stress at the margin of the mortgage market means increased delinquency rates and reduced refinancing options,” further choking off credit‑driven consumption.
Retail Sales, Gasoline Prices, and Consumer Resilience
Recent retail‑sales data show pockets of resilience, but analysts doubt the strength will last. Weak consumer sentiment, coupled with a sharp rise in gasoline prices since the start of the Middle‑East war, is pressuring disposable incomes. An Angus Reid poll found that 70 % of Canadians want Prime Minister Carney to do more to alleviate cost‑of‑living concerns, even though 58 % approve of his overall performance. The poll underscores a growing appetite for policy action that directly addresses household budgets rather than relying on asset‑price gains.
Bank of Canada Forecasts and Policy Outlook
The Bank of Canada projects that consumption will contribute only 0.7 percentage point to average annual GDP growth in 2026, down from 1.2 points in the preceding two years. The central bank is set to update its forecasts on Wednesday, a move that will likely reflect the ongoing housing drag. Meanwhile, the long‑term outlook for the housing market remains uncertain: while some analysts anticipate a gradual stabilization as mortgage rates eventually ease, others warn that prolonged affordability challenges could keep prices subdued for years, sustaining the drag on consumer spending.
Conclusion: Balancing Asset Gains with Real‑Estate Weakness
Canada’s economy presents a paradox: soaring stock‑market wealth coexists with a protracted housing slump that curtails the typical wealth‑to‑spending channel. The concentration of financial‑asset gains among the affluent limits their stimulative effect, while the broader populace feels the pinch of declining home values through reduced borrowing power and heightened caution. For policymakers, the challenge lies in stimulating demand without reigniting unsustainable housing price escalation—perhaps through targeted measures that support middle‑income households, improve affordability, and encourage productive investment rather than relying solely on asset‑price appreciation to revive consumption.