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Canada’s biggest bank has cut its forecast for the housing market and is now predicting a “historic correction” worse than any national downturn seen in this country in 40 years.
Rising inflation has prompted the Bank of Canada to embark on an aggressive rate hike that will push its interest rate to cap levels by the fall, RBC Assistant Chief Economist Robert Hogue wrote in a report out Friday.
“It will send more buyers to the sidelines, especially in British Columbia and Ontario, where affordability is extremely limited,” he said.
RBC now expects home sales to fall nearly 23% this year and 15% next year, and national benchmark prices to fall more than 12% from peak to trough by the second quarter of 2023.
The 42 percent decline in home sales from the peak in early 2021 would exceed the declines seen in the past four national recessions, Hogue said. In 1981-82 and again in 1989-1990, sales fell by 33%; they fell by 38% in 2008-09 and by 20% in 2016-18.
The 12 percent drop in prices through early 2023 would be the sharpest correction in the last five housing downturns, he said.
The housing correction first began to take hold when the Bank began raising rates in March, but the 100 basis point hike on July 13 – an increase that put floating rates within sight of fixed rates – would accelerate the cooling, Hogue said.
RBC expects the bank’s interest rate to reach 3.25% by October – “a big bite for borrowers to swallow that will spoil or delay many buyers’ home ownership plans”.
The most expensive provinces, Ontario and British Columbia, will be the epicenter of the correction, Hogue says. RBC sees home resales in British Columbia and Ontario falling 45% and 38% in 2022 and 2023, respectively, and prices falling more than 14% from the three-month peak to the lowest. The decline will rival the decline Ontario saw in the early 1990s, when sales fell 41% and prices 15%, but it’s not as bad as what BC went through in the early 1980s. when sales fell 62 percent and prices fell 27 percent, Hogue said.
More affordable areas of the country should do better. Although sales are expected to fall more than 20% from record levels in every other province except Ontario and British Columbia, prices may prove more resilient. RBC expects prices to fall by less than 3% in Alberta and Saskatchewan and between 5% and 8% in most other provinces through the first half of 2023.
But while RBC economists predict a “historic correction,” they don’t see a housing market crash.
Rather, they argue that this decline should be seen as a “welcome cooling off” after a two-year buying frenzy that has put home ownership out of reach for many Canadians.
RBC expects the correction to end in the first half of 2023, although a sharper and longer decline cannot be ruled out.
“Solid demographic fundamentals (including rising immigration) and a low likelihood of a rebuild should keep the market from entering a death spiral,” Hogue wrote.
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