12/14/2017 07:54 EST | Updated 12/14/2017 08:23 EST

Watch Out, Canada: Half Of Housing Booms End In Crisis, Research Finds

Busts are likelier with housing markets than with stock markets, a New Zealand study has found.

AFP/Getty Images
A foreclosure sign is seen in front of a bank-owned home for sale in Las Vegas, Nev., Nov. 8, 2010, in the wake of the city's housing bubble bursting. A new study finds that 40 to 50 per cent of housing booms end in a bust.

A new study from New Zealand's central bank has a word of warning for those involved in Canada's long-booming housing markets: There's a good chance it will end badly, and people at the lower end of the income ladder will get hit hardest if and when it does.

Like Canada, New Zealand has struggled with a housing affordability crisis as prices soared over the past decade. Mirroring Toronto and Vancouver, detached homes in some of New Zealand's hottest markets now average above $1 million. The government recently announced it will be banning foreign home buyers from the existing home market.

Hence the interest in the issue of housing booms at the Reserve Bank of New Zealand, which this month released a study looking at booms and busts around the world over the past three decades. The study traced house prices through numerous economic disasters, such as the Scandinavian banking crisis of the 1980s, the Asian financial crisis of the late 1990s and the Great Recession of 2008-09.

Watch: Housing slowdown would hit Canadian jobs hard

It found that between 40 per cent and 50 per cent of housing booms end in a housing bust. By comparison, only about a quarter of stock-market booms end in a bust, the study found.

"The cycle of booms followed by busts appears stronger with house prices than with equities," economic consultant Maitland MacFarlan wrote in the report.

MacFarlan doesn't offer a precise definition of a "housing boom," but said in an email to HuffPost Canada that "multiple years of double-digit price growth would seem to be a signal" of a housing boom. That does, indeed, sound like Toronto and Vancouver.

Earlier on HuffPost Canada:

MacFarlan found that when a housing boom does turn to bust, it's lower-income homeowners who are often hit hardest.

"In the lead-up to the [Great Recession of 2008-09], for example, the strongest house price appreciation in the U.S. tended to be with smaller homes in cheaper areas — price growth that reversed when the crisis hit," the report noted.

What's more, house price collapses are longer, more drawn-out affairs than stock market busts, the report concluded.

"Equity market busts tend to be sharp and short (a V-shaped cycle), with prices falling for about two years before fully recovering over the next couple of years," the report said.

"While house prices may fall by less than equities in a bust, they show a more protracted, U-shaped pattern of downturn and recovery, with downturns lasting around four to six years."

What's Going On In Housing?

Our weekly newsletter delivers the news and analysis you need on Canada's housing market. Sign up below and don't miss an issue.

That squares with Canada's experience with housing busts. In the 1990s housing bust, Toronto house prices fell for seven straight years.

And when housing busts happen, they often pose a risk to a country's financial system, the report found.

"There is a strong association between housing busts and banking crises. ... All of the major banking crises in industrial countries in the post WWII period have coincided with housing price busts," MacFarlan wrote, though he did note that not all housing busts lead to financial crisis, and not all financial crises lead to a housing bust.

And MacFarlan himself notes that the risk of a housing bust does not make one inevitable; after all, if 40 to 50 per cent of booms end in a bust, then 50 to 60 per cent of them don't.

"There seem to be a good number of booms that have more benign outcomes," he wrote.

Also on HuffPost: