Canada’s prolonged housing market downturn is negatively impacting household spending, even as the stock market reaches record highs. This disparity highlights the greater psychological and financial weight Canadians place on their homes compared to other assets.

Housing Market Decline

Canada’s housing market is experiencing its most prolonged slump in recent decades, creating a strain on household spending despite a record surge in the domestic stock market and a corresponding increase in wealth. Data from the Bank for International Settlements and Reuters reveals that Canada is the sole G7 nation to have witnessed a decline in home prices last year, measured in nominal terms.

This downturn is attributed to households renewing mortgages at significantly higher rates than those enjoyed during the pandemic, coupled with a slowdown in immigration impacting housing demand. The resulting decrease in consumption poses a challenge to Prime Minister Carney’s economic revival efforts, already complicated by a trade war initiated by the United States.

Economic Impact and Wealth Effect

Canada’s GDP growth slowed to 1.7% in 2025, the weakest pace in five years. While Canadian household net worth increased by over $1 trillion to $18.6 trillion in 2025, largely due to the strong performance of the natural resource-linked stock market – achieving its largest increase since 2009 and surpassing U.S. indices – analysts are skeptical of a significant ‘wealth effect’.

David Rosenberg, an economist, emphasizes the devastating effect of home price depreciation, contrasting it with the more transient nature of equity market cycles. Canadians continue to maintain a high savings rate, dipping to 4.4% in the fourth quarter but remaining elevated compared to historical levels, indicating a reluctance to increase spending.

Public Sentiment and Government Approval

Public opinion polls reveal that 70% of Canadians desire more action from Prime Minister Carney to address the cost of living, although his performance currently enjoys a 58% approval rating.

Market Trends and Forecasts

Since peaking in February 2022, housing prices have fallen by 20%. The Iran war and subsequent oil price shock further exacerbated the housing market’s woes, driving up borrowing costs and mortgage rates. The Canadian Real Estate Association recently downgraded its housing market forecasts for 2026 and 2027.

Economists at CIBC Capital Markets estimate the reduction in consumption due to the housing correction could exceed $5,000 per household. This ‘negative wealth effect’ is dampening consumer sentiment, and increased mortgage stress is leading to higher delinquency rates and reduced refinancing opportunities.

The Bank of Canada forecasts consumption will contribute less to GDP growth in 2026 compared to the previous two years. The TSX has seen significant gains, advancing 7% since the start of the year and achieving a record high in March, with a 28.2% increase in 2025, outperforming the S&P 500.

Homeownership vs. Stock Market Participation

Homeownership is widespread in Canada, with approximately two-thirds of households owning their homes, many with mortgages. However, stock market participation, excluding retirement plans, is less common, with the majority of financial gains concentrated among the wealthiest 20% of Canadians.